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 over 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 veterinarians and pet owners to livestock farmers and ranchers.

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 that 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 animal proteins.

A summary of our 2023 performance compared with the comparable 2022 period follows:

																		% Change
						Three Months Ended																		Related to
						June 30,																		Foreign
(MILLIONS OF DOLLARS)						2023						2022						Total						Exchange						Operational(a)
Revenue						$	2,180					$	2,052					6						(3)						9
Net income attributable to Zoetis						671						529						27						5						22
Adjusted net income(a)						652						567						15						3						12

																		% Change
						Six Months Ended																		Related to
						June 30,																		Foreign
(MILLIONS OF DOLLARS)						2023						2022						Total						Exchange						Operational(a)
Revenue						$	4,180					$	4,038					4						(2)						6
Net income attributable to Zoetis						1,223						1,124						9						3						6
Adjusted net income(a)						1,259						1,192						6						2						4

(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 2022 Annual Report on Form 10-K. Set forth below are updates to certain of the factors disclosed in our 2022 Annual Report on Form 10-K.

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 decline in global macroeconomic conditions, inflation, global supply chain disruption, Russia’s invasion of Ukraine, geopolitical tensions with and economic uncertainty in China, variability in distributor inventory stocking levels as a result of expected demand and promotional activities, weather patterns, herd management decisions, regulatory actions, competitive dynamics, disease outbreaks, product and geographic mix, timing of price increases and timing of investment decisions.

Global Supply Chain Disruption

We are seeing improvements and recovery in supply for certain products as compared to the prior year. However, we continue to have supply chain challenges for other products and component parts, as well as competition for manufacturing inputs. Our global manufacturing team remains committed to addressing specific issues with ongoing supply chain optimizations, controlled launches for new products in additional markets and customer coordination.

22 |

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 six months ended June 30, 2023, 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 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 six months ended June 30, 2023, approximately 56% of our total revenue was in U.S. dollars. Our year-over-year total revenue growth was unfavorably impacted by approximately 2% from changes in foreign currency values relative to the U.S. dollar. For operations in highly inflationary economies, we translate monetary items at rates in effect at the balance sheet date, with translation adjustments recorded in Other (income)/deductions––net, and we translate non-monetary items at historical rates.

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 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 attributable to Zoetis and reported EPS. See the Adjusted Net Income section below for more information.

23 |

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																		Six Months Ended
						June 30,												%						June 30,												%
(MILLIONS OF DOLLARS)						2023						2022						Change						2023						2022						Change
Revenue						$	2,180					$	2,052					6						$	4,180					$	4,038					4
Costs and expenses:
Cost of sales						607						625						(3)						1,195						1,194						—
% of revenue						27.8		%				30.5		%										28.6		%				29.6		%
Selling, general and administrative expenses						556						529						5						1,061						994						7
% of revenue						26		%				26		%										25		%				25		%
Research and development expenses						146						135						8						288						257						12
% of revenue						7		%				7		%										7		%				6		%
Amortization of intangible assets						37						37						—						74						78						(5)
Restructuring charges and certain acquisition-related costs						8						1						*						29						3						*
Interest expense, net of capitalized interest						58						53						9						121						106						14
Other (income)/deductions—net						(104)						2						*						(157)						9						*
Income before provision for taxes on income						872						670						30						1,569						1,397						12
% of revenue						40		%				33		%										38		%				35		%
Provision for taxes on income						202						141						43						348						274						27
Effective tax rate						23.2		%				21.0		%										22.2		%				19.6		%
Net income before allocation to noncontrolling interests						670						529						27						1,221						1,123						9
Less: Net loss attributable to noncontrolling interests						(1)						—						*						(2)						(1)						*
Net income attributable to Zoetis Inc.						$	671					$	529					27						$	1,223					$	1,124					9
% of revenue						31		%				26		%										29		%				28		%

*Calculation not meaningful

Revenue

Three months ended June 30, 2023 vs. three months ended June 30, 2022

Total revenue increased by $128 million, or 6%, in the three months ended June 30, 2023, compared with the three months ended June 30, 2022, an increase of $176 million, or 9%, on an operational basis. Operational revenue growth was comprised primarily of the following:

• price growth of approximately 4%;

• volume growth from other in-line products of approximately 2%;

• volume growth from new products of approximately 2%; and

• volume growth from key dermatology products of approximately 1%.

Foreign exchange decreased reported revenue growth by approximately 3%.

Six months ended June 30, 2023 vs. six months ended June 30, 2022

Total revenue increased by $142 million, or 4%, in the six months ended June 30, 2023, compared with the six months ended June 30, 2022, an increase of $255 million, or 6%, on an operational basis. Operational revenue growth was comprised primarily of the following:

• price growth of approximately 4%;

• volume growth from new products of approximately 1%; and

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

Foreign exchange decreased reported revenue growth by approximately 2%.

24 |

Costs and Expenses

Cost of sales
						Three Months Ended																		Six Months Ended
						June 30,												%						June 30,												%
(MILLIONS OF DOLLARS)						2023						2022						Change						2023						2022						Change
Cost of sales						$	607					$	625					(3)						$	1,195					$	1,194					—
% of revenue						27.8		%				30.5		%										28.6		%				29.6		%

Three months ended June 30, 2023 vs. three months ended June 30, 2022

Cost of sales as a percentage of revenue was 27.8% in the three months ended June 30, 2023, compared with 30.5% in the three months ended June 30, 2022. The decrease was primarily as a result of:

• favorable foreign exchange;

• price increases;

• favorable product mix; and

• lower freight costs,

partially offset by:

• unfavorable manufacturing and other costs; and

• inventory obsolescence, scrap and other charges.

Six months ended June 30, 2023 vs. six months ended June 30, 2022

Cost of sales as a percentage of revenue was 28.6% in the six months ended June 30, 2023, compared with 29.6% in the six months ended June 30, 2022. The decrease was primarily as a result of:

• favorable foreign exchange;

• price increases; and

• lower freight costs,

partially offset by:

• unfavorable manufacturing and other costs;

• inventory obsolescence, scrap and other charges; and

• unfavorable product mix.

Selling, general and administrative expenses
						Three Months Ended																		Six Months Ended
						June 30,												%						June 30,												%
(MILLIONS OF DOLLARS)						2023						2022						Change						2023						2022						Change
Selling, general and administrative expenses						$	556					$	529					5						$	1,061					$	994					7
% of revenue						26		%				26		%										25		%				25		%

Three months ended June 30, 2023 vs. three months ended June 30, 2022

SG&A expenses increased by $27 million, or 5%, in the three months ended June 30, 2023, compared with the three months ended June 30, 2022, primarily as a result of:

• certain compensation-related costs primarily due to timing of new hires in 2022;

• higher freight and logistics costs; and

• higher bad debt reserves for accounts receivable,

partially offset by:

• favorable foreign exchange.

Six months ended June 30, 2023 vs. six months ended June 30, 2022

SG&A expenses increased by $67 million, or 7%, in the six months ended June 30, 2023, compared with the six months ended June 30, 2022, primarily as a result of:

• certain compensation-related costs primarily due to timing of new hires in 2022;

• higher freight and logistics costs; and

• higher travel and entertainment expenses,

partially offset by:

• favorable foreign exchange; and

• lower bad debt reserves for accounts receivable.

25 |

Research and development expenses
						Three Months Ended																		Six Months Ended
						June 30,												%						June 30,												%
(MILLIONS OF DOLLARS)						2023						2022						Change						2023						2022						Change
Research and development expenses						$	146					$	135					8						$	288					$	257					12
% of revenue						7		%				7		%										7		%				6		%

Three months ended June 30, 2023 vs. three months ended June 30, 2022

R&D expenses increased by $11 million, or 8%, in the three months ended June 30, 2023, compared with the three months ended June 30, 2022, primarily as a result of:

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

• higher other operating costs,

partially offset by:

• timing of spend in project investments; and

• favorable foreign exchange.

Six months ended June 30, 2023 vs. six months ended June 30, 2022

R&D expenses increased by $31 million, or 12%, in the six months ended June 30, 2023, compared with the six months ended June 30, 2022, primarily as a result of:

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

• higher other operating costs,

partially offset by:

• favorable foreign exchange.

Amortization of intangible assets
						Three Months Ended																		Six Months Ended
						June 30,												%						June 30,												%
(MILLIONS OF DOLLARS)						2023						2022						Change						2023						2022						Change
Amortization of intangible assets						$	37					$	37					—						$	74					$	78					(5)

Three months ended June 30, 2023 vs. three months ended June 30, 2022

Amortization of intangible assets was $37 million in the three months ended June 30, 2023 and 2022. An increase in amortization due to intangible assets acquired during 2022 was offset by the effect of asset impairments taken in 2022 and assets that became fully amortized during 2022.

Six months ended June 30, 2023 vs. six months ended June 30, 2022

Amortization of intangible assets decreased in the six months ended June 30, 2023 versus the comparable prior year period primarily due to asset impairments taken in 2022 and assets that became fully amortized during 2022, partially offset by intangible assets acquired during 2022.

Restructuring charges and certain acquisition-related costs
						Three Months Ended																		Six Months Ended
						June 30,												%						June 30,												%
(MILLIONS OF DOLLARS)						2023						2022						Change						2023						2022						Change
Restructuring charges and certain acquisition-related costs						$	8					$	1					*						$	29					$	3					*

• Calculation not meaningful

Restructuring charges and certain acquisition-related costs were $8 million and $29 million in the three and six months ended June 30, 2023, respectively, and primarily consisted of employee termination costs related to organizational structure refinements and costs related to the acquisition of Jurox. Restructuring charges and certain acquisition-related costs were $1 million and $3 million in the three and six months ended June 30, 2022, respectively, and primarily consisted of integration costs related to recent acquisitions.

26 |

Interest expense, net of capitalized interest
						Three Months Ended																		Six Months Ended
						June 30,												%						June 30,												%
(MILLIONS OF DOLLARS)						2023						2022						Change						2023						2022						Change
Interest expense, net of capitalized interest						$	58					$	53					9						$	121					$	106					14

Interest expense, net of capitalized interest, increased in the three and six months ended June 30, 2023 versus the comparable prior year periods. The increases were primarily as a result of higher interest rates on the $1.35 billion aggregate principal amount of our 2022 senior notes issued in November 2022 as compared to the 2013 senior notes redeemed in February 2023, upon maturity. The six months ended June 30, 2023 also included a higher debt balance during a portion of the current period. These increases were partially offset by higher gains on foreign exchange derivative instruments as compared to the prior year periods.

Other (income)/deductions—net
						Three Months Ended																		Six Months Ended
						June 30,												%						June 30,												%
(MILLIONS OF DOLLARS)						2023						2022						Change						2023						2022						Change
Other (income)/deductions—net						$	(104)					$	2					*						$	(157)					$	9					*

*Calculation not meaningful

Three months ended June 30, 2023 vs. three months ended June 30, 2022

The change in Other (income)/deductions—net in the three months ended June 30, 2023 versus the comparable prior year period was primarily as a result of a gain on the sale of a majority interest in our pet insurance business and higher interest income in the current period due to higher interest rates on cash balances denominated in the U.S. dollar, partially offset by certain asset impairment charges related to our precision animal health business.

Six months ended June 30, 2023 vs. six months ended June 30, 2022

The change in Other (income)/deductions—net in the six months ended June 30, 2023 versus the comparable prior year period was primarily as a result of a gain on the sale of a majority interest in our pet insurance business, higher interest income in the current period due to higher interest rates on cash balances denominated in the U.S. dollar and royalty-related income that was predominantly associated with a settlement for underpayment of royalties in prior periods, partially offset by certain asset impairment charges related to our precision animal health business.

Provision for taxes on income
						Three Months Ended																		Six Months Ended
						June 30,												%						June 30,												%
(MILLIONS OF DOLLARS)						2023						2022						Change						2023						2022						Change
Provision for taxes on income						$	202					$	141					43						$	348					$	274					27
Effective tax rate						23.2		%				21.0		%										22.2		%				19.6		%

Our effective tax rate was 23.2% and 21.0% for the three months ended June 30, 2023 and 2022, respectively, and 22.2% and 19.6% for the six months ended June 30, 2023 and 2022, respectively. The higher effective tax rates for the three and six months ended June 30, 2023, compared with the three and six months ended June 30, 2022, were attributable to a higher net discrete tax expense mainly related to changes to prior years' tax positions and a less favorable jurisdictional mix of earnings (which includes the impact of the location of earnings and repatriation costs), partially offset by a higher benefit in the U.S. related to foreign-derived intangible income. Jurisdictional mix of earnings can vary depending on repatriation decisions, operating fluctuations in the normal course of business and the impact of non-deductible items and non-taxable items.

27 |

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
						June 30,																					Foreign
(MILLIONS OF DOLLARS)						2023						2022						Total									Exchange						Operational
U.S.
Companion animal						$	959					$	895					7									—						7
Livestock						206						196						5									—						5
						1,165						1,091						7									—						7
International
Companion animal						530						471						13									(4)						17
Livestock						465						472						(1)									(5)						4
						995						943						6									(5)						11
Total
Companion animal						1,489						1,366						9									(2)						11
Livestock						671						668						—									(4)						4
Contract manufacturing & human health						20						18						11									(1)						12
						$	2,180					$	2,052					6									(3)						9

																		% Change
						Six Months Ended																					Related to
						June 30,																					Foreign
(MILLIONS OF DOLLARS)						2023						2022						Total									Exchange						Operational
U.S.
Companion animal						$	1,680					$	1,669					1									—						1
Livestock						490						442						11									—						11
						2,170						2,111						3									—						3
International
Companion animal						1,034						960						8									(5)						13
Livestock						939						931						1									(6)						7
						1,973						1,891						4									(6)						10
Total
Companion animal						2,714						2,629						3									(2)						5
Livestock						1,429						1,373						4									(4)						8
Contract manufacturing & human health						37						36						3									(1)						4
						$	4,180					$	4,038					4									(2)						6

28 |

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
						June 30,																					Foreign
(MILLIONS OF DOLLARS)						2023						2022						Total									Exchange						Operational
U.S.
Revenue						$	1,165					$	1,091					7									—						7
Cost of Sales						214						198						8									—						8
Gross Profit						951						893						6									—						6
Gross Margin						81.6		%				81.9		%
Operating Expenses						212						207						2									—						2
Other (income)/deductions-net						—						(7)						*									*						*
U.S. Earnings						739						693						7									—						7
International
Revenue						995						943						6									(5)						11
Cost of Sales						315						288						9									(11)						20
Gross Profit						680						655						4									(2)						6
Gross Margin						68.3		%				69.5		%
Operating Expenses						166						161						3									(8)						11
Other (income)/deductions-net						(1)						(2)						(50)									49						(99)
International Earnings						515						496						4									(1)						5
Total operating segments						1,254						1,189						5									(1)						6
Other business activities						(116)						(111)						5
Reconciling Items:
Corporate						(256)						(267)						(4)
Purchase accounting adjustments						(43)						(40)						8
Acquisition-related costs						(4)						(1)						*
Certain significant items						90						(4)						*
Other unallocated						(53)						(96)						(45)
Total Earnings						$	872					$	670					30

29 |

																		% Change
						Six Months Ended																					Related to
						June 30,																					Foreign
(MILLIONS OF DOLLARS)						2023						2022						Total									Exchange						Operational
U.S.
Revenue						$	2,170					$	2,111					3									—						3
Cost of Sales						417						383						9									—						9
Gross Profit						1,753						1,728						1									—						1
Gross Margin						80.8		%				81.9		%
Operating Expenses						400						372						8									—						8
Other (income)/deductions-net						—						(7)						*									*						*
U.S. Earnings						1,353						1,363						(1)									—						(1)
International
Revenue						1,973						1,891						4									(6)						10
Cost of Sales						606						553						10									(10)						20
Gross Profit						1,367						1,338						2									(4)						6
Gross Margin						69.3		%				70.8		%
Operating Expenses						317						306						4									(7)						11
Other (income)/deductions-net						—						(2)						*									*						*
International Earnings						1,050						1,034						2									(3)						5
Total operating segments						2,403						2,397						—									(2)						2
Other business activities						(230)						(209)						10
Reconciling Items:
Corporate						(464)						(526)						(12)
Purchase accounting adjustments						(85)						(80)						6
Acquisition-related costs						(5)						(3)						67
Certain significant items						68						(4)						*
Other unallocated						(118)						(178)						(34)
Total Earnings						$	1,569					$	1,397					12

• Calculation not meaningful

Three months ended June 30, 2023 vs. three months ended June 30, 2022

U.S. operating segment

U.S. segment revenue increased by $74 million, or 7%, in the three months ended June 30, 2023, compared with the three months ended June 30, 2022, reflecting an increase of $64 million in companion animal products and $10 million in livestock products.

• Companion animal revenue growth was driven primarily by increased sales of our key dermatology portfolio, small animal vaccines, our monoclonal antibody (mAb) product for osteoarthritis (OA) pain, Solensia, and small animal diagnostics.

• Livestock revenue grew due to cattle and poultry, partially offset by a decline in swine. Sales of cattle products grew mainly due to increased sales of Draxxin resulting from a favorable comparable quarter versus the prior year. Sales of products in our poultry portfolio grew primarily due to increases in vaccines and medicated feed additives. Sales of swine products declined due to decreased disease prevalence.

U.S. segment earnings increased by $46 million, or 7%, in the three months ended June 30, 2023, compared with the three months ended June 30, 2022, primarily due to higher revenue, partially offset by higher cost of sales and operating expenses.

International operating segment

International segment revenue increased by $52 million, or 6%, in the three months ended June 30, 2023, compared with the three months ended June 30, 2022. Operational revenue increased by $100 million, or 11%, driven by growth of $80 million in companion animal products and $20 million in livestock products.

• Companion animal operational revenue growth was driven primarily by growth in small animal parasiticides, the recent launches of our mAb products for OA pain, Librela and Solensia, as well as key dermatology, partially offset by lower sales of vaccine products.

• Livestock operational revenue growth was due to increased sales of poultry, fish and cattle products, partially offset by a decline in swine. Sales of poultry products grew due to market growth, demand generation efforts and price in key poultry markets. Growth in our fish portfolio was primarily the result of increased sales of vaccines across key salmon markets, primarily Norway and Chile. Sales of cattle products grew due to price and supply recovery, partially offset by unfavorable market conditions in key and emerging markets. Sales of swine products declined due to supply constraints.

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• Additionally, International segment revenue was unfavorably impacted by foreign exchange which decreased revenue by $48 million, or 5%, primarily driven by the Argentinian peso, Australian dollar, Chinese renminbi, Canadian dollar and Turkish lira.

International segment earnings increased by $19 million, or 4%, in the three months ended June 30, 2023, compared with the three months ended June 30, 2022. Operational earnings growth was $23 million, or 5%, primarily due to higher revenue, partially offset by higher cost of sales and operating expenses.

Six months ended June 30, 2023 vs. six months ended June 30, 2022

U.S. operating segment

U.S. segment revenue increased by $59 million, or 3%, in the six months ended June 30, 2023, compared with the six months ended June 30, 2022, reflecting an increase of $11 million in companion animal products and $48 million in livestock products.

• Companion animal revenue increased due to our mAb product for OA pain, Solensia, small animal vaccines, key dermatology and small animal diagnostics, partially offset by lower sales of small animal parasiticides and anti-infection products. Strong growth in the second quarter was primarily offset by the first quarter impacts of distributor de-stocking across the portfolio, as well as purchases in the fourth quarter of 2022 ahead of expected price increases and promotional activities.

• Livestock revenue grew due to cattle and poultry, partially offset by a decline in swine. Sales of cattle products grew due to improved supply of key products and higher volume of anti-infective products. Sales of products in our poultry portfolio grew due to increases in vaccines, medicated feed additives and biodevices. Sales of swine products declined due to decreased disease prevalence.

U.S. segment earnings decreased by $10 million, or 1%, in the six months ended June 30, 2023, compared with the six months ended June 30, 2022, primarily due to higher cost of sales and operating expenses, partially offset by higher revenue, which was tempered by the first quarter impacts detailed above.

International operating segment

International segment revenue increased by $82 million, or 4%, in the six months ended June 30, 2023, compared with the six months ended June 30, 2022. Operational revenue increased by $195 million, or 10%, driven by growth of $129 million in companion animal products and $66 million in livestock products.

• Companion animal operational revenue growth was driven primarily by the recent launches of our mAb products for OA pain, Librela and Solensia, as well as growth in small animal parasiticides and key dermatology, partially offset by lower sales of vaccine products.

• Livestock operational revenue growth was due to increased sales of poultry, cattle, fish and sheep products, partially offset by a decline in swine. Sales of poultry products grew due to market growth, demand generation efforts and price in key poultry markets. Sales of cattle products grew due to price and improved supply of key products. Growth in our fish portfolio was primarily the result of increased sales of vaccines across key salmon markets, primarily Norway and Chile. Sales of sheep products grew as a result of the acquisition of Jurox. Sales of swine products declined due to supply constraints.

• Additionally, International segment revenue was unfavorably impacted by foreign exchange which decreased revenue by $113 million, or 6%, primarily driven by the Argentinian peso, Chinese renminbi, euro, Australian dollar and British pound.

International segment earnings increased by $16 million, or 2%, in the six months ended June 30, 2023, compared with the six months ended June 30, 2022. Operational earnings growth was $47 million, or 5%, primarily due to higher revenue, partially offset by higher cost of sales and 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 June 30, 2023 vs. three months ended June 30, 2022

Other business activities net loss increased by $5 million in the three months ended June 30, 2023, compared with the three months ended June 30, 2022, reflecting an increase in R&D costs due to an increase in certain compensation-related costs to support innovation and an increase in operating costs, as well as lower earnings in our human health business, partially offset by timing of spend in project investments and favorable foreign exchange.

Six months ended June 30, 2023 vs. six months ended June 30, 2022

Other business activities net loss increased by $21 million in the six months ended June 30, 2023, compared with the six months ended June 30, 2022, reflecting an increase in R&D costs due to an increase in certain compensation-related costs to support innovation and an increase in operating costs, as well as lower earnings in our human health business, partially offset by favorable foreign exchange.

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, certain diagnostic costs 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 Purchase accounting adjustments, Acquisition-related activities and Certain significant items, which are defined below; and

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• 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 June 30, 2023 vs. three months ended June 30, 2022

Corporate expenses decreased by $11 million, or 4%, in the three months ended June 30, 2023, compared with the three months ended June 30, 2022, primarily due to favorable foreign exchange and higher interest income, partially offset by higher compensation-related costs, higher interest expense, increases in professional services and investments in information technology.

Other unallocated expenses decreased by $43 million, or 45%, in the three months ended June 30, 2023, compared with the three months ended June 30, 2022, primarily due to lower manufacturing costs and freight charges, partially offset by unfavorable foreign exchange.

Six months ended June 30, 2023 vs. six months ended June 30, 2022

Corporate expenses decreased by $62 million, or 12%, in the six months ended June 30, 2023, compared with the six months ended June 30, 2022, primarily associated with higher interest income, favorable foreign exchange and a settlement for underpayment of royalties in prior periods, partially offset by higher compensation-related costs, higher interest expense, increases in professional services and investments in information technology.

Other unallocated expenses decreased by $60 million, or 34%, in the six months ended June 30, 2023, compared with the six months ended June 30, 2022, primarily due to lower manufacturing costs and freight charges, as well as favorable foreign exchange, partially offset by inventory obsolescence and scrap.

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.

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

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diagnostic 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 impairment charges; 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 attributable to Zoetis, as reported under U.S. GAAP, to adjusted net income follows:

						Three Months Ended																		Six Months Ended
						June 30,												%						June 30,												%
(MILLIONS OF DOLLARS)						2023						2022						Change						2023						2022						Change
GAAP reported net income attributable to Zoetis						$	671					$	529					27						$	1,223					$	1,124					9
Purchase accounting adjustments—net of tax						34						31						10						68						61						11
Acquisition-related costs—net of tax						3						1						*						4						2						*
Certain significant items—net of tax						(56)						6						*						(36)						5						*
Non-GAAP adjusted net income(a)						$	652					$	567					15						$	1,259					$	1,192					6

*Calculation not meaningful

(a) The effective tax rate on adjusted pretax income was 21.5% and 20.7% for the three months ended June 30, 2023 and 2022, respectively, and 21.0% and 19.7% for the six months ended June 30, 2023 and 2022, respectively.

The higher effective tax rates for the three and six months ended June 30, 2023, compared with the three and six months ended June 30, 2022, were attributable to a higher net discrete tax expense mainly related to changes to prior years' tax positions and a less favorable jurisdictional mix of earnings (which includes the impact of the location of earnings and repatriation costs), partially offset by a higher benefit in the U.S. related to foreign-derived intangible income. Jurisdictional mix of earning can vary depending on repatriation decision, operating fluctuations in the normal course of business and the impact of non-deductible and non-taxable items.

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																		Six Months Ended
						June 30,												%						June 30,												%
						2023						2022						Change						2023						2022						Change
Earnings per share—diluted(a):
GAAP reported EPS attributable to Zoetis —diluted						$	1.45					$	1.12					29						$	2.64					$	2.38					11
Purchase accounting adjustments—net of tax						0.07						0.07						—						0.14						0.13						8
Acquisition-related costs—net of tax						0.01						—						*						0.01						—						*
Certain significant items—net of tax						(0.12)						0.01						*						(0.08)						0.01						*
Non-GAAP adjusted EPS—diluted						$	1.41					$	1.20					18						$	2.71					$	2.52					8

• 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 Ended												Six Months Ended
						June 30,												June 30,
(MILLIONS OF DOLLARS)						2023						2022						2023						2022
Interest expense, net of capitalized interest						$	58					$	53					$	121					$	106
Interest income						21						5						54						7
Income taxes						178						148						334						293
Depreciation						72						68						144						129
Amortization						9						9						18						22

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

						Three Months Ended												Six Months Ended
						June 30,												June 30,
(MILLIONS OF DOLLARS)						2023						2022						2023						2022
Purchase accounting adjustments:
Amortization and depreciation						$	40					$	40					$	79					$	80
Cost of sales						3						—						6						—
Total purchase accounting adjustments—pre-tax						43						40						85						80
Income taxes(a)						9						9						17						19
Total purchase accounting adjustments—net of tax						34						31						68						61
Acquisition-related costs:
Transaction costs						2						—						2						—
Integration costs						1						1						2						3
Restructuring costs						1						—						1						—
Total acquisition-related costs—pre-tax						4						1						5						3
Income taxes(a)						1						—						1						1
Total acquisition-related costs—net of tax						3						1						4						2
Certain significant items:
Other restructuring charges and cost-reduction/productivity initiatives(b)						4						1						24						3
Certain asset impairment charges(c)						10						4						10						4
Net gain on sale of business(d)						(101)						—						(101)						—
Other						(3)						(1)						(1)						(3)
Total certain significant items—pre-tax						(90)						4						(68)						4
Income taxes(a)						(34)						(2)						(32)						(1)
Total certain significant items—net of tax						(56)						6						(36)						5
Total purchase accounting adjustments, acquisition-related costs, and certain significant items—net of tax						$	(19)					$	38					$	36					$	68

(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:

• For the six months ended June 30, 2022, tax benefits related to a deferred adjustment as a result of a change in tax basis.

Income taxes in Certain significant items also includes:

• For the three and six months ended June 30, 2023, tax expense related to changes to prior years' tax positions with regard to the one-time mandatory deemed repatriation tax under the Tax Cuts and Jobs Act.

• For the three and six months ended June 30, 2022, changes in valuation allowances.

(b) For the three and six months ended June 30, 2023, primarily consisted of employee termination costs related to organizational structure refinements.

For the three and six months ended June 30, 2022, primarily consisted of product transfer costs.

(c) For the three and six months ended June 30, 2023, represents certain asset impairment charges related to our precision animal health business.

For the three and six months ended June 30, 2022, primarily represents certain asset impairment charges related to the consolidation of manufacturing sites in China.

(d) Represents a net gain on the sale of a majority interest in our pet insurance business.

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

						Three Months Ended												Six Months Ended
						June 30,												June 30,
(MILLIONS OF DOLLARS)						2023						2022						2023						2022
Cost of sales:
Purchase accounting adjustments						$	5					$	1					$	9					$	2
Inventory write-offs						—						4						—						4
Other						—						—						—						3
Total Cost of sales						5						5						9						9
Selling, general & administrative expenses:
Purchase accounting adjustments						7						7						14						14
Total Selling, general & administrative expenses						7						7						14						14
Amortization of intangible assets:
Purchase accounting adjustments						31						32						62						64
Total Amortization of intangible assets						31						32						62						64
Restructuring charges and certain acquisition-related costs:
Transaction costs						2						—						2						—
Integration costs						1						1						2						3
Employee termination costs						5						—						25						—
Total Restructuring charges and certain acquisition-related costs						8						1						29						3
Other (income)/deductions—net:
Net gain on sale of business						(101)						—						(101)						—
Asset impairment charges						10						—						10						—
Other						(3)						—						(1)						(3)
Total Other (income)/deductions—net						(94)						—						(92)						(3)
Provision for taxes on income						(24)						7						(14)						19
Total purchase accounting adjustments, acquisition-related costs, and certain significant items—net of tax						$	(19)					$	38					$	36					$	68

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

June 30, 2023 vs. December 31, 2022

For a discussion about the changes in Cash and cash equivalents, Short-term borrowings, Current portion of long-term debt 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 primarily as a result of higher net sales in the period.

Inventories increased primarily as a result of the increase in demand and build-up of certain products, as well as lower sales than anticipated for certain products.

Other current assets increased primarily due to higher value-added tax receivables for our international markets, the timing of tax benefits recognized and an increase in collateral posted related to derivative contracts, partially offset by the mark-to-market adjustment of derivative instruments.

Property, plant and equipment 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, the impact of foreign exchange and the impairment of certain intangible assets. See Notes to Consolidated Financial Statements - Note 11. Goodwill and Other Intangible Assets.

Other noncurrent assets increased primarily due to the retained noncontrolling investment following the sale of a majority interest in our pet insurance business*.* See Notes to Consolidated Financial Statements - Note 5. Acquisitions and Divestitures.

Accounts payable increased as a result of the timing of vendor and value-added tax payments.

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Accrued compensation and related items decreased due to the payments of 2022 annual incentive bonuses, savings plan contributions to eligible employees and payments for sales incentive bonuses, partially offset by the accrual of 2023 annual incentive bonuses, sales incentive bonuses and savings plan contributions to eligible employees.

Other current liabilities increased primarily due to the mark-to-market adjustment of derivative instruments, partially offset by a decrease in collateral received related to derivative contracts.

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 and the tax impact of various acquisitions.

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

						Six Months Ended
						June 30,												$
(MILLIONS OF DOLLARS)						2023						2022						Change
Net cash provided by (used in):
Operating activities						$	732					$	645					$	87
Investing activities						(296)						(321)						25
Financing activities						(2,296)						(1,155)						(1,141)
Effect of exchange-rate changes on cash and cash equivalents						(4)						(2)						(2)
Net decrease in cash and cash equivalents						$	(1,864)					$	(833)					$	(1,031)

Operating activities

Six months ended June 30, 2023 vs. six months ended June 30, 2022

Net cash provided by operating activities was $732 million for the six months ended June 30, 2023, compared with $645 million for the six months ended June 30, 2022. The increase in operating cash flows was primarily attributable to the timing of receipts and payments in the ordinary course of business and higher net income as adjusted by non-cash items, partially offset by the inventory build-up of certain products for increased demand and to mitigate potential supply constraints.

Investing activities

Six months ended June 30, 2023 vs. six months ended June 30, 2022

Our net cash used in investing activities was $296 million for the six months ended June 30, 2023, compared with net cash used in investing activities of $321 million for the six months ended June 30, 2022. The net cash used in investing activities for the six months ended June 30, 2023 was primarily due to capital expenditures, partially offset by net proceeds on the sale of a majority interest in our pet insurance business. The net cash used in investing activities for the six months ended June 30, 2022 was primarily due to capital expenditures and acquisitions, partially offset by net proceeds from derivative instrument activity.

Financing activities

Six months ended June 30, 2023 vs. six months ended June 30, 2022

Our net cash used in financing activities was $2,296 million for the six months ended June 30, 2023, compared with net cash used in financing activities of $1,155 million for the six months ended June 30, 2022. The net cash used in financing activities for the six months ended June 30, 2023 was primarily attributable to the repayment of the $1.35 billion aggregate principal amount of our 2013 senior notes due 2023 in February 2023, 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 the six months ended June 30, 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.

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 are described in Global economic conditions below.

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Selected measures of liquidity and capital resources

Certain relevant measures of our liquidity and capital resources follow:

			June 30,						December 31,
(MILLIONS OF DOLLARS)			2023						2022
Cash and cash equivalents			$	1,717					$	3,581
Accounts receivable, net(a)			1,322						1,215
Short-term borrowings			2						2
Current portion of long-term debt			—						1,350
Long-term debt			6,555						6,552
Working capital			4,414						4,339
Ratio of current assets to current liabilities			3.50:1						2.37:1

(a) Accounts receivable are usually collected over a period of 45 to 75 days*.* For the six months ended June 30, 2023 compared with December 31, 2022, 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 2022, 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), which expires in December 2027. The credit facility replaced the company's existing revolving credit facility dated as of December 2016. 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. In addition, the credit facility contains other customary covenants.

We were in compliance with all financial covenants as of June 30, 2023 and December 31, 2022. There were no amounts drawn under the credit facility as of June 30, 2023 or December 31, 2022.

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 June 30, 2023, we had access to $52 million of lines of credit which expire at various times and are generally renewed annually. There was $2 million of borrowings outstanding related to these facilities as of June 30, 2023 and December 31, 2022.

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

Global financial markets may be impacted by macroeconomic, business and financial volatility. 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 will continue to monitor our liquidity position. 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.

Debt securities

On November 8, 2022, we issued $1.35 billion aggregate principal amount of our senior notes (2022 senior notes), with an original issue discount of $2 million. These notes are comprised of $600 million aggregate principal amount of 5.400% senior notes due 2025 and $750 million aggregate principal amount of 5.600% senior notes due 2032. On February 1, 2023, the net proceeds were used to redeem in full, upon maturity, the $1.35 billion aggregate principal amount of our 3.250% 2013 senior notes due 2023.

Our senior notes are governed by an indenture and supplemental indentures (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 senior notes may be declared immediately due and payable.

Pursuant to the indenture, we are able to redeem the 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 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 senior notes at a price equal to 101% of the aggregate principal amount of the senior notes together with accrued and unpaid interest to, but excluding, the date of repurchase.

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Our outstanding debt securities are as follows:

Description			Principal Amount			Interest Rate			Terms
2015 Senior Notes due 2025			$750 million			4.500%			Interest due semi annually, not subject to amortization, aggregate principal due on November 13, 2025
2022 Senior Notes due 2025			$600 million			5.400%			Interest due semi annually, not subject to amortization, aggregate principal due on November 14, 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
2022 Senior Notes due 2032			$750 million			5.600%			Interest due semi annually, not subject to amortization, aggregate principal due on November 16, 2032
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 Last Action
Name of Rating Agency						Rating						Rating						Outlook
Moody’s						P-2						Baa1						Stable						August 2017
S&P						A-2						BBB						Stable						December 2016

Share repurchase program

In December 2021, our Board of Directors authorized a $3.5 billion multi-year share repurchase program. As of June 30, 2023, there was $2.0 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 six months of 2023, 3.6 million shares were repurchased for $607 million, which excludes a $5 million accrual for excise tax on net share repurchases.

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 June 30, 2023 and December 31, 2022, recorded amounts for the estimated fair value of these indemnifications are not material.

New accounting standards

There were no accounting standards that were recently issued but not adopted as of June 30, 2023 that the Company expects to have a material impact on its condensed consolidated financial statements.

Forward-looking statements and factors that may affect future results

This report contains “forward-looking” statements. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. 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 our future actions, business plans or prospects, prospective products, product approvals or products under development, product and supply chain disruptions, R&D costs, timing and likelihood of success, future operating or financial performance, future results of current and anticipated products and services, the impact of the COVID-19 pandemic, 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:

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

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

• the decline in global economic conditions, including Russia's invasion of Ukraine, and inflation;

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

• disruptive innovations and advances in medical practices and technologies;

• consolidation of our customers and distributors;

• changes in the distribution channel for companion animal products;

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

• an outbreak of infectious disease carried by animals;

• 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;

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

• adverse weather conditions and the availability of natural resources;

• the impact of climate change on our activities and the activities of our customers and suppliers, including, for example, altered distribution and intensity of rainfall, prolonged droughts or flooding, increased frequency of wildfires and other natural disasters, rising sea levels, and rising heat index;

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

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

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

• 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;

• 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 or possible future proposals;

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

• the other factors set forth under "Risk Factors" in Item 1A. of Part I of our 2022 Annual Report on Form 10-K.

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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