Item 1. Financial Statements

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Item 1. Financial Statements

ZOETIS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(MILLIONS OF DOLLARS AND SHARES, EXCEPT PER SHARE DATA)	2023		2022		2023		2022
Revenue	$	2,151	$	2,002	$	6,331	$	6,040
Costs and expenses:
Cost of sales	638		607		1,833		1,801
Selling, general and administrative expenses	525		501		1,586		1,495
Research and development expenses	152		134		440		391
Amortization of intangible assets	38		37		112		115
Restructuring charges and certain acquisition-related costs	16		6		45		9
Interest expense, net of capitalized interest	59		53		180		159
Other (income)/deductions—net	6		(3)		(151)		6
Income before provision for taxes on income	717		667		2,286		2,064
Provision for taxes on income	121		139		469		413
Net income before allocation to noncontrolling interests	596		528		1,817		1,651
Less: Net loss attributable to noncontrolling interests	—		(1)		(2)		(2)
Net income attributable to Zoetis Inc.	$	596	$	529	$	1,819	$	1,653
Earnings per share attributable to Zoetis Inc. stockholders:
Basic	$	1.29	$	1.13	$	3.94	$	3.52
Diluted	$	1.29	$	1.13	$	3.93	$	3.51
Weighted-average common shares outstanding:
Basic	460.3		467.8		461.9		470.0
Diluted	461.4		469.1		463.0		471.6
Dividends declared per common share	$	—	$	—	$	0.750	$	0.650

See notes to condensed consolidated financial statements.

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ZOETIS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(MILLIONS OF DOLLARS)	2023		2022		2023		2022
Net income before allocation to noncontrolling interests	$	596	$	528	$	1,817	$	1,651
Other comprehensive income/(loss), net of tax(a):
Unrealized gains on derivatives for cash flow hedges, net of tax of $1 and $9 for the three months ended September 30, 2023 and 2022, respectively, and $0 and $23 for the nine months ended September 30, 2023 and 2022, respectively	3		30		—		78
Unrealized gains on derivatives for net investment hedges, net of tax of $5 and $11 for the three months ended September 30, 2023 and 2022, respectively, and $1 and $24 for the nine months ended September 30, 2023 and 2022, respectively	18		39		5		84
Foreign currency translation adjustments	60		(156)		(6)		(208)
Benefit plans: Actuarial gains, net of tax of $0 and $1 for the three months ended September 30, 2023 and 2022, respectively, and $1 and $1 for the nine months ended September 30, 2023 and 2022, respectively	—		—		4		1
Total other comprehensive income/(loss), net of tax	81		(87)		3		(45)
Comprehensive income before allocation to noncontrolling interests	677		441		1,820		1,606
Less: Comprehensive loss attributable to noncontrolling interests	—		(1)		(2)		(2)
Comprehensive income attributable to Zoetis Inc.	$	677	$	442	$	1,822	$	1,608

(a) Presented net of reclassification adjustments, which are not material in any period presented.

See notes to condensed consolidated financial statements.

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ZOETIS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS


	September 30,		December 31,
	2023		2022
(MILLIONS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)	(Unaudited)
Assets
Cash and cash equivalents(a)	$	1,754	$	3,581

Accounts receivable, less allowance for doubtful accounts of $18 in 2023 and $19 in 2022	1,257		1,215
Inventories	2,744		2,345

Other current assets	467		365
Total current assets	6,222		7,506
Property, plant and equipment, less accumulated depreciation of $2,529 in 2023 and $2,297 in 2022	3,092		2,753
Operating lease right of use assets	226		220
Goodwill	2,762		2,746
Identifiable intangible assets, less accumulated amortization	1,398		1,380
Noncurrent deferred tax assets	190		173
Other noncurrent assets	216		147
Total assets	$	14,106	$	14,925

Liabilities and Equity
Short-term borrowings	$	2	$	2
Current portion of long-term debt	—		1,350
Accounts payable	388		405
Dividends payable	—		174
Accrued expenses	693		682
Accrued compensation and related items	284		300
Income taxes payable	144		157
Other current liabilities	97		97
Total current liabilities	1,608		3,167
Long-term debt, net of discount and issuance costs	6,552		6,552
Noncurrent deferred tax liabilities	160		142
Operating lease liabilities	191		186
Other taxes payable	262		258
Other noncurrent liabilities	259		217
Total liabilities	9,032		10,522
Commitments and contingencies (Note 15)
Stockholders’ equity:

Common stock, $0.01 par value: 6,000,000,000 authorized; 501,891,243 and 501,891,243 shares issued; 459,524,713 and 463,808,059 shares outstanding at September 30, 2023, and December 31, 2022, respectively	5		5
Treasury stock, at cost, 42,366,530 and 38,083,184 shares of common stock at September 30, 2023 and December 31, 2022, respectively	(5,369)		(4,539)
Additional paid-in capital	1,116		1,088
Retained earnings	10,140		8,668
Accumulated other comprehensive loss	(814)		(817)
Total Zoetis Inc. equity	5,078		4,405
Noncontrolling interests	(4)		(2)
Total equity	5,074		4,403
Total liabilities and equity	$	14,106	$	14,925

(a) As of September 30, 2023 and December 31, 2022, includes $3 million and $4 million of restricted cash, respectively.

See notes to condensed consolidated financial statements.

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ZOETIS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(UNAUDITED)


Three months ended September 30, 2023
	Zoetis
												Accumulated
								Additional				Other
		Common Stock			Treasury Stock			Paid-in		Retained		Comprehensive		Noncontrolling		Total
(MILLIONS OF DOLLARS AND SHARES)		Shares	Amount		Shares	Amount		Capital		Earnings		Loss		Interests		Equity
Balance, June 30, 2023		501.9	$	5	41.2	$	(5,126)	$	1,098	$	9,543	$	(895)	$	(4)	$	4,621
Net income		—	—		—	—		—		596		—		—		596
Other comprehensive income		—	—		—	—		—		—		81		—		81

Share-based compensation awards (a)		—	—		(0.2)	9		18		1		—		—		28
Treasury stock acquired (b)		—	—		1.4	(252)		—		—		—		—		(252)


Balance, September 30, 2023		501.9	$	5	42.4	$	(5,369)	$	1,116	$	10,140	$	(814)	$	(4)	$	5,074

Three months ended September 30, 2022
	Zoetis
												Accumulated
								Additional				Other
		Common Stock			Treasury Stock			Paid-in		Retained		Comprehensive		Noncontrolling		Total
(MILLIONS OF DOLLARS AND SHARES)		Shares	Amount		Shares	Amount		Capital		Earnings		Loss		Interests		Equity
Balance, June 30, 2022		501.9	$	5	33.3	$	(3,766)	$	1,059	$	8,004	$	(722)	$	—	$	4,580
Net income/(loss)		—	—		—	—		—		529		—		(1)		528
Other comprehensive loss		—	—		—	—		—		—		(87)		—		(87)

Share-based compensation awards (a)		—	—		(0.1)	4		13		—		—		—		17
Treasury stock acquired (b)		—	—		2.2	(377)		—		—		—		—		(377)
Employee benefit plan contribution from Pfizer Inc.(c)		—	—		—	—		1		—		—		—		1

Balance, September 30, 2022		501.9	$	5	35.4	$	(4,139)	$	1,073	$	8,533	$	(809)	$	(1)	$	4,662

Shares may not add due to rounding.

(a) Includes the issuance of shares of Zoetis Inc. common stock and the reacquisition of shares of treasury stock associated with exercises of employee share-based awards. Also includes the reacquisition of shares of treasury stock associated with the vesting of employee share-based awards to satisfy tax withholding requirements. For additional information, see Note 12. Share-based Payments and Note 13. Stockholders’ Equity.

(b) Reflects the acquisition of treasury shares in connection with the share repurchase program. For the three months ended September 30, 2023, includes excise tax accrued on net share repurchases. For additional information, see Note 13. Stockholders’ Equity.

(c) Represents contributed capital from Pfizer Inc. associated with service credit continuation for certain Zoetis Inc. employees in Pfizer Inc.’s U.S. qualified defined benefit and U.S. retiree medical plans.

See notes to condensed consolidated financial statements.

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ZOETIS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY - Continued

(UNAUDITED)


Nine months ended September 30, 2023
	Zoetis
												Accumulated
								Additional				Other
		Common Stock			Treasury Stock			Paid-in		Retained		Comprehensive		Noncontrolling		Total
(MILLIONS OF DOLLARS AND SHARES)		Shares	Amount		Shares	Amount		Capital		Earnings		Loss		Interests		Equity
Balance, December 31, 2022		501.9	$	5	38.1	$	(4,539)	$	1,088	$	8,668	$	(817)	$	(2)	$	4,403
Net income/(loss)		—	—		—	—		—		1,819		—		(2)		1,817
Other comprehensive income		—	—		—	—		—		—		3		—		3

Share-based compensation awards (a)		—	—		(0.7)	34		28		(1)		—		—		61
Treasury stock acquired (b)		—	—		5.0	(864)		—		—		—		—		(864)

Dividends declared		—	—		—	—		—		(346)		—		—		(346)
Balance, September 30, 2023		501.9	$	5	42.4	$	(5,369)	$	1,116	$	10,140	$	(814)	$	(4)	$	5,074

Nine months ended September 30, 2022
	Zoetis
												Accumulated
								Additional				Other
		Common Stock			Treasury Stock			Paid-in		Retained		Comprehensive		Noncontrolling		Total
(MILLIONS OF DOLLARS AND SHARES)		Shares	Amount		Shares	Amount		Capital		Earnings		Loss		Interests		Equity
Balance, December 31, 2021		501.9	$	5	29.3	$	(2,952)	$	1,068	$	7,186	$	(764)	$	1	$	4,544
Net income/(loss)		—	—		—	—		—		1,653		—		(2)		1,651
Other comprehensive loss		—	—		—	—		—		—		(45)		—		(45)

Share-based compensation awards (a)		—	—		(0.6)	2		3		—		—		—		5
Treasury stock acquired (b)		—	—		6.7	(1,189)		—		—		—		—		(1,189)
Employee benefit plan contribution from Pfizer Inc.(c)		—	—		—	—		2		—		—		—		2
Dividends declared		—	—		—	—		—		(306)		—		—		(306)
Balance, September 30, 2022		501.9	$	5	35.4	$	(4,139)	$	1,073	$	8,533	$	(809)	$	(1)	$	4,662

Shares may not add due to rounding.

(b) Reflects the acquisition of treasury shares in connection with the share repurchase program. For the nine months ended September 30, 2023, includes excise tax accrued on net share repurchases. For additional information, see Note 13. Stockholders’ Equity.

(c) Represents contributed capital from Pfizer Inc. associated with service credit continuation for certain Zoetis Inc. employees in Pfizer Inc.'s U.S. qualified defined benefit and U.S. retiree medical plans.

See notes to condensed consolidated financial statements.

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ZOETIS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


	Nine Months Ended
	September 30,
(MILLIONS OF DOLLARS)	2023		2022
Operating Activities
Net income before allocation to noncontrolling interests	$	1,817	$	1,651
Adjustments to reconcile net income before noncontrolling interests to net cash provided by operating activities:
Depreciation and amortization expense	365		346
Share-based compensation expense	43		46
Asset write-offs and asset impairments	27		7
Gain on sale of business, excluding transaction costs	(118)		—

Provision for losses on inventory	82		49
Deferred taxes	(40)		(110)
Employee benefit plan contribution from Pfizer Inc.	—		2

Other non-cash adjustments	(6)		3
Other changes in assets and liabilities, net of acquisitions and divestitures:
Accounts receivable	(54)		(120)
Inventories	(497)		(438)
Other assets	(119)		(20)
Accounts payable	(9)		(59)
Other liabilities	(27)		(227)
Other tax accounts, net	(8)		41
Net cash provided by operating activities	1,456		1,171
Investing Activities
Capital expenditures	(534)		(415)

Acquisitions	(155)		(96)

Purchase of investments	(3)		(8)
Proceeds on derivative instrument activity, net	23		74
Proceeds from sale of business, net of cash sold	96		—
Net proceeds from sale of assets	4		—
Other investing activities	2		—
Net cash used in investing activities	(567)		(445)
Financing Activities
Increase in short-term borrowings, net	—		3

Principal payments on long-term debt	(1,350)		—
Payment of consideration related to previous acquisitions	(3)		—

Share-based compensation-related proceeds, net of taxes paid on withholding shares	18		(38)
Purchases of treasury stock	(857)		(1,189)
Cash dividends paid	(520)		(460)

Net cash used in financing activities	(2,712)		(1,684)
Effect of exchange-rate changes on cash and cash equivalents	(4)		(20)
Net decrease in cash and cash equivalents	(1,827)		(978)
Cash and cash equivalents at beginning of period	3,581		3,485
Cash and cash equivalents at end of period	$	1,754	$	2,507

Supplemental cash flow information
Cash paid during the period for:
Income taxes	$	586	$	471
Interest, net of capitalized interest	225		209
Amounts included in the measurement of lease liabilities	42		37
Non-cash transactions:
Capital expenditures	4		5
Excise tax accrued on net share repurchases, not paid	7		—

Lease obligations obtained in exchange for right-of-use assets	74		46

See notes to condensed consolidated financial statements.

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ZOETIS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. Organization

Zoetis Inc. (including its subsidiaries, collectively, Zoetis, the company, we, us or our) 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. We organize and operate our business in two geographic regions: the United States (U.S.) and International.

We directly market our products in approximately 45 countries across North America, Europe, Africa, Asia, Australia and South America. Our products are sold in more than 100 countries, including developed markets and emerging markets. We have a diversified business, commercializing products across eight core species: dogs, cats and horses (collectively, companion animals) and cattle, swine, poultry, fish and sheep (collectively, livestock); and within seven major product categories: parasiticides, vaccines, dermatology, other pharmaceutical products, anti-infectives, animal health diagnostics and medicated feed additives.

2. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements were prepared following the requirements of the Securities and Exchange Commission (SEC) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by accounting principles generally accepted in the United States of America (U.S. GAAP) can be condensed or omitted. Balance sheet amounts and operating results for subsidiaries operating outside the U.S. are as of and for the three and nine months ended August 31, 2023 and August 31, 2022.

Revenue, expenses, assets and liabilities can vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be representative of those for the full year.

We are responsible for the unaudited condensed consolidated financial statements included in this Form 10-Q. The condensed consolidated financial statements include all normal and recurring adjustments that are considered necessary for the fair presentation of our financial position and operating results. The information included in this interim report should be read in conjunction with the financial statements and accompanying notes included in our 2022 Annual Report on Form 10-K.

3. Accounting Standards

Recently Adopted Accounting Standards

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. In January 2021 and December 2022, it issued subsequent amendments to the initial guidance: ASU No. 2021-01 and ASU No. 2022-06, Reference Rate Reform (Topic 848). The new guidance provides temporary optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions that reference the London Interbank Offered Rate (LIBOR) or another reference rate expected to be discontinued because of reference rate reform. Adoption of the guidance is optional and effective as of March 12, 2020, but only available through December 31, 2024. During the first quarter of 2023, we adopted the guidance by executing amendments to our affected contracts that referenced LIBOR. The adoption did not have a material impact on our condensed consolidated financial statements or related disclosures.

4. Revenue

A. Revenue from Product Sales

We offer a diversified portfolio of products which allows us to capitalize on local and regional customer needs. Generally, our products are promoted to veterinarians and livestock producers by our sales organization which includes sales representatives and technical and veterinary operations specialists, and then sold directly by us or through distributors, retailers or e-commerce outlets. The depth of our product portfolio enables us to address the varying needs of customers in different species and geographies. Many of our top-selling product lines are distributed across both of our operating segments, leveraging our research and development (R&D) operations and manufacturing and supply chain network.

Over the course of our history, we have focused on developing a diverse portfolio of animal health products, including medicines, vaccines and diagnostics, complemented by biodevices, genetic tests and a range of services. We refer to all different brands of a particular product, or its dosage forms for all species, as a product line. We have approximately 300 comprehensive product lines, including products for both companion animals and livestock within each of our major product categories.

Our major product categories are:

parasiticides: products that prevent or eliminate external and internal parasites such as fleas, ticks and worms;
vaccines:** biological preparations that help prevent diseases of the respiratory, gastrointestinal and reproductive tracts or induce a specific immune response;
dermatology products:** products that relieve itch associated with allergic conditions and atopic dermatitis;
other pharmaceutical products: pain and sedation, antiemetic, reproductive, and oncology products;
anti-infectives:** products that prevent, kill or slow the growth of bacteria, fungi or protozoa;
animal health diagnostics:** testing and analysis of blood, urine and other animal samples and related products and services, including point-of-care diagnostic products, instruments and reagents, rapid immunoassay tests, reference laboratory kits and services and blood glucose monitors; and

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medicated feed additives:** products added to animal feed that provide medicines to livestock.

Our remaining revenue is derived from other non-pharmaceutical product categories, such as nutritionals, as well as products and services in biodevices, genetic tests and precision animal health.

Our companion animal products help extend and improve the quality of life for pets; increase convenience and compliance for pet owners; and help veterinarians improve the quality of their care and the efficiency of their businesses. Growth in the companion animal medicines, vaccines and diagnostics sector is driven by economic development, related increases in disposable income and increases in pet ownership and spending on pet care. Companion animals are also living longer, deepening the human-animal bond, receiving increased medical treatment and benefiting from advances in animal health medicine, vaccines and diagnostics.

Our livestock products primarily help prevent or treat diseases and conditions to allow veterinarians and producers to care for their animals and to enable the cost-effective production of safe, high-quality animal protein. Human population growth and increasing standards of living are important long-term growth drivers for our livestock products in three major ways. First, population growth and increasing standards of living drive demand for improved nutrition, particularly through increased consumption of animal protein. Second, population growth leads to greater natural resource constraints driving a need for enhanced productivity. Finally, as standards of living improve and the global food chain faces increased scrutiny, there is more focus on food quality, safety and reliability of supply.

The following tables present our revenue disaggregated by geographic area, species and major product category:

Revenue by geographic area


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(MILLIONS OF DOLLARS)	2023		2022		2023		2022
United States	$	1,174	$	1,090	$	3,344	$	3,201
Australia	84		80		248		225
Brazil	101		70		276		233
Canada	63		56		183		172
Chile	31		31		109		106
China	69		92		255		291
France	34		28		102		91
Germany	50		43		148		132
Italy	26		24		87		86
Japan	34		37		120		137
Mexico	42		33		119		101
Spain	30		29		94		97
United Kingdom	78		59		209		174
Other developed markets	127		121		374		354
Other emerging markets	187		186		605		581
	2,130		1,979		6,273		5,981
Contract manufacturing & human health	21		23		58		59
Total Revenue	$	2,151	$	2,002	$	6,331	$	6,040

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Revenue by major species


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(MILLIONS OF DOLLARS)	2023		2022		2023		2022
U.S.
Companion animal	$	908	$	819	$	2,588	$	2,488
Livestock	266		271		756		713
	1,174		1,090		3,344		3,201
International
Companion animal	506		452		1,540		1,412
Livestock	450		437		1,389		1,368
	956		889		2,929		2,780
Total
Companion animal	1,414		1,271		4,128		3,900
Livestock	716		708		2,145		2,081
Contract manufacturing & human health	21		23		58		59
Total Revenue	$	2,151	$	2,002	$	6,331	$	6,040

Revenue by species


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(MILLIONS OF DOLLARS)	2023		2022		2023		2022
Companion Animal:
Dogs and Cats	$	1,354	$	1,213	$	3,931	$	3,715
Horses	60		58		197		185
	1,414		1,271		4,128		3,900
Livestock:
Cattle	374		371		1,102		1,063
Swine	129		129		404		427
Poultry	127		116		397		361
Fish	57		60		158		151
Sheep and other	29		32		84		79
	716		708		2,145		2,081
Contract manufacturing & human health	21		23		58		59
Total Revenue	$	2,151	$	2,002	$	6,331	$	6,040

Revenue by major product category


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(MILLIONS OF DOLLARS)	2023		2022		2023		2022
Parasiticides	$	465	$	422	$	1,465	$	1,417
Vaccines	449		449		1,308		1,300
Dermatology	397		348		1,048		978
Other pharmaceuticals	313		252		922		771
Anti-infectives	264		284		796		802
Animal health diagnostics	95		83		284		268
Medicated feed additives	86		78		257		261
Other non-pharmaceuticals	61		63		193		184
	2,130		1,979		6,273		5,981
Contract manufacturing & human health	21		23		58		59
Total Revenue	$	2,151	$	2,002	$	6,331	$	6,040

B. Revenue from Contracts with Customers

Contract liabilities reflected within Other current liabilities as of December 31, 2022 and 2021, and subsequently recognized as revenue during the first nine months of 2023 and 2022 were $4 million and $3 million, respectively. Contract liabilities as of September 30, 2023 and December 31, 2022 were $13 million and $14 million, respectively.

Estimated future revenue expected to be generated from long-term contracts with unsatisfied performance obligations as of September 30, 2023 is not material.

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5. Acquisitions and Divestitures

A. Acquisitions

During the third quarter of 2023, we acquired 100% of the issued share capital of PetMedix Ltd. (PetMedix), a privately held research and development stage animal health biopharmaceutical company based in the United Kingdom, which develops antibody-based therapeutics for companion animals. The purchase price included upfront cash consideration of $111 million, excluding $19 million of cash acquired, $5 million in cash withheld for customary post-closing adjustments, and contingent consideration up to $100 million based on the achievement of certain milestones. There are additional contingent payments to be made to the seller upon receipt of payments from a third party related to a preexisting collaboration arrangement between PetMedix and the third party. The initial fair value assessment of the contingent consideration and additional contingent payments is not material and the transaction did not have a material impact on our condensed consolidated financial statements.

During the third quarter of 2023, we also completed the acquisition of adivo GmbH (adivo), a privately held research and development stage animal health biopharmaceutical company based in Germany. The transaction did not have a material impact on our condensed consolidated financial statements.

In 2022, we completed the acquisition of Basepaws, a privately held petcare genetics company based in the U.S., which provides pet owners with genetic tests, analytics and early health risk assessments that can help manage the health, wellness and quality of care for their pets. We also completed the acquisition of NewMetrica, a privately held company based in Scotland, that provides scientifically-developed instruments to measure quality of life in companion animals. These transactions did not have a material impact on our condensed consolidated financial statements.

During 2021, we entered into an agreement to acquire Jurox, a privately held animal health company based in Australia, which develops, manufactures and markets a wide range of veterinary medicines for treating companion animals and livestock. On September 30, 2022, after satisfying all customary closing conditions, including clearance from the Australian Competition and Consumer Commission, we completed the acquisition of Jurox. We acquired 100% of the outstanding shares for an aggregate cash purchase price of $226 million, which was adjusted to $240 million for cash and working capital and other adjustments as of the closing date. Net cash consideration transferred to the seller was $215 million during 2022 and $5 million for the nine months ended September 30, 2023. The transaction was accounted for as a business combination, with the assets acquired and liabilities assumed measured at their respective acquisition date fair values. The valuation was finalized during the third quarter of 2023. The table below presents the final fair values allocated to the assets and liabilities of Jurox as of the acquisition date:


(MILLIONS OF DOLLARS)	Amounts
Cash and cash equivalents	$	20
Accounts receivable	8
Inventories(a)	21
Other current assets	1
Property, plant and equipment(b)	25
Identifiable intangible assets(c)	135
Other noncurrent assets	7
Accounts payable	2

Other current liabilities	12
Other noncurrent liabilities	1

Total net assets acquired	202
Goodwill(d)	38
Total consideration	$	240

(a) Acquired inventory is comprised of finished goods, work in process and raw materials. The fair value of finished goods was determined based on net realizable value adjusted for the costs of the selling effort, a reasonable profit allowance for the selling effort, and estimated holding costs. The fair value of work in process was determined based on net realizable value adjusted for costs to complete the manufacturing process, costs of the selling effort, a reasonable profit allowance for the remaining manufacturing and selling effort, and an estimate of holding costs. The fair value of raw materials was determined to approximate book value.

(b) Property, plant and equipment is comprised of buildings, machinery and equipment, land, construction in progress and furniture and fixtures. The fair value was primarily determined using a reproduction/replacement cost approach which measures the value of an asset by estimating the cost to acquire or construct comparable assets adjusted for age and condition of the asset.

(c) Identifiable intangible assets consist of developed technology rights. The fair value of identifiable intangible assets was determined using the income approach, which includes a forecast of expected future cash flows. For additional information regarding identifiable intangible assets, see Note 11. Goodwill and Other Intangible Assets.

(d) Goodwill represents the excess of consideration transferred over the fair values of the assets acquired and liabilities assumed. It is allocated to our International segment and is primarily attributable to cost and revenue synergies including market share capture, elimination of cost redundancies and gain of cost efficiencies, and intangible assets such as assembled workforce which are not separately recognizable. The primary strategic purpose of the acquisition was to enhance the company’s existing product portfolio.

B. Divestitures

During the third quarter of 2023, we completed the divestiture of Performance Livestock Analytics, part of our precision animal health business. The transaction did not have a material impact on our condensed consolidated financial statements.

During the nine months ended September 30, 2023, we received net cash proceeds of $93 million ($99 million sales proceeds, net of cash sold of $6 million) for the sale of a majority interest in our pet insurance business, Pumpkin Insurance Services. For the nine months ended September 30, 2023, we recorded a net pre-tax gain of $101 million within Other (income)/deductions—net, which includes $24 million related to the remeasurement of our retained noncontrolling investment to fair value.

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6. Restructuring Charges and Other Costs Associated with Acquisitions, Cost-Reduction and Productivity Initiatives

In connection with our cost-reduction/productivity initiatives, we typically incur costs and charges associated with site closings and other facility rationalization actions, workforce reductions and the expansion of shared services, including the development of global systems. In connection with our acquisition activity, we typically incur costs and charges associated with executing the transactions, integrating the acquired operations, which may include expenditures for consulting and the integration of systems and processes, product transfers and restructuring the consolidated company, which may include charges related to employees, assets and activities that will not continue in the consolidated company. All operating functions can be impacted by these actions, including sales and marketing, manufacturing and R&D, as well as functions such as business technology, shared services and corporate operations.

The components of costs incurred in connection with restructuring initiatives, acquisitions and cost-reduction/productivity initiatives are as follows:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(MILLIONS OF DOLLARS)	2023		2022		2023		2022
Restructuring charges and certain acquisition-related costs:
Integration costs(a)	$	1	$	1	$	3	$	4
Transaction costs(b)	2		—		4		—
Restructuring charges(c):
Employee termination costs	8		2		33		2

Asset impairment charges	1		2		1		2
Exit costs	4		1		4		1
Total Restructuring charges and certain acquisition-related costs	$	16	$	6	$	45	$	9

(a) Integration costs represent external, incremental costs directly related to integrating acquired businesses and primarily include expenditures for consulting and the integration of systems and processes, as well as product transfer costs.

(b) Transaction costs represent external costs directly related to acquiring businesses and primarily includes expenditures for banking, legal, accounting and other similar services.

(c) The restructuring charges for the three and nine months ended September 30, 2023 primarily consisted of employee termination and exit costs related to organizational structure refinements and other cost-reduction and productivity initiatives.

The restructuring charges for the three and nine months ended September 30, 2022, represent employee termination and exit costs associated with cost-reduction and productivity initiatives in certain international markets, as well as asset impairment charges primarily related to the consolidation of manufacturing sites in China.



(MILLIONS OF DOLLARS)	Accrual
Balance, December 31, 2022(a)	$	15
Provision	38
Non-cash activity	(1)
Utilization and other(b)	(18)

Balance, September 30, 2023(a)	$	34

(a) At September 30, 2023 and December 31, 2022, included in Accrued expenses ($25 million and $5 million, respectively) and Other noncurrent liabilities ($9 million and $10 million, respectively).

(b) Includes adjustments for foreign currency translation.

7. Other (Income)/Deductions—Net

The components of Other (income)/deductions—net are as follows:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(MILLIONS OF DOLLARS)	2023		2022		2023		2022
Royalty-related income(a)	$	(1)	$	(1)	$	(36)	$	(3)
Interest income	(23)		(13)		(79)		(20)
Identifiable intangible asset impairment charges(b)	6		1		17		1
Other asset impairment charges	1		—		1		—

Net gain on sale of business(c)	—		—		(101)		—
Foreign currency loss(d)	19		11		41		36

Other, net	4		(1)		6		(8)
Other (income)/deductions—net	$	6	$	(3)	$	(151)	$	6

(a) For the nine months ended September 30, 2023, predominantly associated with a settlement for underpayment of royalties in prior periods.

(b) For the three months ended September 30, 2023, primarily represents certain asset impairment charges related to our diagnostics business.

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For the nine months ended September 30, 2023, primarily represents certain asset impairment charges related to our precision animal health and diagnostics businesses.

(c) Primarily relates to the gain on sale of a majority interest in our pet insurance business. For additional information, see Note 5. Acquisitions and Divestitures.

(d) Primarily driven by costs related to hedging and exposures to certain emerging and developed market currencies.

8. Income Taxes

A. Taxes on Income

Our effective tax rate was 16.9% and 20.8% for the three months ended September 30, 2023 and 2022, respectively. The lower effective tax rate for the three months ended September 30, 2023, compared with the three months ended September 30, 2022, was primarily attributable to a benefit from the tax loss on the divestiture of Performance Livestock Analytics, a more favorable jurisdictional mix of earnings (which includes the impact of the location of earnings and repatriation costs) and a higher benefit in the U.S. related to foreign-derived income, partially offset by lower net discrete tax benefits. 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.

Our effective tax rate was 20.5% and 20.0% for the nine months ended September 30, 2023 and 2022, respectively. The higher effective tax rate for the nine months ended September 30, 2023, compared with the nine months ended September 30, 2022, was primarily 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 and a benefit from the tax loss on the divestiture of Performance Livestock Analytics. 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.

In 2022, the company implemented an initiative to maximize its cash position in the U.S. This initiative resulted in a tax benefit in the U.S. in connection with a prepayment from a related foreign entity in Belgium which qualifies as foreign-derived intangible income; however, this income tax benefit was deferred to 2023 and 2024. A portion of this benefit was recognized during the three and nine months ended September 30, 2023.

B. Deferred Taxes

As of September 30, 2023, the total net deferred income tax asset of $30 million is included in Noncurrent deferred tax assets ($190 million) and Noncurrent deferred tax liabilities ($160 million).

As of December 31, 2022, the total net deferred income tax asset of $31 million is included in Noncurrent deferred tax assets ($173 million) and Noncurrent deferred tax liabilities ($142 million).

C. Tax Contingencies

As of September 30, 2023, the net tax liabilities associated with uncertain tax positions of $202 million (exclusive of interest and penalties related to uncertain tax positions of $27 million) are included in Noncurrent deferred tax assets and Other noncurrent assets ($2 million) and Other taxes payable ($200 million).

As of December 31, 2022, the net tax liabilities associated with uncertain tax positions of $194 million (exclusive of interest and penalties related to uncertain tax positions of $19 million) are included in Noncurrent deferred tax assets and Other noncurrent assets ($2 million) and Other taxes payable ($192 million).

Our tax liabilities for uncertain tax positions relate primarily to issues common among multinational corporations. Any settlements or statute of limitations expirations could result in a significant decrease in our uncertain tax positions. Substantially all of these unrecognized tax benefits, if recognized, would impact our effective income tax rate. We do not expect that within the next twelve months any of our uncertain tax positions could significantly decrease as a result of settlements with taxing authorities or the expiration of the statutes of limitations. Our assessments are based on estimates and assumptions that have been deemed reasonable by management, but our estimates of uncertain tax positions and potential tax benefits may not be representative of actual outcomes, and any variation from such estimates could materially affect our financial statements in the period of settlement or when the statutes of limitations expire, as we treat these events as discrete items in the period of resolution. Finalizing audits with the relevant taxing authorities can include formal administrative and legal proceedings, and, as a result, it is difficult to estimate the timing and range of possible changes related to our uncertain tax positions, and such changes could be significant.

9. Financial Instruments

A. Debt

Credit Facilities

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 September 30, 2023 and December 31, 2022. There were no amounts drawn under the credit facility as of September 30, 2023 or December 31, 2022.

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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, 2023, we had access to $50 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 September 30, 2023 and December 31, 2022.

Commercial Paper Program

In February 2013, we entered into a commercial paper program with a capacity of up to $1.0 billion. As of September 30, 2023 and December 31, 2022, there was no commercial paper outstanding under this program.

Senior Notes and Other Long-Term Debt

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-leaseback transactions. The indenture also contains restrictions on our ability to consolidate, merge or sell substantially all of our assets. In addition, the indenture contains other customary terms, including certain events of default, upon the occurrence of which the 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.

The components of our long-term debt are as follows:


	September 30,		December 31,
(MILLIONS OF DOLLARS)	2023		2022
3.250% 2013 senior notes due 2023	$	—	$	1,350
4.500% 2015 senior notes due 2025	750		750
5.400% 2022 senior notes due 2025	600		600
3.000% 2017 senior notes due 2027	750		750
3.900% 2018 senior notes due 2028	500		500
2.000% 2020 senior notes due 2030	750		750
5.600% 2022 senior notes due 2032	750		750
4.700% 2013 senior notes due 2043	1,150		1,150
3.950% 2017 senior notes due 2047	500		500
4.450% 2018 senior notes due 2048	400		400
3.000% 2020 senior notes due 2050	500		500
	6,650		8,000
Unamortized debt discount / debt issuance costs	(62)		(66)
Less current portion of long-term debt	—		1,350
Cumulative fair value adjustment for interest rate swap contracts	(36)		(32)
Long-term debt, net of discount and issuance costs	$	6,552	$	6,552

The fair value of our long-term debt was $5,893 million and $6,108 million as of September 30, 2023 and December 31, 2022, respectively, and has been determined using a third-party matrix-pricing model that uses significant inputs derived from, or corroborated by, observable market data and Zoetis’ credit rating (Level 2 inputs).

The principal amount of long-term debt outstanding, as of September 30, 2023, matures in the following years:


											After
(MILLIONS OF DOLLARS)	2023		2024		2025		2026		2027		2027		Total
Maturities	$	—	$	—	$	1,350	$	—	$	750	$	4,550	$	6,650

Interest Expense

Interest expense, net of capitalized interest, was $59 million and $180 million for the three and nine months ended September 30, 2023, respectively, and $53 million and $159 million for the three and nine months ended September 30, 2022, respectively. Capitalized interest expense was $7 million and $19 million for the three and nine months ended September 30, 2023, respectively, and $5 million and $16 million for the three and nine months ended September 30, 2022, respectively.

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B. Derivative Financial Instruments

Foreign Exchange Risk

A significant portion of our revenue, earnings and net investment in foreign affiliates is exposed to changes in foreign exchange rates. We seek to manage our foreign exchange risk, in part, through operational means, including managing same-currency revenue in relation to same-currency costs and same-currency assets in relation to same-currency liabilities. Depending on market conditions, foreign exchange risk is also managed through the use of various derivative financial instruments. These derivative financial instruments serve to manage the exposure of our net investment in certain foreign operations to changes in foreign exchange rates and protect net income against the impact of translation into U.S. dollars of certain foreign exchange-denominated transactions.

All derivative financial instruments used to manage foreign currency risk are measured at fair value and are reported as assets or liabilities on the Condensed Consolidated Balance Sheets. The derivative financial instruments primarily offset exposures in the Australian dollar, British pound, Canadian dollar, Chinese yuan, euro and Norwegian krone. Changes in fair value are reported in earnings or in Accumulated other comprehensive income/(loss), depending on the nature and purpose of the financial instrument, as follows:

For foreign currency forward-exchange contracts not designated as hedging instruments, we recognize the gains and losses that are used to offset the same foreign currency assets or liabilities immediately into earnings along with the earnings impact of the items they generally offset. These contracts essentially take the opposite currency position of that reflected in the month-end balance sheet to counterbalance the effect of any currency movement. The vast majority of the foreign currency forward-exchange contracts mature within 60 days and all mature within three years.
For foreign exchange derivative instruments that are designated as hedging instruments against our net investment in foreign operations, changes in the fair value are recorded as a component of cumulative translation adjustment within Accumulated other comprehensive income/(loss) and reclassified into earnings when the foreign investment is sold or substantially liquidated. These instruments include cross-currency interest rate swaps and foreign currency forward-exchange contracts. Gains and losses excluded from the assessment of hedge effectiveness are recognized in earnings (Interest expense, net of capitalized interest). The cash flows from these contracts are reflected within the investing section of our Condensed Consolidated Statements of Cash Flows*.* These contracts have varying maturities of up to two years.

Interest Rate Risk

The company may use interest rate swap contracts on certain investing and borrowing transactions to manage its net exposure to interest rates and to reduce its overall cost of borrowing.

In anticipation of issuing fixed-rate debt, we may use forward-starting interest rate swaps that are designated as cash flow hedges to hedge against changes in interest rates that could impact expected future issuances of debt. Unrealized gains or losses on the forward-starting interest rate swaps are reported in Accumulated other comprehensive loss and are recognized in earnings over the life of the future fixed rate notes. When the company discontinues hedge accounting because it is no longer probable that an anticipated transaction will occur within the originally expected period of execution, or within an additional two-month period thereafter, changes to fair value accumulated in other comprehensive income are recognized immediately in earnings.
During the period from 2019 to 2022, we entered into forward-starting interest rate swaps with an aggregate notional value of $650 million. We designated these swaps as cash flow hedges against interest rate exposure related principally to the issuance of fixed-rate debt to refinance our 3.250% 2013 senior notes due 2023. Upon issuance of our 2022 senior notes, we terminated these contracts and received $114 million in cash from the counterparties for settlement, included in Net cash provided by operating activities in the Consolidated Statements of Cash Flows. The settlement amount, which represented the fair value of the contracts at the time of termination, was recorded in Accumulated other comprehensive loss, and will be amortized into income (offset to Interest expense, net of capitalized interest) over the life of the 5.600% 2022 senior notes due 2032.
As of September 30, 2023, we had outstanding forward-starting interest rate swaps, having an effective date and mandatory termination date in March 2026, to hedge against interest rate exposure related principally to the anticipated future issuance of fixed-rate debt to be used primarily to refinance our 4.500% 2015 senior notes due 2025.
We may use fixed-to-floating interest rate swaps that are designated as fair value hedges to hedge against changes in the fair value of certain fixed-rate debt attributable to changes in the benchmark Secured Overnight Financing Rate (SOFR). These derivative instruments effectively convert a portion of the company’s long-term debt from fixed-rate to floating-rate debt based on the daily SOFR rate plus a spread. Gains or losses on the fixed-to-floating interest rate swaps due to changes in SOFR are recorded in Interest expense, net of capitalized interest. Changes in the fair value of the fixed-to-floating interest rate swaps are offset by changes in the fair value of the underlying fixed-rate debt. As of September 30, 2023, we had outstanding fixed-to-floating interest rate swaps that correspond to a portion of the 3.900% 2018 senior notes due 2028 and the 2.000% senior notes due 2030. The amounts recorded during the three and nine months ended September 30, 2023 for changes in the fair value of these hedges are not material to our condensed consolidated financial statements.

During the first quarter of 2023, we executed amendments to certain of our interest rate swap contracts, which changed the floating rate index from LIBOR to SOFR. These amendments did not have a material impact on our condensed consolidated financial statements.

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Outstanding Positions

The aggregate notional amount of derivative instruments are as follows:


	Notional
	September 30,		December 31,
(MILLIONS)	2023		2022
Derivatives not Designated as Hedging Instruments
Foreign currency forward-exchange contracts	$	1,984	$	1,753

Derivatives Designated as Hedging Instruments
Foreign exchange derivative instruments (in foreign currency):
Euro	650		650
Danish krone	600		600
Swiss franc	25		25


Forward-starting interest rate swaps	$	100	$	50

Fixed-to-floating interest rate swap contracts	$	250	$	250

Fair Value of Derivative Instruments

The classification and fair values of derivative instruments are as follows:


		Fair Value of Derivatives
		September 30,		December 31,
(MILLIONS OF DOLLARS)	Balance Sheet Location	2023		2022
Derivatives Not Designated as Hedging Instruments
Foreign currency forward-exchange contracts	Other current assets	$	12	$	22
Foreign currency forward-exchange contracts	Other current liabilities	(11)		(21)
Total derivatives not designated as hedging instruments		$	1	$	1

Derivatives Designated as Hedging Instruments:

Forward-starting interest rate swap contracts	Other noncurrent assets	$	17	$	10


Foreign exchange derivative instruments	Other current assets	15		21
Foreign exchange derivative instruments	Other noncurrent assets	19		19
Foreign exchange derivative instruments	Other current liabilities	(5)		(9)
Foreign exchange derivative instruments	Other noncurrent liabilities	—		(4)



Fixed-to-floating interest rate swap contracts	Other noncurrent liabilities	(36)		(32)
Total derivatives designated as hedging instruments		10		5
Total derivatives		$	11	$	6

The company’s derivative transactions are subject to master netting agreements that mitigate credit risk by permitting net settlement of transactions with the same counterparty. The company also has collateral security agreements with certain of its counterparties. Under these collateral security agreements either party is required to post cash collateral when the net fair value of derivative instruments covered by the collateral agreement exceeds contractually established thresholds. At September 30, 2023, there was $25 million of collateral received and $32 million of collateral posted related to derivative instruments recorded in Other current liabilities and Other current assets, respectively. At December 31, 2022, there was $8 million of collateral received and $21 million of collateral posted related to derivative instruments recorded in Other current liabilities and Other current assets, respectively.

We use a market approach in valuing financial instruments on a recurring basis. Our derivative financial instruments are measured at fair value on a recurring basis using Level 2 inputs in the calculation of fair value.

The amounts of net gains/(losses) on derivative instruments not designated as hedging instruments, recorded in Other (income)/deductions—net, are as follows:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(MILLIONS OF DOLLARS)	2023		2022		2023		2022
Foreign currency forward-exchange contracts	$	16	$	(23)	$	(20)	$	(49)

These amounts were substantially offset in Other (income)/deductions—net by the effect of changing exchange rates on the underlying foreign currency exposures.

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The amounts of unrecognized net gains on interest rate swap contracts, recorded, net of tax, in Accumulated other comprehensive loss, are as follows:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(MILLIONS OF DOLLARS)	2023		2022		2023		2022
Forward-starting interest rate swap contracts	$	5	$	30	$	5	$	77
Foreign exchange derivative instruments	$	18	$	39	$	5	$	84

Gains on interest rate swap contracts, recognized within Interest expense, net of capitalized interest, are as follows:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(MILLIONS OF DOLLARS)	2023		2022		2023		2022
Foreign exchange derivative instruments	$	4	$	4	$	14	$	11

The net amount of deferred gains related to derivative instruments designated as cash flow hedges that is expected to be reclassified from Accumulated other comprehensive loss into earnings over the next 12 months is not material.

10. Inventories

The components of inventory are as follows:


	September 30,		December 31,
(MILLIONS OF DOLLARS)	2023		2022
Finished goods	$	1,185	$	1,090
Work-in-process	1,062		825
Raw materials and supplies	497		430
Inventories	$	2,744	$	2,345

11. Goodwill and Other Intangible Assets

A. Goodwill

The components of, and changes in, the carrying amount of goodwill are as follows:


(MILLIONS OF DOLLARS)	U.S.		International		Total
Balance, December 31, 2022	$	1,485	$	1,261	$	2,746
Additions	24		14		38
Transfers/Adjustments(a)	27		(34)		(7)
Other(b)	(2)		(13)		(15)
Balance, September 30, 2023	$	1,534	$	1,228	$	2,762

(a) Primarily related to asset transfers from international markets to the U.S.

(b) Includes adjustments for foreign currency translation and the sale of a majority interest in our pet insurance business within our U.S. segment.

The gross goodwill balance was $3,298 million and $3,282 million as of September 30, 2023 and December 31, 2022, respectively. Accumulated goodwill impairment losses (generated entirely in fiscal 2002) were $536 million as of September 30, 2023 and December 31, 2022.

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B. Other Intangible Assets

The components of identifiable intangible assets are as follows:


	As of September 30, 2023						As of December 31, 2022
					Identifiable						Identifiable
	Gross				Intangible Assets		Gross				Intangible Assets
	Carrying		Accumulated		Less Accumulated		Carrying		Accumulated		Less Accumulated
(MILLIONS OF DOLLARS)	Amount		Amortization		Amortization		Amount		Amortization		Amortization
Finite-lived intangible assets:
Developed technology rights(a)	$	1,994	$	(1,065)	$	929	$	1,918	$	(975)	$	943
Brands and tradenames	391		(245)		146		395		(237)		158
Other	333		(250)		83		337		(233)		104
Total finite-lived intangible assets	2,718		(1,560)		1,158		2,650		(1,445)		1,205
Indefinite-lived intangible assets:
Brands and tradenames	91		—		91		91		—		91
In-process research and development(a)(b)	142		—		142		77		—		77
Product rights	7		—		7		7		—		7
Total indefinite-lived intangible assets	240		—		240		175		—		175
Identifiable intangible assets	$	2,958	$	(1,560)	$	1,398	$	2,825	$	(1,445)	$	1,380

(a) During the nine months ended September 30, 2023, certain intangible assets related to the acquisition of an Irish biologic therapeutics company, acquired in 2017, were placed into service.

(b) As of September 30, 2023, primarily includes intangible assets related to the acquisitions of PetMedix and adivo in the third quarter of 2023.

C. Amortization

Amortization expense related to finite-lived acquired intangible assets that contribute to our ability to sell, manufacture, research, market and distribute products, compounds and intellectual property is included in Amortization of intangible assets as it benefits multiple business functions. Amortization expense related to finite-lived acquired intangible assets that are associated with a single function is included in Cost of sales, Selling, general and administrative expenses or Research and development expenses, as appropriate. Total amortization expense for finite-lived intangible assets was $46 million and $141 million for the three and nine months ended September 30, 2023, respectively, and $48 million and $147 million for the three and nine months ended September 30, 2022, respectively.

12. Share-based Payments

The Zoetis 2013 Equity and Incentive Plan (Equity Plan) provides long-term incentives to our employees and non-employee directors. The principal types of share-based awards available under the Equity Plan may include, but are not limited to, stock options, restricted stock and restricted stock units (RSUs), deferred stock units (DSUs), performance-vesting restricted stock units (PSUs) and other equity-based or cash-based awards.

The components of share-based compensation expense are as follows:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(MILLIONS OF DOLLARS)	2023		2022		2023		2022
Stock options / stock appreciation rights	$	3	$	2	$	6	$	7
RSUs / DSUs	10		9		27		26
PSUs	4		4		10		13
Share-based compensation expense—total(a)	$	17	$	15	$	43	$	46

(a) For the three and nine months ended September 30, 2023 and 2022, we capitalized less than $1 million of share-based compensation expense to inventory.

During the nine months ended September 30, 2023, the company granted 271,150 stock options with a weighted-average exercise price of $162.12 per stock option and a weighted-average fair value of $43.56 per stock option. The fair-value based method for valuing each Zoetis stock option grant on the grant date uses the Black-Scholes-Merton option-pricing model, which incorporates a number of valuation assumptions. The weighted-average fair value was estimated based on the following assumptions: risk-free interest rate of 3.84%; expected dividend yield of 0.92%; expected stock price volatility of 28.63%; and expected term of 4.2 years. In general, stock options granted prior to 2023 vest after three years of continuous service, while stock options granted in 2023 are subject to graded vesting over three years. The values determined through this fair-value based method generally are amortized on a straight-line basis over the vesting term into Cost of sales, Selling, general and administrative expenses, or Research and development expenses, as appropriate.

During the nine months ended September 30, 2023, the company granted 270,960 RSUs, with a weighted-average grant date fair value of $162.53 per RSU. RSUs are accounted for using a fair-value-based method that utilizes the closing price of Zoetis common stock on the date of grant. In general, RSUs granted prior to 2023 vest after three years of continuous service from the grant date while RSUs granted in 2023 are subject to graded vesting over three years. The values generally are amortized on a straight-line basis over the vesting term into Cost of sales, Selling, general and administrative expenses, or Research and development expenses, as appropriate.

During the nine months ended September 30, 2023, the company granted 99,626 PSUs with a weighted-average grant date fair value of $238.24 per PSU. PSUs are accounted for using a Monte Carlo simulation model. The units underlying the PSUs will be earned and vested over a three-year

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performance period, based upon the total shareholder return of the company in comparison to the total shareholder return of the companies comprising the S&P 500 stock market index at the start of the performance period, excluding companies that during the performance period are acquired or no longer publicly traded (Relative TSR). The weighted-average fair value was estimated based on volatility assumptions of Zoetis common stock and an average of the S&P 500 companies, which were 31.8% and 40.9%, respectively. Depending on the company’s Relative TSR performance at the end of the performance period, the recipient may earn from 0% to 200% of the target number of units. Vested units are settled in shares of the company’s common stock. PSU values are amortized on a straight-line basis over the vesting term into Cost of sales, Selling, general and administrative expenses, or Research and development expenses, as appropriate.

13. Stockholders’ Equity

Zoetis is authorized to issue 6 billion shares of common stock and 1 billion shares of preferred stock.

In December 2021, our Board of Directors authorized a $3.5 billion share repurchase program. As of September 30, 2023, there was $1.7 billion remaining under this authorization. Purchases of Zoetis shares may be made at the discretion of management, depending on market conditions and business needs.

Accumulated other comprehensive loss

Changes, net of tax, in accumulated other comprehensive loss, were as follows:



			Currency Translation Adjustments
					Other Currency		Benefit Plans		Accumulated Other
	Cash Flow		Net Investment		Translation		Actuarial		Comprehensive
(MILLIONS OF DOLLARS)	Hedges		Hedges		Adjustments		(Losses)/Gains		Loss
Balance, December 31, 2022	$	90	$	41	$	(944)	$	(4)	$	(817)
Other comprehensive income/(loss), net of tax	—		5		(6)		4		3

Balance, September 30, 2023	$	90	$	46	$	(950)	$	—	$	(814)

Balance, December 31, 2021	$	4	$	5	$	(756)	$	(17)	$	(764)
Other comprehensive income/(loss), net of tax	78		84		(208)		1		(45)

Balance, September 30, 2022	$	82	$	89	$	(964)	$	(16)	$	(809)

14. Earnings per Share

The following table presents the calculation of basic and diluted earnings per share:


		Three Months Ended						Nine Months Ended
(MILLIONS OF DOLLARS AND SHARES, EXCEPT PER SHARE DATA)		September 30,						September 30,
	2023			2022			2023			2022
Numerator
Net income before allocation to noncontrolling interests		$	596		$	528		$	1,817		$	1,651
Less: Net loss attributable to noncontrolling interests		—			(1)			(2)			(2)
Net income attributable to Zoetis Inc.		$	596		$	529		$	1,819		$	1,653
Denominator
Weighted-average common shares outstanding		460.3			467.8			461.9			470.0
Common stock equivalents: stock options, RSUs, PSUs and DSUs		1.1			1.3			1.1			1.6
Weighted-average common and potential dilutive shares outstanding		461.4			469.1			463.0			471.6

Earnings per share attributable to Zoetis Inc. stockholders—basic		$	1.29		$	1.13		$	3.94		$	3.52
Earnings per share attributable to Zoetis Inc. stockholders—diluted		$	1.29		$	1.13		$	3.93		$	3.51

The number of stock options outstanding under the company’s Equity Plan that were excluded from the computation of diluted earnings per share, as the effect would have been antidilutive, were not material for the three and nine months ended September 30, 2023 and 2022.

15. Commitments and Contingencies

We and certain of our subsidiaries are subject to numerous contingencies arising in the ordinary course of business. For a discussion of our tax contingencies, see Note 8. Income Taxes.

A. Legal Proceedings

Our non-tax contingencies include, among others, the following:

Product liability and other product-related litigation, which can include injury, consumer, off-label promotion, antitrust and breach of contract claims.
Commercial and other matters, which can include product-pricing claims and environmental claims and proceedings.
Patent litigation, which typically involves challenges to the coverage and/or validity of our patents or those of third parties on various products or processes.

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Government investigations, which can involve regulation by national, state and local government agencies in the U.S. and in other countries.

Certain of these contingencies could result in losses, including damages, fines and/or civil penalties, and/or criminal charges, which could be substantial.

We believe that we have strong defenses in these types of matters, but litigation is inherently unpredictable and excessive verdicts do occur. We do not believe that any of these matters will have a material adverse effect on our financial position. However, we could incur judgments, enter into settlements or revise our expectations regarding the outcome of certain matters, and such developments could have a material adverse effect on our results of operations or cash flows in the period in which the amounts are paid.

We have accrued for losses that are both probable and reasonably estimable. Substantially all of these contingencies are subject to significant uncertainties and, therefore, determining the likelihood of a loss and/or the measurement of any loss can be complex. Consequently, we are unable to estimate the range of reasonably possible loss in excess of amounts accrued. Our assessments are based on estimates and assumptions that have been deemed reasonable by management, but the assessment process relies on estimates and assumptions that may prove to be incomplete or inaccurate, and unanticipated events and circumstances may occur that might cause us to change those estimates and assumptions.

Amounts recorded for legal and environmental contingencies can result from a complex series of judgments about future events and uncertainties and can rely on estimates and assumptions.

The principal matters to which we are a party are discussed below. In determining whether a pending matter is significant for financial reporting and disclosure purposes, we consider both quantitative and qualitative factors in order to assess materiality, such as, among other things, the amount of damages and the nature of any other relief sought in the proceeding, if such damages and other relief are specified; our view of the merits of the claims and of the strength of our defenses; whether the action purports to be a class action and our view of the likelihood that a class will be certified by the court; the jurisdiction in which the proceeding is pending; any experience that we or, to our knowledge, other companies have had in similar proceedings; whether disclosure of the action would be important to a reader of our financial statements, including whether disclosure might change a reader’s judgment about our financial statements in light of all of the information about the company that is available to the reader; the potential impact of the proceeding on our reputation; and the extent of public interest in the matter. In addition, with respect to patent matters, we consider, among other things, the financial significance of the product protected by the patent.

Ulianopolis, Brazil

In February 2012, the Municipality of Ulianopolis (State of Para, Brazil) filed a complaint against Fort Dodge Saúde Animal Ltda. (FDSAL), a Zoetis entity, and five other large companies alleging that waste sent to a local waste incineration facility for destruction, but that was not ultimately destroyed as the facility lost its operating permit, caused environmental impacts requiring cleanup.

The Municipality is seeking recovery of cleanup costs purportedly related to FDSAL’s share of all waste accumulated at the incineration facility awaiting destruction, and compensatory damages to be allocated among the six defendants. We believe we have strong arguments against the claim, including defense strategies against any claim of joint and several liability.

At the request of the Municipal prosecutor, in April 2012, the lawsuit was suspended for one year. Since that time, the prosecutor has initiated investigations into the Municipality's actions in the matter as well as the efforts undertaken by the six defendants to remove and dispose of their individual waste from the incineration facility. On October 3, 2014, the Municipal prosecutor announced that the investigation remained ongoing and outlined the terms of a proposed Term of Reference (a document that establishes the minimum elements to be addressed in the preparation of an Environmental Impact Assessment), under which the companies would be liable to withdraw the waste and remediate the area.

On March 5, 2015, we presented our response to the prosecutor’s proposed Term of Reference, arguing that the proposed terms were overly general in nature and expressing our interest in discussing alternatives to address the matter. The prosecutor agreed to consider our request to engage a technical consultant to conduct an environmental diagnostic of the contaminated area. On May 29, 2015, we, in conjunction with the other defendant companies, submitted a draft cooperation agreement to the prosecutor, which outlined the proposed terms and conditions for the engagement of a technical consultant to conduct the environmental diagnostic. On August 19, 2016, the parties and the prosecutor agreed to engage the services of a third-party consultant to conduct a limited environmental assessment of the site. The site assessment was conducted during June 2017, and a written report summarizing the results of the assessment was provided to the parties and the prosecutor in November 2017. The report noted that waste is still present on the site and that further (Phase II) environmental assessments are needed before a plan to manage that remaining waste can be prepared. On April 1, 2019, the defendants met with the Prosecutor to discuss the conclusions set forth in the written report. Following that discussion, on April 10, 2019, the Prosecutor issued a procedural order requesting that the defendants prepare and submit a technical proposal outlining the steps needed to conduct the additional Phase II environmental assessments. The defendants presented the technical proposal to the Prosecutor on October 21, 2019. On March 3, 2020, the Prosecutor notified the defendants that he submitted the proposal to the Ministry of the Environment for its review and consideration by the Prosecutor. On July 15, 2020, the Prosecutor recommended certain amendments to the proposal for the Phase II testing. On September 28, 2020, the parties and the Prosecutor agreed to the final terms and conditions concerning the cooperation agreement with respect to the Phase II testing. Due to the ongoing issues presented by the coronavirus (COVID-19) pandemic, the parties have been unable to secure a start date for the Phase II testing and have no timeline at this point when testing will begin.

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Belgium Excess Profit Tax Regime

On February 14, 2019, the General Court of the European Union (General Court) annulled the January 11, 2016 decision of the European Commission (EC) that selective tax advantages granted by Belgium under its “excess profit” tax scheme constitute illegal state aid. As a result of the 2016 decision, the company recorded a net tax charge of approximately $35 million in the first half of 2016. On May 8, 2019, the EC filed an appeal to the decision of the General Court. On September 16, 2019, the EC opened separate in-depth investigations to assess whether Belgium excess profit rulings granted to 39 multinational companies, including Zoetis, constituted state aid for those companies. On September 16, 2021, the European Court of Justice upheld the EC’s decision that the Belgium excess profit ruling system is considered an aid scheme and referred the case back to the General Court to rule on open questions. On September 20, 2023, the General Court confirmed the decision of the EC that the Belgium excess profit tax scheme constitutes illegal state aid. We are in the process of preparing an appeal of the General Court’s decision. The company has not reflected any potential benefits in its condensed consolidated financial statements as of September 30, 2023 as a result of the 2019 annulment. We will continue to monitor the developments of the appeal and its ultimate resolution.

B. Guarantees and Indemnifications

In the ordinary course of business and in connection with the sale of assets and businesses, we indemnify our counterparties against certain liabilities that may arise in connection with the transaction or related to activities prior to the 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, 2023, recorded amounts for the estimated fair value of these indemnifications were not material.

16. Segment Information

Operating Segments

We manage our operations through two geographic operating segments: the U.S. and International. Each operating segment has responsibility for its commercial activities. Within each of these operating segments, we offer a diversified product portfolio, including parasiticides, vaccines, dermatology, other pharmaceutical products, anti-infectives, animal health diagnostics and medicated feed additives, for both companion animal and livestock customers. Our chief operating decision maker uses the revenue and earnings of the two operating segments, among other factors, for performance evaluation and resource allocation.

Other Costs and Business Activities

Certain costs are not allocated to our operating segment results, such as costs associated with the following:

Other business activities, includes our Client Supply Services (CSS) contract manufacturing results, our human health business, and expenses associated with our dedicated veterinary medicine research and development organization, research alliances, U.S. regulatory affairs and other operations focused on the development of our products. Other R&D-related costs associated with non-U.S. market and regulatory activities are generally included in the international commercial segment.
Corporate, includes enabling functions such as 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 not charged to our operating segments, as well as interest income and expense.
Certain transactions and events such as (i) Purchase accounting adjustments, where we incur expenses associated with the amortization of fair value adjustments to inventory, intangible assets and property, plant and equipment; (ii) Acquisition-related activities, where we incur costs associated with acquiring and integrating newly acquired businesses, such as transaction costs and integration costs; and (iii) Certain significant items, which comprise substantive, unusual items that, either as a result of their nature or size, would not be expected to occur as part of our normal business on a regular basis, such as restructuring charges and implementation costs associated with our cost-reduction/productivity initiatives that are not associated with an acquisition, certain asset impairment charges, certain legal and commercial settlements and the impact of divestiture-related gains and losses.
Other unallocated 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.

Segment Assets

We manage our assets on a total company basis, not by operating segment. Therefore, our chief operating decision maker does not regularly review any asset information by operating segment and, accordingly, we do not report asset information by operating segment.

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Selected Statement of Income Information


	Earnings						Depreciation and Amortization(a)
	Three Months Ended						Three Months Ended
	September 30,						September 30,
(MILLIONS OF DOLLARS)	2023			2022			2023		2022
U.S.
Revenue	$	1,174		$	1,090
Cost of sales	228			204
Gross profit	946			886
Gross margin	80.6		%	81.3		%
Operating expenses	202			206
Other (income)/deductions-net	—			1
U.S. Earnings	744			679			$	19	$	12

International
Revenue(b)	956			889
Cost of sales	306			256
Gross profit	650			633
Gross margin	68.0		%	71.2		%
Operating expenses	156			150
Other (income)/deductions-net	1			(3)
International Earnings	493			486			24		21

Total operating segments	1,237			1,165			43		33

Other business activities	(124)			(106)			9		7
Reconciling Items:
Corporate	(258)			(245)			33		33
Purchase accounting adjustments	(39)			(40)			39		40
Acquisition-related costs	(3)			(1)			—		—
Certain significant items(c)	(23)			(6)			—		—
Other unallocated	(73)			(100)			—		2
Total Earnings(d)	$	717		$	667		$	124	$	115

(a) Certain production facilities are shared. Depreciation and amortization is allocated to the reportable operating segments based on estimates of where the benefits of the related assets are realized.

(b) Revenue denominated in euros was $206 million and $183 million for the three months ended September 30, 2023 and 2022, respectively.

(c) For the three months ended September 30, 2023, primarily consisted of employee termination and exit costs related to organizational structure refinements and other cost-reduction and productivity initiatives, as well as certain asset impairment charges related to our diagnostics and precision animal health businesses.

For the three 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 asset impairment charges related to the consolidation of manufacturing sites in China.

(d) Defined as income before provision for taxes on income.

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	Earnings						Depreciation and Amortization(a)
	Nine Months Ended						Nine Months Ended
	September 30,						September 30,
(MILLIONS OF DOLLARS)	2023			2022			2023		2022
U.S.
Revenue	$	3,344		$	3,201
Cost of sales	645			587
Gross profit	2,699			2,614
Gross margin	80.7		%	81.7		%
Operating expenses	602			578
Other (income)/deductions-net	—			(6)
U.S. Earnings	2,097			2,042			$	58	$	40

International
Revenue(b)	2,929			2,780
Cost of sales	912			809
Gross profit	2,017			1,971
Gross margin	68.9		%	70.9		%
Operating expenses	473			456
Other (income)/deductions-net	1			(5)
International Earnings	1,543			1,520			67		62

Total operating segments	3,640			3,562			125		102

Other business activities	(354)			(315)			24		21
Reconciling Items:
Corporate	(722)			(771)			95		99
Purchase accounting adjustments	(124)			(120)			118		120
Acquisition-related costs	(8)			(4)			—		—
Certain significant items(c)	45			(10)			—		—
Other unallocated	(191)			(278)			3		4
Total Earnings(d)	$	2,286		$	2,064		$	365	$	346

(b) Revenue denominated in euros was $627 million and $590 million for the nine months ended September 30, 2023 and 2022, respectively.

(c) For the nine months ended September 30, 2023, primarily consisted of a gain on the sale of a majority interest in our pet insurance business, partially offset by employee termination costs related to organizational structure refinements and certain asset impairment charges related to our precision animal health and diagnostics businesses.

For the nine months ended September 30, 2022, primarily represents inventory and asset impairment charges related to the consolidation of manufacturing sites in China as well as employee termination and exit costs associated with cost-reduction and productivity initiatives in certain international markets.

(d) Defined as income before provision for taxes on income.

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