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

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

Overview of our business

Zoetis is a global leader in the animal health industry, focused on the discovery, development, manufacture and commercialization of medicines, vaccines, diagnostic products and services, biodevices, genetic tests and precision animal health technology. For 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 EndedRelated to
September 30,Foreign
(MILLIONS OF DOLLARS)20232022TotalExchangeOperational(a)
Revenue$2,151$2,0027(1)8
Net income attributable to Zoetis59652913(3)16
Adjusted net income(a)62956611(2)13
% Change
Nine Months EndedRelated to
September 30,Foreign
(MILLIONS OF DOLLARS)20232022TotalExchangeOperational(a)
Revenue$6,331$6,0405(2)7
Net income attributable to Zoetis1,8191,6531019
Adjusted net income(a)1,8881,7587—7

(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.

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

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disease near our main production sites could require us to immediately halt production of our products at such sites or force us to incur substantial expenses in procuring raw materials or products elsewhere. Alternatively, sales of products that treat specific disease outbreaks may increase.

Foreign Exchange Rates

Significant portions of our revenue and costs are exposed to changes in foreign exchange rates. Our products are sold in more than 100 countries and, as a result, our revenue is influenced by changes in foreign exchange rates. For the nine months ended September 30, 2023, approximately 43% of our revenue was denominated in foreign currencies. We seek to manage our foreign exchange risk, in part, through operational means, including managing same-currency revenue in relation to same-currency costs and same-currency assets in relation to same-currency liabilities. As we operate in multiple foreign currencies, including the Australian dollar, Brazilian real, British pound, Canadian dollar, Chinese yuan, euro and other currencies, changes in those currencies relative to the U.S. dollar will impact our revenue, cost of goods and expenses, and consequently, net income. Exchange rate fluctuations may also have an impact beyond our reported financial results and directly impact operations. These fluctuations may affect the ability to buy and sell our goods and services between markets impacted by significant exchange rate variances. For the nine months ended September 30, 2023, approximately 57% 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.

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Analysis of the condensed consolidated statements of income

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

Three Months EndedNine Months Ended
September 30,%September 30,%
(MILLIONS OF DOLLARS)20232022Change20232022Change
Revenue$2,151$2,0027$6,331$6,0405
Costs and expenses:
Cost of sales63860751,8331,8012
% of revenue29.7%30.3%29.0%29.8%
Selling, general and administrative expenses52550151,5861,4956
% of revenue24%25%25%25%
Research and development expenses1521341344039113
% of revenue7%7%7%6%
Amortization of intangible assets38373112115(3)
Restructuring charges and certain acquisition-related costs166*459*
Interest expense, net of capitalized interest59531118015913
Other (income)/deductions—net6(3)*(151)6*
Income before provision for taxes on income71766772,2862,06411
% of revenue33%33%36%34%
Provision for taxes on income121139(13)46941314
Effective tax rate16.9%20.8%20.5%20.0%
Net income before allocation to noncontrolling interests596528131,8171,65110
Less: Net loss attributable to noncontrolling interests—(1)*(2)(2)*
Net income attributable to Zoetis Inc.$596$52913$1,819$1,65310
% of revenue28%26%29%27%

*Calculation not meaningful

Revenue

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

Total revenue increased by $149 million, or 7%, in the three months ended September 30, 2023, compared with the three months ended September 30, 2022, an increase of $156 million, or 8%, on an operational basis. Operational revenue growth was comprised primarily of the following:

  • price growth of approximately 5%;

  • 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 1%.

Nine months ended September 30, 2023 vs. nine months ended September 30, 2022

Total revenue increased by $291 million, or 5%, in the nine months ended September 30, 2023, compared with the nine months ended September 30, 2022, an increase of $411 million, or 7%, on an operational basis. Operational revenue growth was comprised primarily of the following:

  • price growth of approximately 5%;

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

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

Foreign exchange decreased reported revenue growth by approximately 2%.

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Costs and Expenses

Cost of sales
Three Months EndedNine Months Ended
September 30,%September 30,%
(MILLIONS OF DOLLARS)20232022Change20232022Change
Cost of sales$638$6075$1,833$1,8012
% of revenue29.7%30.3%29.0%29.8%

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

Cost of sales as a percentage of revenue was 29.7% in the three months ended September 30, 2023, compared with 30.3% in the three months ended September 30, 2022. The decrease was primarily as a result of:

  • price increases; and

  • lower freight costs,

partially offset by:

  • unfavorable manufacturing and other costs;

  • inventory obsolescence, scrap and other charges; and

  • unfavorable product mix.

Nine months ended September 30, 2023 vs. nine months ended September 30, 2022

Cost of sales as a percentage of revenue was 29.0% in the nine months ended September 30, 2023, compared with 29.8% in the nine months ended September 30, 2022. The decrease was primarily as a result of:

  • price increases;

  • favorable foreign exchange; 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 EndedNine Months Ended
September 30,%September 30,%
(MILLIONS OF DOLLARS)20232022Change20232022Change
Selling, general and administrative expenses$525$5015$1,586$1,4956
% of revenue24%25%25%25%

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

SG&A expenses increased by $24 million, or 5%, in the three months ended September 30, 2023, compared with the three months ended September 30, 2022, primarily as a result of:

  • certain compensation-related costs;

  • an increase in technology costs; and

  • higher freight and logistics costs,

partially offset by:

  • lower travel and entertainment expenses.

Nine months ended September 30, 2023 vs. nine months ended September 30, 2022

SG&A expenses increased by $91 million, or 6%, in the nine months ended September 30, 2023, compared with the nine months ended September 30, 2022, primarily as a result of:

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

  • higher freight and logistics costs; and

  • an increase in technology costs,

partially offset by:

  • favorable foreign exchange; and

  • lower bad debt expenses.

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Research and development expenses
Three Months EndedNine Months Ended
September 30,%September 30,%
(MILLIONS OF DOLLARS)20232022Change20232022Change
Research and development expenses$152$13413$440$39113
% of revenue7%7%7%6%

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

R&D expenses increased by $18 million, or 13%, in the three months ended September 30, 2023, compared with the three months ended September 30, 2022, primarily as a result of:

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

  • higher spend in project investments; and

  • higher other operating costs.

Nine months ended September 30, 2023 vs. nine months ended September 30, 2022

R&D expenses increased by $49 million, or 13%, in the nine months ended September 30, 2023, compared with the nine months ended September 30, 2022, primarily as a result of:

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

  • higher other operating costs; and

  • higher spend in project investments.

Amortization of intangible assets
Three Months EndedNine Months Ended
September 30,%September 30,%
(MILLIONS OF DOLLARS)20232022Change20232022Change
Amortization of intangible assets$38$373$112$115(3)

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

Amortization of intangible assets was $38 million in the three months ended September 30, 2023 and $37 million in the three months ended September 30, 2022. An increase in amortization due to intangible assets acquired during 2022 was partially offset by the effect of asset impairments taken in 2022 and assets that became fully amortized during 2022.

Nine months ended September 30, 2023 vs. nine months ended September 30, 2022

Amortization of intangible assets decreased in the nine months ended September 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 EndedNine Months Ended
September 30,%September 30,%
(MILLIONS OF DOLLARS)20232022Change20232022Change
Restructuring charges and certain acquisition-related costs$16$6*$45$9*
  • Calculation not meaningful

Restructuring charges and certain acquisition-related costs were $16 million and $45 million in the three and nine months ended September 30, 2023, respectively, and primarily consisted of employee termination and exit costs related to organizational structure refinements and other cost-reduction and productivity initiatives, as well as costs related to recent acquisitions.

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

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Interest expense, net of capitalized interest
Three Months EndedNine Months Ended
September 30,%September 30,%
(MILLIONS OF DOLLARS)20232022Change20232022Change
Interest expense, net of capitalized interest$59$5311$180$15913

Interest expense, net of capitalized interest, increased in the three and nine months ended September 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, partially offset by an increase in capitalized interest as compared to the prior year periods. The nine months ended September 30, 2023 also included a higher debt balance during a portion of the current period, partially offset by higher gains on foreign exchange derivative instruments as compared to the prior year period.

Other (income)/deductions—net
Three Months EndedNine Months Ended
September 30,%September 30,%
(MILLIONS OF DOLLARS)20232022Change20232022Change
Other (income)/deductions—net$6$(3)*$(151)$6*

*Calculation not meaningful

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

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

Nine months ended September 30, 2023 vs. nine months ended September 30, 2022

The change in Other (income)/deductions—net in the nine months ended September 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 higher foreign currency losses and certain asset impairment charges primarily related to our precision animal health and diagnostics businesses.

Provision for taxes on income
Three Months EndedNine Months Ended
September 30,%September 30,%
(MILLIONS OF DOLLARS)20232022Change20232022Change
Provision for taxes on income$121$139(13)$469$41314
Effective tax rate16.9%20.8%20.5%20.0%

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 to 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 intangible 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.

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Operating Segment Results

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

% Change
Three Months EndedRelated to
September 30,Foreign
(MILLIONS OF DOLLARS)20232022TotalExchangeOperational
U.S.
Companion animal$908$81911—11
Livestock266271(2)—(2)
1,1741,0908—8
International
Companion animal50645212—12
Livestock4504373(2)5
9568898—8
Total
Companion animal1,4141,27111—11
Livestock7167081(2)3
Contract manufacturing & human health2123(9)3(12)
$2,151$2,0027(1)8
% Change
Nine Months EndedRelated to
September 30,Foreign
(MILLIONS OF DOLLARS)20232022TotalExchangeOperational
U.S.
Companion animal$2,588$2,4884—4
Livestock7567136—6
3,3443,2014—4
International
Companion animal1,5401,4129(4)13
Livestock1,3891,3682(4)6
2,9292,7805(5)10
Total
Companion animal4,1283,9006(1)7
Livestock2,1452,0813(3)6
Contract manufacturing & human health5859(2)—(2)
$6,331$6,0405(2)7

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

% Change
Three Months EndedRelated to
September 30,Foreign
(MILLIONS OF DOLLARS)20232022TotalExchangeOperational
U.S.
Revenue$1,174$1,0908—8
Cost of Sales22820412—12
Gross Profit9468867—7
Gross Margin80.6%81.3%
Operating Expenses202206(2)—(2)
Other (income)/deductions-net—1***
U.S. Earnings74467910—10
International
Revenue9568898—8
Cost of Sales30625620119
Gross Profit6506333(1)4
Gross Margin68.0%71.2%
Operating Expenses1561504—4
Other (income)/deductions-net1(3)***
International Earnings4934861(3)4
Total operating segments1,2371,1656(1)7
Other business activities(124)(106)17
Reconciling Items:
Corporate(258)(245)5
Purchase accounting adjustments(39)(40)(3)
Acquisition-related costs(3)(1)*
Certain significant items(23)(6)*
Other unallocated(73)(100)(27)
Total Earnings$717$6677

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% Change
Nine Months EndedRelated to
September 30,Foreign
(MILLIONS OF DOLLARS)20232022TotalExchangeOperational
U.S.
Revenue$3,344$3,2014—4
Cost of Sales64558710—10
Gross Profit2,6992,6143—3
Gross Margin80.7%81.7%
Operating Expenses6025784—4
Other (income)/deductions-net—(6)***
U.S. Earnings2,0972,0423—3
International
Revenue2,9292,7805(5)10
Cost of Sales91280913(7)20
Gross Profit2,0171,9712(4)6
Gross Margin68.9%70.9%
Operating Expenses4734564(5)9
Other (income)/deductions-net1(5)***
International Earnings1,5431,5202(2)4
Total operating segments3,6403,5622(1)3
Other business activities(354)(315)12
Reconciling Items:
Corporate(722)(771)(6)
Purchase accounting adjustments(124)(120)3
Acquisition-related costs(8)(4)*
Certain significant items45(10)*
Other unallocated(191)(278)(31)
Total Earnings$2,286$2,06411
  • Calculation not meaningful

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

U.S. operating segment

U.S. segment revenue increased by $84 million, or 8%, in the three months ended September 30, 2023, compared with the three months ended September 30, 2022, reflecting an increase of $89 million in companion animal products, partially offset by a decrease of $5 million in livestock products.

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

  • Livestock revenue declined due to cattle and swine, partially offset by growth in poultry. Sales of cattle products declined mainly due to timing of supply in the prior year, partially offset by increased sales of cattle implants. Sales of swine products declined due to decreased disease prevalence. Sales of products in our poultry portfolio grew primarily due to increases in vaccines and medicated feed additives.

U.S. segment earnings increased by $65 million, or 10%, in the three months ended September 30, 2023, compared with the three months ended September 30, 2022, primarily due to higher revenue and lower operating expenses, partially offset by higher cost of sales.

International operating segment

International segment revenue increased by $67 million, or 8%, in the three months ended September 30, 2023, compared with the three months ended September 30, 2022. Operational revenue increased by $75 million, or 8%, driven by growth of $52 million in companion animal products and $23 million in livestock products.

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

  • Livestock operational revenue growth was due to increased sales of cattle, poultry and swine products. Sales of cattle products grew due to price and supply recovery, partially offset by unfavorable market conditions in key and emerging markets. Sales of poultry products grew due to price and demand generation efforts in key poultry markets. Sales of swine products grew due to demand generation efforts in key and emerging markets.

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  • Additionally, International segment revenue was unfavorably impacted by foreign exchange which decreased revenue by $8 million, or 0%, primarily driven by the Argentinian peso, Chinese renminbi, Russian ruble, Australian dollar and Turkish lira.

International segment earnings increased by $7 million, or 1%, in the three months ended September 30, 2023, compared with the three months ended September 30, 2022. Operational earnings growth was $17 million, or 4%, primarily due to higher revenue, partially offset by higher cost of sales and operating expenses.

Nine months ended September 30, 2023 vs. nine months ended September 30, 2022

U.S. operating segment

U.S. segment revenue increased by $143 million, or 4%, in the nine months ended September 30, 2023, compared with the nine months ended September 30, 2022, reflecting an increase of $100 million in companion animal products and $43 million in livestock products.

  • Companion animal revenue increased due to key dermatology, our mAb product for OA pain, Solensia, our small animal antiemetic product, Cerenia, small animal vaccines and small animal diagnostics, partially offset by lower sales of anti-infective products and small animal parasiticides. Strong growth in the second and third quarters was partially 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 increased sales of cattle implants, higher volume of anti-infective products and improved supply of key 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 increased by $55 million, or 3%, in the nine months ended September 30, 2023, compared with the nine months ended September 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 $149 million, or 5%, in the nine months ended September 30, 2023, compared with the nine months ended September 30, 2022. Operational revenue increased by $270 million, or 10%, driven by growth of $181 million in companion animal products and $89 million in livestock products.

  • Companion animal operational revenue growth was driven primarily by the growth in 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 cattle, poultry, fish and sheep products. Sales of cattle products grew due to price and improved supply of key products. 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. Sales of sheep products grew primarily as a result of the acquisition of Jurox.

  • Additionally, International segment revenue was unfavorably impacted by foreign exchange which decreased revenue by $121 million, or 5%, primarily driven by the Argentinian peso, Chinese renminbi, Australian dollar, Turkish lira and Japanese yen.

International segment earnings increased by $23 million, or 2%, in the nine months ended September 30, 2023, compared with the nine months ended September 30, 2022. Operational earnings growth was $64 million, or 4%, 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 September 30, 2023 vs. three months ended September 30, 2022

Other business activities net loss increased by $18 million in the three months ended September 30, 2023, compared with the three months ended September 30, 2022, reflecting an increase in R&D costs due to an increase in certain compensation-related costs to support innovation, higher project investments and an increase in operating costs, as well as lower earnings in our human health business.

Nine months ended September 30, 2023 vs. nine months ended September 30, 2022

Other business activities net loss increased by $39 million in the nine months ended September 30, 2023, compared with the nine months ended September 30, 2022, reflecting an increase in R&D costs due to an increase in certain compensation-related costs to support innovation, an increase in operating costs and higher project investments, 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

  • 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.

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

Corporate expenses increased by $13 million, or 5%, in the three months ended September 30, 2023, compared with the three months ended September 30, 2022, primarily due to higher compensation-related costs, higher interest expense, increases in professional services and investments in information technology, partially offset by favorable foreign exchange and higher interest income.

Other unallocated expenses decreased by $27 million, or 27%, in the three months ended September 30, 2023, compared with the three months ended September 30, 2022, primarily due to lower manufacturing costs and freight charges, as well as favorable foreign exchange, partially offset by higher inventory obsolescence, scrap and other charges.

Nine months ended September 30, 2023 vs. nine months ended September 30, 2022

Corporate expenses decreased by $49 million, or 6%, in the nine months ended September 30, 2023, compared with the nine months ended September 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 $87 million, or 31%, in the nine months ended September 30, 2023, compared with the nine months ended September 30, 2022, primarily due to lower manufacturing costs and freight charges, as well as favorable foreign exchange, partially offset by inventory obsolescence, scrap and other charges.

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

Adjusted net income

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

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

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

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

  • other goal setting and performance measurements.

Purchase accounting adjustments

Adjusted net income is calculated prior to considering certain significant purchase accounting impacts that result from business combinations and net asset acquisitions. These impacts, primarily associated with 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 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.

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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 EndedNine Months Ended
September 30,%September 30,%
(MILLIONS OF DOLLARS)20232022Change20232022Change
GAAP reported net income attributable to Zoetis$596$52913$1,819$1,65310
Purchase accounting adjustments—net of tax3031(3)98927
Acquisition-related costs—net of tax31*73*
Certain significant items—net of tax—5*(36)10*
Non-GAAP adjusted net income(a)$629$56611$1,888$1,7587

*Calculation not meaningful

(a) The effective tax rate on adjusted pretax income was 19.6% and 20.9% 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 the three months ended September 30, 2022, was primarily attributable to 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 intangible income, partially offset by a lower net discrete tax benefit mainly related to changes to prior years’ tax positions. Jurisdictional mix of earnings can vary depending on repatriation decisions, operating fluctuations in the normal course of business and the impact of non-deductible and non-taxable items.

The effective tax rate on adjusted pretax income was 20.5% and 20.1% 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, partially offset by a higher benefit in the U.S. related to foreign-derived intangible income and a more favorable jurisdictional mix of earnings (which includes the impact of the location of earnings and repatriation costs). Jurisdictional mix of earnings can vary depending on repatriation decisions, 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 EndedNine Months Ended
September 30,%September 30,%
20232022Change20232022Change
Earnings per share—diluted(a):
GAAP reported EPS attributable to Zoetis —diluted$1.29$1.1314$3.93$3.5112
Purchase accounting adjustments—net of tax0.060.07(14)0.210.205
Acquisition-related costs—net of tax0.01—*0.02—*
Certain significant items—net of tax—0.01*(0.08)0.02*
Non-GAAP adjusted EPS—diluted$1.36$1.2112$4.08$3.739
  • Calculation not meaningful

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

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

Three Months EndedNine Months Ended
September 30,September 30,
(MILLIONS OF DOLLARS)2023202220232022
Interest expense, net of capitalized interest$59$53$180$159
Interest income23137720
Income taxes153149487442
Depreciation7666220195
Amortization992731

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

Three Months EndedNine Months Ended
September 30,September 30,
(MILLIONS OF DOLLARS)2023202220232022
Purchase accounting adjustments:
Amortization and depreciation$39$40$118$120
Cost of sales——6—
Total purchase accounting adjustments—pre-tax3940124120
Income taxes(a)992628
Total purchase accounting adjustments—net of tax30319892
Acquisition-related costs:
Transaction costs2—4—
Integration costs1134
Restructuring costs——1—
Total acquisition-related costs—pre-tax3184
Income taxes(a)——11
Total acquisition-related costs—net of tax3173
Certain significant items:
Other restructuring charges and cost-reduction/productivity initiatives(b)124367
Certain asset impairment charges(c)112216
Net gain on sale of business(d)——(101)—
Other——(1)(3)
Total certain significant items—pre-tax236(45)10
Income taxes(a)231(9)—
Total certain significant items—net of tax—5(36)10
Total purchase accounting adjustments, acquisition-related costs, and certain significant items—net of tax$33$37$69$105

(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 nine months ended September 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 nine months ended September 30, 2023, a benefit from the tax loss on the divestiture of Performance Livestock Analytics, partially offset by a 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 nine months ended September 30, 2022, changes in valuation allowances.

(b) 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.

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

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

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

(d) Primarily 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 EndedNine Months Ended
September 30,September 30,
(MILLIONS OF DOLLARS)2023202220232022
Cost of sales:
Purchase accounting adjustments$1$1$10$3
Inventory write-offs2—24
Other—1—4
Total Cost of sales321211
Selling, general & administrative expenses:
Purchase accounting adjustments481822
Total Selling, general & administrative expenses481822
Research & development expenses:
Purchase accounting adjustments1—1—
Total Research & development expenses1—1—
Amortization of intangible assets:
Purchase accounting adjustments33319595
Total Amortization of intangible assets33319595
Restructuring charges and certain acquisition-related costs:
Transaction costs2—4—
Integration costs1134
Employee termination costs82332
Asset impairments1212
Exit costs4141
Total Restructuring charges and certain acquisition-related costs166459
Other (income)/deductions—net:
Net gain on sale of business——(101)—
Asset impairment charges8—18—
Other——(1)(3)
Total Other (income)/deductions—net8—(84)(3)
Provision for taxes on income32101829
Total purchase accounting adjustments, acquisition-related costs, and certain significant items—net of tax$33$37$69$105

Analysis of the condensed consolidated statements of comprehensive income

Changes in other comprehensive income for the periods presented are primarily related to foreign currency translation adjustments and unrealized gains/(losses) on derivative instruments. The foreign currency translation adjustment changes result from the strengthening or weakening of the U.S. dollar as compared to the currencies in the countries in which we do business. Unrealized gains/(losses) on the changes in the fair value of derivative instruments are recorded within Accumulated other comprehensive income/(loss) and reclassified into earnings depending on the nature and purpose of the financial instrument, as described in Note 9. Financial Instruments of the Notes to Condensed Consolidated Financial Statements.

Analysis of the condensed consolidated balance sheets

September 30, 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.

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 the timing of tax benefits recognized and higher value-added tax receivables for our international markets.

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

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

Accrued compensation and related items decreased primarily due to the payments of 2022 annual incentive bonuses, savings plan contributions to eligible employees and payments for sales incentive bonuses, as well as the timing of the bi-weekly payroll, partially offset by the accrual of 2023 annual incentive bonuses, sales incentive bonuses and savings plan contributions to eligible employees.

Other noncurrent liabilities increased primarily due to the contingent purchase price consideration associated with the acquisition of PetMedix during the third quarter of 2023 and the addition of a financing lease obligation.

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

Nine Months Ended
September 30,$
(MILLIONS OF DOLLARS)20232022Change
Net cash provided by (used in):
Operating activities$1,456$1,171$285
Investing activities(567)(445)(122)
Financing activities(2,712)(1,684)(1,028)
Effect of exchange-rate changes on cash and cash equivalents(4)(20)16
Net decrease in cash and cash equivalents$(1,827)$(978)$(849)

Operating activities

Nine months ended September 30, 2023 vs. nine months ended September 30, 2022

Net cash provided by operating activities was $1,456 million for the nine months ended September 30, 2023, compared with $1,171 million for the nine months ended September 30, 2022. The increase in operating cash flows was primarily attributable to higher net income as adjusted by non-cash items and the timing of receipts and payments in the ordinary course of business, partially offset by the inventory build-up of certain products for increased demand and to mitigate potential supply constraints.

Investing activities

Nine months ended September 30, 2023 vs. nine months ended September 30, 2022

Our net cash used in investing activities was $567 million for the nine months ended September 30, 2023, compared with net cash used in investing activities of $445 million for the nine months ended September 30, 2022. The net cash used in investing activities for the nine months ended September 30, 2023 was primarily due to capital expenditures and acquisitions, partially offset by net proceeds on the sale of a majority interest in our pet insurance business and net proceeds from derivative instrument activity. The net cash used in investing activities for the nine months ended September 30, 2022 was primarily due to capital expenditures and acquisitions, partially offset by net proceeds from derivative instrument activity.

Financing activities

Nine months ended September 30, 2023 vs. nine months ended September 30, 2022

Our net cash used in financing activities was $2,712 million for the nine months ended September 30, 2023, compared with net cash used in financing activities of $1,684 million for the nine months ended September 30, 2022. The net cash used in financing activities for the nine months ended September 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 nine months ended September 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:

September 30,December 31,
(MILLIONS OF DOLLARS)20232022
Cash and cash equivalents$1,754$3,581
Accounts receivable, net(a)1,2571,215
Short-term borrowings22
Current portion of long-term debt—1,350
Long-term debt6,5526,552
Working capital4,6144,339
Ratio of current assets to current liabilities3.87:12.37:1

(a) Accounts receivable are usually collected over a period of 45 to 75 days*.* For the nine months ended September 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 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.

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.

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:

DescriptionPrincipal AmountInterest RateTerms
2015 Senior Notes due 2025$750 million4.500%Interest due semi annually, not subject to amortization, aggregate principal due on November 13, 2025
2022 Senior Notes due 2025$600 million5.400%Interest due semi annually, not subject to amortization, aggregate principal due on November 14, 2025
2017 Senior Notes due 2027$750 million3.000%Interest due semi annually, not subject to amortization, aggregate principal due on September 12, 2027
2018 Senior Notes due 2028$500 million3.900%Interest due semi annually, not subject to amortization, aggregate principal due on August 20, 2028
2020 Senior Notes due 2030$750 million2.000%Interest due semi annually, not subject to amortization, aggregate principal due on May 15, 2030
2022 Senior Notes due 2032$750 million5.600%Interest due semi annually, not subject to amortization, aggregate principal due on November 16, 2032
2013 Senior Notes due 2043$1,150 million4.700%Interest due semi annually, not subject to amortization, aggregate principal due on February 1, 2043
2017 Senior Notes due 2047$500 million3.950%Interest due semi annually, not subject to amortization, aggregate principal due on September 12, 2047
2018 Senior Notes due 2048$400 million4.450%Interest due semi annually, not subject to amortization, aggregate principal due on August 20, 2048
2020 Senior Notes due 2050$500 million3.000%Interest due semi annually, not subject to amortization, aggregate principal due on May 15, 2050

Credit ratings

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

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

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

Share repurchase program

In December 2021, our Board of Directors authorized a $3.5 billion multi-year 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. Share repurchases may be executed through various means, including open market or privately negotiated transactions. During the first nine months of 2023, 5.0 million shares were repurchased for $857 million, which excludes a $7 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 September 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 September 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, R&D costs, timing and likelihood of success, future operating or financial performance, future results of current and anticipated products and services, product and supply chain disruptions, 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:

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

  • 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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