Item 1. Financial Statements

ZOETIS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

						Three Months Ended												Six Months Ended
						June 30,												June 30,
(MILLIONS OF DOLLARS AND SHARES, EXCEPT PER SHARE DATA)						2024						2023						2024						2023
Revenue						$	2,361					$	2,180					$	4,551					$	4,180
Costs and expenses:
Cost of sales						668						607						1,311						1,195
Selling, general and administrative expenses						581						556						1,128						1,061
Research and development expenses						171						146						333						288
Amortization of intangible assets						35						37						72						74
Restructuring charges and certain acquisition and divestiture-related costs						42						8						46						29
Interest expense, net of capitalized interest						59						58						117						121
Other (income)/deductions—net						25						(104)						17						(157)
Income before provision for taxes on income						780						872						1,527						1,569
Provision for taxes on income						156						202						304						348
Net income before allocation to noncontrolling interests						624						670						1,223						1,221
Less: Net loss attributable to noncontrolling interests						—						(1)						—						(2)
Net income attributable to Zoetis Inc.						$	624					$	671					$	1,223					$	1,223
Earnings per share attributable to Zoetis Inc. stockholders:
Basic						$	1.37					$	1.45					$	2.68					$	2.64
Diluted						$	1.37					$	1.45					$	2.67					$	2.64
Weighted-average common shares outstanding:
Basic						455.5						461.9						456.7						462.7
Diluted						456.0						462.9						457.4						463.8
Dividends declared per common share						$	0.432					$	0.375					$	0.864					$	0.750

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												Six Months Ended
						June 30,												June 30,
(MILLIONS OF DOLLARS)						2024						2023						2024						2023
Net income before allocation to noncontrolling interests						$	624					$	670					$	1,223					$	1,221
Other comprehensive loss, net of tax(a):
Unrealized losses on derivatives for cash flow hedges, net of tax of $0 and $0 for the three months ended June 30, 2024 and 2023, respectively, and $0 and $(1) for the six months ended June 30, 2024 and 2023, respectively						(1)						(1)						(1)						(3)
Unrealized gains/(losses) on derivatives for net investment hedges, net of tax of $0 and $(2) for the three months ended June 30, 2024 and 2023, respectively, and $5 and $(4) for the six months ended June 30, 2024 and 2023, respectively						2						(7)						18						(13)
Foreign currency translation adjustments						(5)						(59)						(23)						(66)
Benefit plans: Actuarial gains, net of tax of $0 and $0 for the three months ended June 30, 2024 and 2023, respectively, and $0 and $1 for the six months ended June 30, 2024 and 2023, respectively						—						—						—						4
Total other comprehensive loss, net of tax						(4)						(67)						(6)						(78)
Comprehensive income before allocation to noncontrolling interests						620						603						1,217						1,143
Less: Comprehensive loss attributable to noncontrolling interests						—						(1)						—						(2)
Comprehensive income attributable to Zoetis Inc.						$	620					$	604					$	1,217					$	1,145

(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

						June 30,						December 31,
						2024						2023
(MILLIONS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)						(Unaudited)
Assets
Cash and cash equivalents(a)						$	1,574					$	2,041
Accounts receivable, less allowance for doubtful accounts of $22 in 2024 and $18 in 2023						1,383						1,304
Inventories						2,452						2,564
Assets held for sale						326						—
Other current assets						467						434
Total current assets						6,202						6,343
Property, plant and equipment, less accumulated depreciation of $2,590 in 2024 and $2,594 in 2023						3,200						3,204
Operating lease right-of-use assets						222						230
Goodwill						2,739						2,759
Identifiable intangible assets, less accumulated amortization						1,226						1,338
Noncurrent deferred tax assets						366						206
Other noncurrent assets						210						206
Total assets						$	14,165					$	14,286
Liabilities and Equity
Short-term borrowings						$	—					$	3
Accounts payable						420						411
Dividends payable						197						198
Accrued expenses						704						683
Accrued compensation and related items						276						382
Income taxes payable						82						110
Liabilities associated with assets held for sale						25						—
Other current liabilities						93						102
Total current liabilities						1,797						1,889
Long-term debt, net of discount and issuance costs						6,563						6,564
Noncurrent deferred tax liabilities						175						146
Operating lease liabilities						181						188
Other taxes payable						267						271
Other noncurrent liabilities						222						237
Total liabilities						9,205						9,295
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; 453,812,361 and 458,367,358 shares outstanding at June 30, 2024, and December 31, 2023, respectively						5						5
Treasury stock, at cost, 48,078,882 and 43,523,885 shares of common stock at June 30, 2024 and December 31, 2023, respectively						(6,464)						(5,597)
Additional paid-in capital						1,146						1,133
Retained earnings						11,124						10,295
Accumulated other comprehensive loss						(845)						(839)
Total Zoetis Inc. equity						4,966						4,997
Equity attributable to noncontrolling interests						(6)						(6)
Total equity						4,960						4,991
Total liabilities and equity						$	14,165					$	14,286

(a) As of June 30, 2024 and December 31, 2023, includes $1 million and $2 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 June 30, 2024
			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, March 31, 2024						501.9						$	5					44.9						$	(5,928)					$	1,126					$	10,696					$	(841)					$	(6)					$	5,052
Net income						—						—						—						—						—						624						—						—						624
Other comprehensive loss						—						—						—						—						—						—						(4)						—						(4)
Share-based compensation awards (a)						—						—						(0.1)						2						20						—						—						—						22
Treasury stock acquired (b)						—						—						3.2						(538)						—						—						—						—						(538)
Dividends declared						—						—						—						—						—						(196)						—						—						(196)
Balance, June 30, 2024						501.9						$	5					48.0						$	(6,464)					$	1,146					$	11,124					$	(845)					$	(6)					$	4,960
Three months ended June 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, March 31, 2023						501.9						$	5					39.4						$	(4,807)					$	1,079					$	9,045					$	(828)					$	(3)					$	4,491
Net income/(loss)						—						—						—						—						—						671						—						(1)						670
Other comprehensive loss						—						—						—						—						—						—						(67)						—						(67)
Share-based compensation awards (a)						—						—						(0.1)						8						19						(1)						—						—						26
Treasury stock acquired (b)						—						—						1.9						(327)						—						—						—						—						(327)
Dividends declared						—						—						—						—						—						(172)						—						—						(172)
Balance, June 30, 2023						501.9						$	5					41.2						$	(5,126)					$	1,098					$	9,543					$	(895)					$	(4)					$	4,621

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 and includes excise tax accrued on net share repurchases. For additional information, see Note 13. Stockholders’ Equity.

See notes to condensed consolidated financial statements.

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ZOETIS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(UNAUDITED) - Continued

Six months ended June 30, 2024
			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, 2023						501.9						$	5					43.5						$	(5,597)					$	1,133					$	10,295					$	(839)					$	(6)					$	4,991
Net income						—						—						—						—						—						1,223						—						—						1,223
Other comprehensive loss						—						—						—						—						—						—						(6)						—						(6)
Share-based compensation awards (a)						—						—						(0.5)						13						13						—						—						—						26
Treasury stock acquired (b)						—						—						5.0						(880)						—						—						—						—						(880)
Dividends declared						—						—						—						—						—						(394)						—						—						(394)
Balance, June 30, 2024						501.9						$	5					48.0						$	(6,464)					$	1,146					$	11,124					$	(845)					$	(6)					$	4,960
Six months ended June 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)						—						—						—						—						—						1,223						—						(2)						1,221
Other comprehensive loss						—						—						—						—						—						—						(78)						—						(78)
Share-based compensation awards (a)						—						—						(0.5)						25						10						(2)						—						—						33
Treasury stock acquired (b)						—						—						3.6						(612)						—						—						—						—						(612)
Dividends declared						—						—						—						—						—						(346)						—						—						(346)
Balance, June 30, 2023						501.9						$	5					41.2						$	(5,126)					$	1,098					$	9,543					$	(895)					$	(4)					$	4,621

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 and includes excise tax accrued on net share repurchases. For additional information, see Note 13. Stockholders’ Equity.

See notes to condensed consolidated financial statements.

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ZOETIS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

						Six Months Ended
						June 30,
(MILLIONS OF DOLLARS)						2024						2023
Operating Activities
Net income before allocation to noncontrolling interests						$	1,223					$	1,221
Adjustments to reconcile net income before noncontrolling interests to net cash provided by operating activities:
Depreciation and amortization expense						253						241
Share-based compensation expense						37						26
Asset write-offs and asset impairments						13						13
Loss on assets held for sale						22						—
Net gain on sale of businesses, excluding transaction costs						—						(118)
Provision for losses on inventory						42						47
Deferred taxes						(144)						(26)
Other non-cash adjustments						11						(6)
Other changes in assets and liabilities, net of acquisitions and divestitures:
Accounts receivable						(112)						(116)
Inventories						(115)						(424)
Other assets						(35)						(82)
Accounts payable						20						65
Other liabilities						(88)						(59)
Other tax accounts, net						(30)						(50)
Net cash provided by operating activities						1,097						732
Investing Activities
Capital expenditures						(272)						(389)
Acquisitions, net of cash acquired						(8)						(7)
Purchase of investments						(3)						(2)
Proceeds from derivative instrument activity, net						21						3
Proceeds from sale of businesses, net of cash sold						—						93
Net proceeds from sale of assets						1						3
Other investing activities						(2)						3
Net cash used in investing activities						(263)						(296)
Financing Activities
Decrease in short-term borrowings, net						(3)						—
Principal payments on long-term debt						—						(1,350)
Payment of consideration related to previous acquisitions						(5)						—
Share-based compensation-related proceeds, net of taxes paid on withholding shares						(12)						8
Purchases of treasury stock						(872)						(607)
Cash dividends paid						(395)						(347)
Net cash used in financing activities						(1,287)						(2,296)
Effect of exchange-rate changes on cash and cash equivalents						(14)						(4)
Net decrease in cash and cash equivalents						(467)						(1,864)
Cash and cash equivalents at beginning of period						2,041						3,581
Cash and cash equivalents at end of period						$	1,574					$	1,717
Supplemental cash flow information
Cash paid during the period for:
Income taxes						$	481					$	458
Interest, net of capitalized interest						138						158
Amounts included in the measurement of lease liabilities:
Operating cash flows - operating leases						30						28
Financing cash flows - finance leases						1						—
Non-cash transactions:
Capital expenditures						3						3
Excise tax accrued on net share repurchases, not paid						8						5
Lease obligations obtained in exchange for right-of-use assets - operating						26						33
Dividends declared, not paid						197						173

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. 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 and emerging markets. We have a diversified business, commercializing products across eight core species: dogs, cats and horses (collectively, companion animals) and cattle, poultry, swine, fish and sheep (collectively, livestock); and within eight major product categories: parasiticides, vaccines, dermatology, anti-infectives, pain and sedation, other pharmaceutical, 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 six months ended May 31, 2024 and May 31, 2023.

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.

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

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 2023 Annual Report on Form 10-K.

3. Accounting Standards

Recently Issued Accounting Standards

In December 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. The new guidance requires expanded annual and interim disclosures for significant segment expenses that are regularly provided to the chief operating decision maker and included within each reported measure of segment profit or loss. This update is effective for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024. The update is to be applied retrospectively to all periods presented in the financial statements. Early adoption is permitted. We are currently evaluating the impact that the new guidance will have on our notes to the consolidated financial statements.

In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax disclosures. The new guidance requires standardized categories for the effective tax rate reconciliation, disaggregation of income taxes paid and other income tax-related disclosures. This update is effective for fiscal years beginning after December 15, 2024. We are currently evaluating the impact that the new guidance will have on our notes to the consolidated financial statements.

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.

In the first quarter of 2024, we modified the list of major product categories to include a category for pain and sedation products, which were previously included within other pharmaceutical products. The prior period presentation has been revised to reflect the new product category.

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;

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• dermatology:** products that relieve itch associated with allergic conditions and atopic dermatitis;

• anti-infectives:** products that prevent, kill or slow the growth of bacteria, fungi or protozoa;

• pain and sedation:** products that alleviate pain, primarily associated with osteoarthritis and postoperative pain;

• other pharmaceutical:** antiemetic, reproductive and oncology products;

• 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

• 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												Six Months Ended
						June 30,												June 30,
(MILLIONS OF DOLLARS)						2024						2023						2024						2023
United States						$	1,308					$	1,165					$	2,471					$	2,170
Australia						83						82						156						164
Brazil						99						91						200						175
Canada						75						70						136						120
Chile						31						39						62						78
China						68						84						144						186
France						34						34						75						68
Germany						58						53						109						98
Italy						36						35						64						61
Japan						39						47						76						86
Mexico						46						38						90						77
Spain						33						31						65						64
United Kingdom						73						63						150						131
Other developed markets						138						125						265						247
Other emerging markets						222						203						450						418
						2,343						2,160						4,513						4,143
Contract manufacturing & human health						18						20						38						37
Total Revenue						$	2,361					$	2,180					$	4,551					$	4,180

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Revenue by major species

						Three Months Ended												Six Months Ended
						June 30,												June 30,
(MILLIONS OF DOLLARS)						2024						2023						2024						2023
U.S.
Companion animal						$	1,080					$	959					$	1,978					$	1,680
Livestock						228						206						493						490
						1,308						1,165						2,471						2,170
International
Companion animal						569						530						1,121						1,034
Livestock						466						465						921						939
						1,035						995						2,042						1,973
Total
Companion animal						1,649						1,489						3,099						2,714
Livestock						694						671						1,414						1,429
Contract manufacturing & human health						18						20						38						37
Total Revenue						$	2,361					$	2,180					$	4,551					$	4,180

Revenue by species

						Three Months Ended												Six Months Ended
						June 30,												June 30,
(MILLIONS OF DOLLARS)						2024						2023						2024						2023
Companion Animal:
Dogs and Cats						$	1,581					$	1,424					$	2,965					$	2,577
Horses						68						65						134						137
						1,649						1,489						3,099						2,714
Livestock:
Cattle						350						329						741						728
Poultry						132						131						271						270
Swine						130						133						257						275
Fish						62						52						107						101
Sheep and other						20						26						38						55
						694						671						1,414						1,429
Contract manufacturing & human health						18						20						38						37
Total Revenue						$	2,361					$	2,180					$	4,551					$	4,180

Revenue by major product category

						Three Months Ended												Six Months Ended
						June 30,												June 30,
(MILLIONS OF DOLLARS)						2024						2023						2024						2023
Parasiticides						$	600					$	568					$	1,104					$	1,000
Vaccines						445						430						897						859
Dermatology						418						359						781						651
Anti-infectives						264						244						545						532
Pain and sedation						221						145						415						261
Other pharmaceutical						153						170						309						348
Animal health diagnostics						103						96						185						189
Medicated feed additives						74						84						151						171
Other non-pharmaceutical						65						64						126						132
						2,343						2,160						4,513						4,143
Contract manufacturing & human health						18						20						38						37
Total Revenue						$	2,361					$	2,180					$	4,551					$	4,180

B. Revenue from Contracts with Customers

Contract liabilities reflected within Other current liabilities as of December 31, 2023 and 2022, and subsequently recognized as revenue during each of the first six months of 2024 and 2023 were $3 million. Contract liabilities as of June 30, 2024 and December 31, 2023 were $18 million and $11 million, respectively.

Estimated future revenue expected to be generated from long-term contracts with unsatisfied performance obligations as of June 30, 2024 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.

B. Divestitures

During the second quarter of 2024, we entered into a definitive agreement where Phibro Animal Health will acquire Zoetis’ medicated feed additive product portfolio, certain water soluble products and related assets for $350 million, subject to customary closing adjustments. Net assets and liabilities related to the sale met all the criteria to be classified as held for sale during the second quarter of 2024. We have determined that this future divestiture does not qualify for reporting as a discontinued operation, as it does not represent a strategic shift that has or will have a major effect on our operations and/or financial results. This transaction is expected to be completed in the second half of 2024.

As of June 30, 2024, major classes of assets held for sale and liabilities associated with assets held for sale are summarized below:

			June 30,
(MILLIONS OF DOLLARS)			2024
Assets held for sale
Accounts receivable, less allowance for doubtful accounts			$	1
Inventories			176
Other current assets			1
Property, plant and equipment, less accumulated depreciation			106
Operating lease right-of-use assets			2
Goodwill(a)			12
Identifiable intangible assets, less accumulated amortization			26
Noncurrent deferred tax assets			3
Other noncurrent assets			9
Loss on assets held for sale(a)			(10)
Total Assets Held for Sale			$	326
Liabilities associated with assets held for sale
Accounts payable			$	8
Accrued expenses			9
Accrued compensation and related items			1
Other noncurrent liabilities			7
Total Liabilities Associated with Assets Held for Sale			$	25

(a) We recorded a loss on assets held for sale of $22 million in the Condensed Consolidated Statements of Income during the three and six months ended June 30, 2024. Of the loss on assets held for sale, $12 million is allocated to goodwill and the remaining $10 million relates to selling costs to be recognized upon closing and foreign currency translation losses to be reclassified out of accumulated other comprehensive income into earnings at closing of the transaction.

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

6. Restructuring Charges and Other Costs Associated with Acquisitions and Divestitures

In connection with our cost-reduction/productivity initiatives, we typically incur restructuring charges associated with workforce reductions and site closings. In connection with our acquisition and divestiture activities, we typically incur costs associated with executing the transactions. Acquisition activity may also include integrating the acquired operations, which may include expenditures for consulting and the integration of systems and processes, product transfers and restructuring the company, which may include charges related to employees, assets and activities that will not continue in the company. Divestiture activity may also include costs to separate the divested operations, which may include expenditures for consulting and the disintegration of systems and processes, transfer costs, and restructuring charges which may include charges related to employees, assets and activities that will not continue in the company's ongoing operations. 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.

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The components of costs incurred in connection with restructuring initiatives, acquisitions and divestitures are as follows:

						Three Months Ended												Six Months Ended
						June 30,												June 30,
(MILLIONS OF DOLLARS)						2024						2023						2024						2023
Restructuring charges and certain acquisition and divestiture-related costs:
Acquisition-related costs						$	1					$	3					$	1					$	4
Divestiture-related costs(a)						4						—						4						—
Restructuring charges, net(b):
Employee termination costs, net						37						5						41						25
Total Restructuring charges and certain acquisition and divestiture-related costs						$	42					$	8					$	46					$	29

(a) Divestiture-related costs consisted of costs related to the planned sale of our medicated feed additive product portfolio, certain water soluble products and related assets.

(b) The restructuring charges for the three and six months ended June 30, 2024 primarily consisted of employee termination costs related to organizational structure refinements. Restructuring charges for the six months ended June 30, 2024 were partially offset by a reversal of certain employee termination costs as a result of a change in strategy from our 2015 operational efficiency initiative.

The restructuring charges for the three and six months ended June 30, 2023 primarily consisted of employee termination costs related to organizational structure refinements.

The change in our restructuring accrual is as follows:

(MILLIONS OF DOLLARS)																														Accrual
Balance, December 31, 2023(a)																														$	35
Provision																														48
Reserve adjustment																														(7)
Utilization and other**(b)**																														(21)
Balance, June 30, 2024**(a)**																														$	55

(a) At June 30, 2024 and December 31, 2023, included in Accrued expenses ($53 million and $26 million, respectively) and Other noncurrent liabilities ($2 million and $9 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												Six Months Ended
						June 30,												June 30,
(MILLIONS OF DOLLARS)						2024						2023						2024						2023
Royalty-related income(a)						$	(1)					$	(1)					$	(3)					$	(35)
Interest income						(24)						(23)						(56)						(56)
Identifiable intangible asset impairment charges(b)						11						10						11						11
Loss on assets held for sale(c)						22						—						22						—
Net gain on sale of business(d)						—						(101)						—						(101)
Foreign currency loss(e)						18						13						37						22
Other, net						(1)						(2)						6						2
Other (income)/deductions—net						$	25					$	(104)					$	17					$	(157)

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

(b) For the three and six months ended June 30, 2024, represents asset impairment charges related to our aquaculture business.

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

(c) Represents a loss on assets held for sale related to the planned sale of our medicated feed additive product portfolio, certain water soluble products and related assets. For additional information, see Note 5. Acquisitions and Divestitures.

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

(e) 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 20.0% and 23.2% for the three months ended June 30, 2024 and 2023, respectively, and 19.9% and 22.2% for the six months ended June 30, 2024 and 2023, respectively. The lower effective tax rate for the three and six months ended June 30, 2024, compared with the three and six months ended June 30, 2023, was primarily attributable to lower net discrete tax expenses, 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

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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 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 six months ended June 30, 2024 and 2023.

The global minimum tax provisions (Pillar Two) resulting from the Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting project are effective beginning in 2024 and the impact of these provisions is included in our effective tax rate for the three and six months ended June 30, 2024.

B. Deferred Taxes

As of June 30, 2024, the total net deferred income tax asset of $191 million is included in Noncurrent deferred tax assets ($366 million) and Noncurrent deferred tax liabilities ($175 million).

As of December 31, 2023, the total net deferred income tax asset of $60 million is included in Noncurrent deferred tax assets ($206 million) and Noncurrent deferred tax liabilities ($146 million).

C. Tax Contingencies

As of June 30, 2024, the net tax liabilities associated with uncertain tax positions of $214 million (exclusive of interest and penalties related to uncertain tax positions of $33 million) are included in Other taxes payable.

As of December 31, 2023, the net tax liabilities associated with uncertain tax positions of $209 million (exclusive of interest and penalties related to uncertain tax positions of $27 million) are included in Other taxes payable.

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. See Note 17. Subsequent Events for further details on the status of the U.S. income tax audit for tax years 2017 and 2018.

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. Subject to certain conditions, we have the right to increase the credit facility to up to $1.5 billion. The credit facility contains a financial covenant requiring us to not exceed a maximum total leverage ratio (the ratio of consolidated net debt as of the end of the period to consolidated Earnings Before Interest, Income Taxes, Depreciation and Amortization (EBITDA) for such period) of 3.50:1. Upon entering into a material acquisition, the maximum total leverage ratio increases to 4.00:1, and extends until the fourth full consecutive fiscal quarter ended immediately following the consummation of a material acquisition. In addition, the credit facility contains other customary covenants.

We were in compliance with all financial covenants as of June 30, 2024 and December 31, 2023. There were no amounts drawn under the credit facility as of June 30, 2024 or December 31, 2023.

We have additional lines of credit and other credit arrangements with a group of banks and other financial intermediaries for general corporate purposes. We maintain cash and cash equivalent balances in excess of our outstanding short-term borrowings. As of June 30, 2024, we had access to $55 million of lines of credit which expire at various times and are generally renewed annually. There were no borrowings outstanding related to these facilities as of June 30, 2024 and $3 million of borrowings outstanding related to these facilities as of December 31, 2023.

Commercial Paper Program

In February 2013, we entered into a commercial paper program with a capacity of up to $1.0 billion. As of June 30, 2024 and December 31, 2023, 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

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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:

						June 30,						December 31,
(MILLIONS OF DOLLARS)						2024						2023
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						6,650
Unamortized debt discount / debt issuance costs						(57)						(60)
Cumulative fair value adjustment for interest rate swap contracts						(30)						(26)
Long-term debt, net of discount and issuance costs						$	6,563					$	6,564

The fair value of our long-term debt was $6,057 million and $6,319 million as of June 30, 2024 and December 31, 2023, respectively, and has been determined using a third-party model that uses significant inputs derived from, or corroborated by, observable market data, including benchmark security prices and Zoetis’ credit spreads (Level 2 inputs).

The following table provides the principal amount of debt outstanding, as of June 30, 2024, by scheduled maturity date:

																																				After
(MILLIONS OF DOLLARS)						2024						2025						2026						2027						2028						2028						Total
Maturities						$	—					$	1,350					$	—					$	750					$	500					$	4,050					$	6,650

Interest Expense

Interest expense, net of capitalized interest, was $59 million and $117 million for the three and six months ended June 30, 2024, respectively, and $58 million and $121 million for the three and six months ended June 30, 2023, respectively. Capitalized interest expense was $9 million and $17 million for the three and six months ended June 30, 2024, respectively, and $6 million and $12 million for the three and six months ended June 30, 2023, respectively.

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 renminbi, euro and Norwegian krone. Changes in fair value are reported in earnings or in Accumulated other comprehensive 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 four 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 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

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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 and all mature within one year.

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 Condensed 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 June 30, 2024, 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 of the 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 June 30, 2024, 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% 2020 senior notes due 2030. The amounts recorded during the three and six months ended June 30, 2024 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.

Outstanding Positions

The aggregate notional amount of derivative instruments are as follows:

						Notional
						June 30,						December 31,
(MILLIONS)						2024						2023
Derivatives not Designated as Hedging Instruments:
Foreign currency forward-exchange contracts						$	2,237					$	1,948
Derivatives Designated as Hedging Instruments:
Foreign exchange derivative instruments (in foreign currency):
Euro						650						650
Danish krone						575						600
Swiss franc						25						25
Forward-starting interest rate swaps						$	100					$	100
Fixed-to-floating interest rate swap contracts						$	250					$	250

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Fair Value of Derivative Instruments

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

						Fair Value of Derivatives
						June 30,						December 31,
(MILLIONS OF DOLLARS)			Balance Sheet Location			2024						2023
Derivatives Not Designated as Hedging Instruments:
Foreign currency forward-exchange contracts			Other current assets			$	17					$	11
Foreign currency forward-exchange contracts			Other current liabilities			(5)						(11)
Total derivatives not designated as hedging instruments						$	12					$	—
Derivatives Designated as Hedging Instruments:
Forward-starting interest rate swap contracts			Other noncurrent assets			$	15					$	12
Foreign exchange derivative instruments			Other current assets			28						5
Foreign exchange derivative instruments			Other noncurrent assets			—						11
Foreign exchange derivative instruments			Other current liabilities			(1)						(20)
Foreign exchange derivative instruments			Other noncurrent liabilities			—						(1)
Fixed-to-floating interest rate swap contracts			Other noncurrent liabilities			(30)						(26)
Total derivatives designated as hedging instruments						12						(19)
Total derivatives						$	24					$	(19)

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 each 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 June 30, 2024, there was $24 million of collateral received and $24 million of collateral posted related to derivative instruments recorded in Other current liabilities and Other current assets, respectively. At December 31, 2023, there was $13 million of collateral received and $33 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												Six Months Ended
						June 30,												June 30,
(MILLIONS OF DOLLARS)						2024						2023						2024						2023
Foreign currency forward-exchange contracts						$	2					$	(20)					$	1					$	(36)

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

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

						Three Months Ended												Six Months Ended
						June 30,												June 30,
(MILLIONS OF DOLLARS)						2024						2023						2024						2023
Forward-starting interest rate swap contracts						$	1					$	1					$	3					$	—
Foreign exchange derivative instruments						$	2					$	(7)					$	18					$	(13)

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

						Three Months Ended												Six Months Ended
						June 30,												June 30,
(MILLIONS OF DOLLARS)						2024						2023						2024						2023
Foreign exchange derivative instruments						$	4					$	5					$	8					$	10

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.

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10. Inventories

The components of inventory are as follows:

						June 30,						December 31,
(MILLIONS OF DOLLARS)						2024						2023
Finished goods						$	1,050					$	1,147
Work-in-process						953						966
Raw materials and supplies						449						451
Inventories						$	2,452					$	2,564

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, 2023						$	1,532					$	1,227					$	2,759
Other(a)						(17)						(3)						(20)
Balance, June 30, 2024						$	1,515					$	1,224					$	2,739

(a) Includes adjustments for the reclassification of goodwill of $24 million to Assets held for sale related to the planned sale of our medicated feed additive product portfolio, certain water soluble products and related assets*,* as well as foreign currency translation. For additional information, see Note 5. Acquisitions and Divestitures: B. Divestitures.

The gross goodwill balance was $3,275 million and $3,295 million as of June 30, 2024 and December 31, 2023, respectively. Accumulated goodwill impairment losses were $536 million as of June 30, 2024 and December 31, 2023.

B. Other Intangible Assets

The components of identifiable intangible assets are as follows:

						As of June 30, 2024																		As of December 31, 2023
																		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						$	1,925					$	(1,124)					$	801					$	1,986					$	(1,101)					$	885
Brands and tradenames						370						(242)						128						383						(246)						137
Other						275						(193)						82						270						(190)						80
Total finite-lived intangible assets						2,570						(1,559)						1,011						2,639						(1,537)						1,102
Indefinite-lived intangible assets:
Brands and tradenames						67						—						67						88						—						88
In-process research and development						142						—						142						141						—						141
Product rights						6						—						6						7						—						7
Total indefinite-lived intangible assets						215						—						215						236						—						236
Identifiable intangible assets						$	2,785					$	(1,559)					$	1,226					$	2,875					$	(1,537)					$	1,338

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 $42 million and $86 million for the three and six months ended June 30, 2024, respectively, and $48 million and $95 million for the three and six months ended June 30, 2023, respectively.

12. Share-based Payments

The Zoetis 2013 Equity and Incentive Plan, Amended and Restated as of May 19, 2022 (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.

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

						Three Months Ended												Six Months Ended
						June 30,												June 30,
(MILLIONS OF DOLLARS)						2024						2023						2024						2023
Stock options / stock appreciation rights						$	3					$	2					$	6					$	3
RSUs / DSUs						11						10						21						17
PSUs						5						5						10						6
Share-based compensation expense—total(a)						$	19					$	17					$	37					$	26

(a) For the three and six months ended June 30, 2024 and 2023, we capitalized less than $1 million of share-based compensation expense to inventory.

During the six months ended June 30, 2024, the company granted 266,526 stock options with a weighted-average exercise price of $196.04 per stock option and a weighted-average fair value of $50.98 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 4.06%; expected dividend yield of 0.88%; expected stock price volatility of 27.04%; and expected term of 4.1 years. Stock options granted prior to 2023 generally vest after three years of continuous service from the date of grant and have a contractual term of 10 years. Beginning in 2023, stock options granted are subject to graded vesting over three years from the date of grant and have a contractual term of 10 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 six months ended June 30, 2024, the company granted 240,809 RSUs, with a weighted-average grant date fair value of $195.32 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. RSUs granted prior to 2023 generally vest after three years of continuous service from the date of grant. Beginning in 2023, RSUs granted are subject to graded vesting over three years from the date of grant. 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 six months ended June 30, 2024, the company granted 101,099 PSUs with a weighted-average grant date fair value of $268.71 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 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 26.2% and 30.6%, 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 multi-year share repurchase program. As of June 30, 2024, there was $623 million remaining under this authorization. In August 2024, our Board of Directors authorized a new multi-year share repurchase program of up to $6 billion of our outstanding common stock. See Note 17. Subsequent Events for additional information. Purchases of Zoetis shares may be made at the discretion of management, depending on market conditions, business needs and available liquidity.

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						Gains/(Losses)						Loss
Balance, December 31, 2023						$	85					$	18					$	(944)					$	2					$	(839)
Other comprehensive (loss)/income, net of tax						(1)						18						(23)						—						(6)
Balance, June 30, 2024						$	84					$	36					$	(967)					$	2					$	(845)
Balance, December 31, 2022						$	90					$	41					$	(944)					$	(4)					$	(817)
Other comprehensive (loss)/income, net of tax						(3)						(13)						(66)						4						(78)
Balance, June 30, 2023						$	87					$	28					$	(1,010)					$	—					$	(895)

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14. Earnings per Share

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

						Three Months Ended												Six Months Ended
(MILLIONS OF DOLLARS AND SHARES, EXCEPT PER SHARE DATA)						June 30,												June 30,
			2024						2023						2024						2023
Numerator
Net income before allocation to noncontrolling interests						$	624					$	670					$	1,223					$	1,221
Less: Net loss attributable to noncontrolling interests						—						(1)						—						(2)
Net income attributable to Zoetis Inc.						$	624					$	671					$	1,223					$	1,223
Denominator
Weighted-average common shares outstanding						455.5						461.9						456.7						462.7
Common stock equivalents: stock options, RSUs, PSUs and DSUs						0.5						1.0						0.7						1.1
Weighted-average common and potential dilutive shares outstanding						456.0						462.9						457.4						463.8
Earnings per share attributable to Zoetis Inc. stockholders—basic						$	1.37					$	1.45					$	2.68					$	2.64
Earnings per share attributable to Zoetis Inc. stockholders—diluted						$	1.37					$	1.45					$	2.67					$	2.64

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 six months ended June 30, 2024 and 2023.

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.

• 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.

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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. The parties have been unable to secure a start date for the Phase II testing.

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 June 30, 2024, 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, anti-infectives, pain and sedation, other pharmaceutical, 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 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 and divestiture-related costs, where we incur costs associated with acquiring and integrating newly acquired businesses, such as transaction costs and integration costs, as well as divestiture-related 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 or divestiture, 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
						June 30,												June 30,
(MILLIONS OF DOLLARS)						2024						2023						2024						2023
U.S.
Revenue						$	1,308					$	1,165
Cost of sales						232						214
Gross profit						1,076						951
Gross margin						82.3		%				81.6		%
Operating expenses						204						212
Other (income)/deductions-net						—						—
U.S. Earnings						872						739						$	21					$	20
International
Revenue(b)						1,035						995
Cost of sales						342						315
Gross profit						693						680
Gross margin						67.0		%				68.3		%
Operating expenses						175						166
Other (income)/deductions-net						—						(1)
International Earnings						518						515						25						22
Total operating segments						1,390						1,254						46						42
Other business activities						(142)						(116)						11						7
Reconciling Items:
Corporate						(299)						(256)						33						30
Purchase accounting adjustments						(35)						(43)						35						40
Acquisition and divestiture-related costs						(5)						(4)						—						—
Certain significant items(c)						(70)						90						—						—
Other unallocated						(59)						(53)						2						2
Total Earnings**(d)**						$	780					$	872					$	127					$	121

(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 $237 million and $217 million for the three months ended June 30, 2024 and 2023, respectively.

(c) For the three months ended June 30, 2024, primarily consisted of employee termination costs related to organizational structure refinements and a loss on assets held for sale related to the planned sale of our medicated feed additive product portfolio, certain water soluble products and related assets, as well as asset impairment charges related to our aquaculture business.

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

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

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						Earnings												Depreciation and Amortization(a)
						Six Months Ended												Six Months Ended
						June 30,												June 30,
(MILLIONS OF DOLLARS)						2024						2023						2024						2023
U.S.
Revenue						$	2,471					$	2,170
Cost of sales						449						417
Gross profit						2,022						1,753
Gross margin						81.8		%				80.8		%
Operating expenses						394						400
Other (income)/deductions-net						—						—
U.S. Earnings						1,628						1,353						$	45					$	39
International
Revenue(b)						2,042						1,973
Cost of sales						655						606
Gross profit						1,387						1,367
Gross margin						67.9		%				69.3		%
Operating expenses						334						317
Other (income)/deductions-net						—						—
International Earnings						1,053						1,050						48						43
Total operating segments						2,681						2,403						93						82
Other business activities						(274)						(230)						20						15
Reconciling Items:
Corporate						(587)						(464)						65						62
Purchase accounting adjustments						(72)						(85)						72						79
Acquisition and divestiture-related costs						(5)						(5)						—						—
Certain significant items(c)						(76)						68						—						—
Other unallocated						(140)						(118)						3						3
Total Earnings**(d)**						$	1,527					$	1,569					$	253					$	241

(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 $460 million and $421 million for the six months ended June 30, 2024 and 2023, respectively.

(c) For the six months ended June 30, 2024, primarily consisted of employee termination costs related to organizational structure refinements, a loss on assets held for sale related to the planned sale of our medicated feed additive product portfolio, certain water soluble products and related assets, as well as asset impairment charges related to our aquaculture business, partially offset by a reversal of certain employee termination costs as a result of a change in strategy from our 2015 operational efficiency initiative.

For the six months ended June 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 business.

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

17. Subsequent Events

Status of Tax Audits and Potential Impact on Accrual for Uncertain Tax Positions

We are currently under income tax audit by the U.S. Internal Revenue Service (IRS) for tax years 2017 and 2018. In July 2024, the IRS issued Notices of Proposed Adjustment (NOPA) related to the one-time mandatory deemed repatriation tax incurred on the 2018 U.S. Federal Income Tax return. As of June 30, 2024, the estimated additional tax liability, based on the income adjustment proposed by the IRS under the NOPA, is approximately $450 million, excluding interest and penalties.

Based on current facts and circumstances, we disagree with the IRS’ position and will defend our position taken on the 2018 U.S. Federal Income Tax return. We believe the amount previously accrued related to this uncertain tax position remains appropriate, but we will continue to evaluate the adequacy of our tax reserve as the audit progresses. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in our tax audits are not consistent with management’s expectations, we could be required to adjust our provision for income taxes and this amount could be material to our financial statements.

Share Repurchase Program

On August 1, 2024, our Board of Directors authorized a new multi-year share repurchase program of up to $6 billion of our outstanding common stock. Purchases of Zoetis shares may be made at the discretion of management, depending on market conditions, business needs and available liquidity.

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