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. 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.

Our companion animal and livestock products are primarily available by prescription through a veterinarian. On a more limited basis, in certain markets, we sell certain products through retail and e-commerce outlets. We also market our products by advertising to veterinarians, livestock producers and pet owners.

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 2024 performance compared with the comparable 2023 periods follows:


					% Change
	Three Months Ended					Related to
	September 30,					Foreign
(MILLIONS OF DOLLARS)	2024		2023		Total	Exchange	Operational(a)
Revenue	$	2,388	$	2,151	11	(3)	14
Net income attributable to Zoetis	682		596		14	(2)	16
Adjusted net income(a)	716		629		14	(1)	15


					% Change
	Nine Months Ended					Related to
	September 30,					Foreign
(MILLIONS OF DOLLARS)	2024		2023		Total	Exchange	Operational(a)
Revenue	$	6,939	$	6,331	10	(2)	12
Net income attributable to Zoetis	1,905		1,819		5	(9)	14
Adjusted net income(a)	2,061		1,888		9	(7)	16

(a) Operational results 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 2023 Annual Report on Form 10-K. Set forth below are updates to certain of the factors disclosed in our 2023 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, competitive dynamics, the regional conflict in the Middle East, geopolitical tensions with and economic uncertainty in China, inflation, global supply chain disruption, variability in distributor inventory stocking levels as a result of expected demand and promotional activities, weather patterns, herd management decisions, regulatory actions, disease outbreaks, product and geographic mix, timing of price increases and timing of investment decisions.

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Disease Outbreaks

Sales of our livestock products have in the past, and may in the future be, adversely affected by the outbreak of disease carried by animals. Outbreaks of disease may reduce regional or global sales of particular animal-derived food products or result in reduced exports of such products, either due to heightened export restrictions or import prohibitions, which may reduce demand for our products. Also, the outbreak of any highly contagious disease near our main production sites could require us to immediately halt production of our products at such sites or force us to incur substantial expenses in procuring raw materials or products elsewhere. Alternatively, sales of products that treat specific disease outbreaks may increase.

Foreign Exchange Rates

Significant portions of our revenue and costs are exposed to changes in foreign exchange rates. Our products are sold in more than 100 countries and, as a result, our revenue is influenced by changes in foreign exchange rates. For the nine months ended September 30, 2024, approximately 41% 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 renminbi, 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, 2024, approximately 59% 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 Results

We believe that it is important to not only understand overall revenue and earnings results, but also “operational" results. Operational results is a non-GAAP financial measure defined as revenue or earnings results 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 results.

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 and divestiture-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, divestiture 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 Ended							Nine Months Ended
	September 30,						%	September 30,						%
(MILLIONS OF DOLLARS)	2024			2023			Change	2024			2023			Change
Revenue	$	2,388		$	2,151		11	$	6,939		$	6,331		10
Costs and expenses:
Cost of sales	701			638			10	2,012			1,833			10
% of revenue	29.4		%	29.7		%		29.0		%	29.0		%
Selling, general and administrative expenses	565			525			8	1,693			1,586			7
% of revenue	24		%	24		%		24		%	25		%
Research and development expenses	167			152			10	500			440			14
% of revenue	7		%	7		%		7		%	7		%
Amortization of intangible assets	35			38			(8)	107			112			(4)
Restructuring charges and certain acquisition and divestiture-related costs	5			16			(69)	51			45			13
Interest expense, net of capitalized interest	57			59			(3)	174			180			(3)
Other (income)/deductions—net	(16)			6			*	1			(151)			*
Income before provision for taxes on income	874			717			22	2,401			2,286			5
% of revenue	37		%	33		%		35		%	36		%
Provision for taxes on income	182			121			50	486			469			4
Effective tax rate	20.8		%	16.9		%		20.2		%	20.5		%
Net income before allocation to noncontrolling interests	692			596			16	1,915			1,817			5
Less: Net income/(loss) attributable to noncontrolling interests	10			—			—	10			(2)			*
Net income attributable to Zoetis Inc.	$	682		$	596		14	$	1,905		$	1,819		5
% of revenue	29		%	28		%		27		%	29		%

*Calculation not meaningful

Revenue

Three months ended September 30, 2024 vs. three months ended September 30, 2023

Total revenue increased by $237 million, or 11%, in the three months ended September 30, 2024, compared with the three months ended September 30, 2023, an increase of $297 million, or 14%, on an operational basis. Operational revenue growth was comprised primarily of the following:

price growth of approximately 6%;
volume growth from new products of approximately 3%;
volume growth from other in-line products of approximately 3%; and
volume growth from key dermatology products of approximately 2%.

Foreign exchange decreased reported revenue growth by approximately 3%.

Nine months ended September 30, 2024 vs. nine months ended September 30, 2023

Total revenue increased by $608 million, or 10%, in the nine months ended September 30, 2024, compared with the nine months ended September 30, 2023, an increase of $779 million, or 12%, on an operational basis. Operational revenue growth was comprised primarily of the following:

price growth of approximately 7%;
volume growth from new products of approximately 3%; and
volume growth from key dermatology products of approximately 2%.

Foreign exchange decreased reported revenue growth by approximately 2%.

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Costs and Expenses


Cost of sales
	Three Months Ended							Nine Months Ended
	September 30,						%	September 30,						%
(MILLIONS OF DOLLARS)	2024			2023			Change	2024			2023			Change
Cost of sales	$	701		$	638		10	$	2,012		$	1,833		10
% of revenue	29.4		%	29.7		%		29.0		%	29.0		%

Three months ended September 30, 2024 vs. three months ended September 30, 2023

Cost of sales as a percentage of revenue was 29.4% in the three months ended September 30, 2024, compared with 29.7% in the three months ended September 30, 2023. The decrease was primarily as a result of:

price increases;
favorable product mix;
lower inventory charges; and
favorable foreign exchange,

partially offset by:

unfavorable manufacturing and other costs; and
higher freight costs.

Nine months ended September 30, 2024 vs. nine months ended September 30, 2023

Cost of sales as a percentage of revenue remained flat at 29.0% in the nine months ended September 30, 2024, compared with the nine months ended September 30, 2023 primarily as a result of:

price increases;
favorable product mix;
lower freight costs; and
lower inventory charges,

fully offset by:

unfavorable manufacturing and other costs; and
unfavorable foreign exchange.


Selling, general and administrative expenses
	Three Months Ended							Nine Months Ended
	September 30,						%	September 30,						%
(MILLIONS OF DOLLARS)	2024			2023			Change	2024			2023			Change
Selling, general and administrative expenses	$	565		$	525		8	$	1,693		$	1,586		7
% of revenue	24		%	24		%		24		%	25		%

Three months ended September 30, 2024 vs. three months ended September 30, 2023

SG&A expenses increased by $40 million, or 8%, in the three months ended September 30, 2024, compared with the three months ended September 30, 2023, primarily as a result of:

an increase in certain compensation-related costs;
higher professional and consulting costs;
higher selling and distribution costs; and
increased technology project investments,

partially offset by:

favorable foreign exchange;
lower advertising and promotion costs due to timing of marketing activities; and
lower contract labor costs.

Nine months ended September 30, 2024 vs. nine months ended September 30, 2023

SG&A expenses increased by $107 million, or 7%, in the nine months ended September 30, 2024, compared with the nine months ended September 30, 2023, primarily as a result of:

an increase in certain compensation-related costs;
higher selling and distribution costs;
higher professional and consulting fees;
higher logistics and freight costs; and

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an increase in technology project investments,

partially offset by:

favorable foreign exchange;
the reduced impact of purchase accounting adjustments; and
lower advertising and promotion costs due to timing of marketing activities.


Research and development expenses
	Three Months Ended							Nine Months Ended
	September 30,						%	September 30,						%
(MILLIONS OF DOLLARS)	2024			2023			Change	2024			2023			Change
Research and development expenses	$	167		$	152		10	$	500		$	440		14
% of revenue	7		%	7		%		7		%	7		%

Three months ended September 30, 2024 vs. three months ended September 30, 2023

R&D expenses increased by $15 million, or 10%, in the three months ended September 30, 2024, compared with the three months ended September 30, 2023, primarily as a result of:

an increase in certain compensation-related costs to support innovation and portfolio progression;
higher spend in project investments;
increased costs due to recent acquisitions; and
higher depreciation expense.

Nine months ended September 30, 2024 vs. nine months ended September 30, 2023

R&D expenses increased by $60 million, or 14%, in the nine months ended September 30, 2024, compared with the nine months ended September 30, 2023, primarily as a result of:

an increase in certain compensation-related costs to support innovation and portfolio progression;
higher spend in project investments;
increased costs due to recent acquisitions;
higher other operating costs; and
higher depreciation expense.


Amortization of intangible assets
	Three Months Ended					Nine Months Ended
	September 30,				%	September 30,				%
(MILLIONS OF DOLLARS)	2024		2023		Change	2024		2023		Change
Amortization of intangible assets	$	35	$	38	(8)	$	107	$	112	(4)

Amortization of intangible assets decreased in the three and nine months ended versus the comparable prior year periods primarily due to asset impairments taken in 2023 and assets that became fully amortized, partially offset by intangible assets placed in service in 2023.


Restructuring charges and certain acquisition and divestiture-related costs
	Three Months Ended					Nine Months Ended
	September 30,				%	September 30,				%
(MILLIONS OF DOLLARS)	2024		2023		Change	2024		2023		Change
Restructuring charges and certain acquisition and divestiture-related costs	$	5	$	16	(69)	$	51	$	45	13

Three months ended September 30, 2024 vs. three months ended September 30, 2023

Restructuring charges and certain acquisition and divestiture-related costs were $5 million and $16 million in the three months ended September 30, 2024 and 2023, respectively. Restructuring charges and certain acquisition and divestiture-related costs in the three months ended September 30, 2024 primarily consisted of costs related to the planned sale of our medicated feed additive product portfolio, certain water soluble products and related assets. Restructuring charges and certain acquisition and divestiture-related costs in the three months ended September 30, 2023 primarily consisted of employee termination and exit costs related to organizational structure refinements and other cost-reduction and productivity initiatives, as well as costs related to recent acquisitions.

Nine months ended September 30, 2024 vs. nine months ended September 30, 2023

Restructuring charges and certain acquisition and divestiture-related costs were $51 million and $45 million in the nine months ended September 30, 2024 and 2023, respectively. Restructuring charges and certain acquisition and divestiture-related costs for the nine months ended September 30, 2024 primarily consisted of employee termination costs related to organizational structure refinements, as well as costs related to the planned sale of our medicated feed additive product portfolio, certain water soluble products and related assets, partially offset by a reversal of certain employee

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termination costs as a result of a change in strategy from our 2015 operational efficiency initiative. Restructuring charges and certain acquisition and divestiture-related costs in the 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, as well as costs related to recent acquisitions.


Interest expense, net of capitalized interest
	Three Months Ended					Nine Months Ended
	September 30,				%	September 30,				%
(MILLIONS OF DOLLARS)	2024		2023		Change	2024		2023		Change
Interest expense, net of capitalized interest	$	57	$	59	(3)	$	174	$	180	(3)

Three months ended September 30, 2024 vs. three months ended September 30, 2023

Interest expense, net of capitalized interest, decreased in the three months ended September 30, 2024 versus the comparable prior year period. The decrease was primarily as a result of higher capitalized interest in the current period associated with capital projects to support our future growth.

Nine months ended September 30, 2024 vs. nine months ended September 30, 2023

Interest expense, net of capitalized interest, decreased in the nine months ended September 30, 2024 versus the comparable prior year period. The decrease was primarily as a result of higher capitalized interest in the current period associated with capital projects to support our future growth and a higher debt balance during a portion of the prior year period.


Other (income)/deductions—net
	Three Months Ended					Nine Months Ended
	September 30,				%	September 30,				%
(MILLIONS OF DOLLARS)	2024		2023		Change	2024		2023		Change
Other (income)/deductions—net	$	(16)	$	6	*	$	1	$	(151)	*

Calculation not meaningful

Three months ended September 30, 2024 vs. three months ended September 30, 2023

The change in Other (income)/deductions—net in the three months ended September 30, 2024 versus the comparable prior year period was primarily as a result of lower foreign currency losses in the current period and certain asset impairment charges related to our diagnostics and precision animal health businesses in the prior year period.

Nine months ended September 30, 2024 vs. nine months ended September 30, 2023

The change in Other (income)/deductions—net in the nine months ended September 30, 2024 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 in the prior year period, royalty-related income in the prior year period that was predominantly associated with a settlement received from a third-party for underpayment of royalties related to prior periods, 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 in the current period, as well as certain asset impairment charges related to our aquaculture business in the current period, partially offset by certain asset impairment charges related to our precision animal health and diagnostics businesses in the prior year period.


Provision for taxes on income
	Three Months Ended							Nine Months Ended
	September 30,						%	September 30,						%
(MILLIONS OF DOLLARS)	2024			2023			Change	2024			2023			Change
Provision for taxes on income	$	182		$	121		50	$	486		$	469		4
Effective tax rate	20.8		%	16.9		%		20.2		%	20.5		%

The global minimum tax provisions (Pillar Two) resulting from the 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 nine months ended September 30, 2024.

Three months ended September 30, 2024 vs. three months ended September 30, 2023

Our effective tax rate was 20.8% and 16.9% for the three months ended September 30, 2024 and 2023, respectively. The higher effective tax rate for the three months ended September 30, 2024, compared with the three months ended September 30, 2023, was primarily attributable to a benefit from the tax loss on the divestiture of Performance Livestock Analytics recorded in the third quarter of 2023, higher net discrete tax expenses and a less favorable jurisdictional mix of earnings (which includes the impact of the location of earnings and repatriation costs), partially offset by a higher benefit in the U.S. related to foreign-derived intangible income. Jurisdictional mix of earnings can vary depending on repatriation decisions, operating fluctuations in the normal course of business and the impact of non-deductible items and non-taxable items.

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Nine months ended September 30, 2024 vs. nine months ended September 30, 2023

Our effective tax rate was 20.2% and 20.5% for the nine months ended September 30, 2024 and 2023, respectively. The lower effective tax rate for the nine months ended September 30, 2024, compared with the nine months ended September 30, 2023, was primarily attributable to a higher benefit in the U.S. related to foreign-derived intangible income, lower net discrete tax expenses and a more favorable jurisdictional mix of earnings (which includes the impact of the location of earnings and repatriation costs), partially offset by a benefit from the tax loss on the divestiture of Performance Livestock Analytics recorded in the third quarter of 2023. 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.

Operating Segment Results

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


					% Change
	Three Months Ended					Related to
	September 30,					Foreign
(MILLIONS OF DOLLARS)	2024		2023		Total	Exchange	Operational
U.S.
Companion animal	$	1,068	$	908	18	—	18
Livestock	278		266		5	—	5
	1,346		1,174		15	—	15
International
Companion animal	541		506		7	(4)	11
Livestock	480		450		7	(8)	15
	1,021		956		7	(6)	13
Total
Companion animal	1,609		1,414		14	(1)	15
Livestock	758		716		6	(5)	11
Contract manufacturing & human health	21		21		—	(2)	2
	$	2,388	$	2,151	11	(3)	14

					% Change
	Nine Months Ended					Related to
	September 30,					Foreign
(MILLIONS OF DOLLARS)	2024		2023		Total	Exchange	Operational
U.S.
Companion animal	$	3,046	$	2,588	18	—	18
Livestock	771		756		2	—	2
	3,817		3,344		14	—	14
International
Companion animal	1,662		1,540		8	(4)	12
Livestock	1,401		1,389		1	(7)	8
	3,063		2,929		5	(5)	10
Total
Companion animal	4,708		4,128		14	(2)	16
Livestock	2,172		2,145		1	(5)	6
Contract manufacturing & human health	59		58		2	—	2
	$	6,939	$	6,331	10	(2)	12

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


							% Change
	Three Months Ended							Related to
	September 30,							Foreign
(MILLIONS OF DOLLARS)	2024			2023			Total	Exchange	Operational
U.S.
Revenue	$	1,346		$	1,174		15	—	15
Cost of Sales	258			228			13	—	13
Gross Profit	1,088			946			15	—	15
Gross Margin	80.8		%	80.6		%
Operating Expenses	199			202			(1)	—	(1)
Other (income)/deductions-net	—			—			*	*	*
U.S. Earnings	889			744			19	—	19

International
Revenue	1,021			956			7	(6)	13
Cost of Sales	321			306			5	(8)	13
Gross Profit	700			650			8	(5)	13
Gross Margin	68.6		%	68.0		%
Operating Expenses	157			156			1	(6)	7
Other (income)/deductions-net	1			1			—	13	(13)
International Earnings	542			493			10	(5)	15

Total operating segments	1,431			1,237			16	(2)	18

Other business activities	(137)			(124)			10
Reconciling Items:
Corporate	(306)			(258)			19
Purchase accounting adjustments	(35)			(39)			(10)
Acquisition and divestiture-related costs	(7)			(3)			*
Certain significant items	(1)			(23)			(96)
Other unallocated	(71)			(73)			(3)
Total Earnings	$	874		$	717		22

Calculation not meaningful

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							% Change
	Nine Months Ended							Related to
	September 30,							Foreign
(MILLIONS OF DOLLARS)	2024			2023			Total	Exchange	Operational
U.S.
Revenue	$	3,817		$	3,344		14	—	14
Cost of Sales	707			645			10	—	10
Gross Profit	3,110			2,699			15	—	15
Gross Margin	81.5		%	80.7		%
Operating Expenses	593			602			(1)	—	(1)
Other (income)/deductions-net	—			—			*	*	*
U.S. Earnings	2,517			2,097			20	—	20

International
Revenue	3,063			2,929			5	(5)	10
Cost of Sales	976			912			7	(3)	10
Gross Profit	2,087			2,017			3	(8)	11
Gross Margin	68.1		%	68.9		%
Operating Expenses	491			473			4	(4)	8
Other (income)/deductions-net	1			1			—	(39)	39
International Earnings	1,595			1,543			3	(9)	12

Total operating segments	4,112			3,640			13	(3)	16

Other business activities	(411)			(354)			16
Reconciling Items:
Corporate	(893)			(722)			24
Purchase accounting adjustments	(107)			(124)			(14)
Acquisition and divestiture-related costs	(12)			(8)			50
Certain significant items	(77)			45			*
Other unallocated	(211)			(191)			10
Total Earnings	$	2,401		$	2,286		5

Calculation not meaningful

Three months ended September 30, 2024 vs. three months ended September 30, 2023

U.S. operating segment

U.S. segment revenue increased by $172 million, or 15%, in the three months ended September 30, 2024, compared with the three months ended September 30, 2023, reflecting an increase of $160 million in companion animal products and $12 million in livestock products.

Companion animal revenue increased primarily due to growth in sales of our mAb products for osteoarthritis (OA) pain, Librela® and Solensia®, Simparica Trio® and key dermatology products.
Livestock growth was primarily due to increased sales of cattle and swine products. Sales of cattle and swine products grew due to supply availability in the current year compared to the prior year period.

U.S. segment earnings increased by $145 million, or 19%, in the three months ended September 30, 2024, compared with the three months ended September 30, 2023, primarily due to higher revenue, partially offset by higher cost of sales.

International operating segment

International segment revenue increased by $65 million, or 7%, in the three months ended September 30, 2024, compared with the three months ended September 30, 2023. Operational revenue increased by $125 million, or 13%, driven by growth of $58 million in companion animal products and $67 million in livestock products.

Companion animal operational revenue growth was driven primarily by the growth in sales of key dermatology products, our mAb products for OA pain, Librela and Solensia, small animal parasiticides and vaccine products.
Livestock operational revenue growth was due to increased sales of cattle, poultry, fish and swine products, partially offset by declines in sheep products. Sales of cattle products grew primarily due to price, increased demand and improved supply, partially offset by market conditions in China. Sales of products in our poultry portfolio grew primarily due to price and key account penetration. Sales of products in our fish portfolio grew due to increased vaccine sales in Norway. Sales of products in our swine portfolio grew as a result of price, favorable market conditions and key market penetration. Sales of sheep products declined primarily due to poor market conditions.
Additionally, International segment revenue was unfavorably impacted by foreign exchange which decreased revenue by $60 million, or 6%, primarily driven by the Argentinian peso, Brazilian real, Turkish lira, Mexican peso and Japanese yen.

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International segment earnings increased by $49 million, or 10%, in the three months ended September 30, 2024, compared with the three months ended September 30, 2023. Operational earnings growth was $76 million, or 15%, primarily due to higher revenue, partially offset by higher cost of sales and operating expenses.

Nine months ended September 30, 2024 vs. nine months ended September 30, 2023

U.S. operating segment

U.S. segment revenue increased by $473 million, or 14%, in the nine months ended September 30, 2024, compared with the nine months ended September 30, 2023, reflecting an increase of $458 million in companion animal products and $15 million in livestock products.

Companion animal revenue increased primarily due to growth in sales of Simparica Trio, our mAb products for OA pain, Librela and Solensia and key dermatology products, partially offset by lower sales of our small animal antiemetic product, Cerenia, and small animal diagnostics.
Livestock growth was due to increased sales of cattle and swine products, partially offset by lower sales of poultry products. Sales of cattle products grew due to timing of supply partially offset by price. Sales of products in our poultry portfolio declined primarily as a result of the expanded use of lower cost alternatives and generic competition.

U.S. segment earnings increased by $420 million, or 20%, in the nine months ended September 30, 2024, compared with the nine months ended September 30, 2023, primarily due to higher revenue and lower operating expenses, partially offset by higher cost of sales.

International operating segment

International segment revenue increased by $134 million, or 5%, in the nine months ended September 30, 2024, compared with the nine months ended September 30, 2023. Operational revenue increased by $305 million, or 10%, driven by growth of $190 million in companion animal products and $115 million in livestock products.

Companion animal operational revenue growth was driven primarily by the growth in sales of our mAb products for OA pain, Librela and Solensia, key dermatology products, vaccine products and small animal parasiticides.
Livestock operational revenue growth was due to increased sales of cattle, poultry and fish products, partially offset by a decline in sheep products. Sales of cattle products grew due to price, partially offset by volume declines as compared to the prior year period due to prior year supply recoveries. Sales of products in our poultry portfolio grew due to price and demand generation efforts in key poultry markets. Sales of our fish portfolio grew due to increased vaccine sales in Norway, partially offset by lower sales of anti-infective products in Chile. Sales of sheep products declined primarily due to poor market conditions.
Additionally, International segment revenue was unfavorably impacted by foreign exchange which decreased revenue by $171 million, or 5%, primarily driven by the Argentinian peso, Turkish lira, Japanese yen, Brazilian real, Chinese renminbi and Russian ruble.

International segment earnings increased by $52 million, or 3%, in the nine months ended September 30, 2024, compared with the nine months ended September 30, 2023. Operational earnings growth was $179 million, or 12%, 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, 2024 vs. three months ended September 30, 2023

Other business activities net loss increased by $13 million in the three months ended September 30, 2024, compared with the three months ended September 30, 2023, reflecting an increase in R&D costs due to an increase in higher project investments, certain compensation-related costs to support innovation, acquisitions and other operating costs.

Nine months ended September 30, 2024 vs. nine months ended September 30, 2023

Other business activities net loss increased by $57 million in the nine months ended September 30, 2024, compared with the nine months ended September 30, 2023, reflecting an increase in R&D costs due to an increase in higher project investments, certain compensation-related costs to support innovation, acquisitions and other operating costs.

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 and divestiture-related costs 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, 2024 vs. three months ended September 30, 2023

Corporate expenses increased by $48 million, or 19%, in the three months ended September 30, 2024, compared with the three months ended September 30, 2023, primarily due to higher compensation-related costs and investments in information technology.

Other unallocated expenses decreased by $2 million, or 3%, in the three months ended September 30, 2024, compared with the three months ended September 30, 2023, primarily due to higher manufacturing costs and freight charges, partially offset by lower scrap charges and favorable foreign exchange.

Nine months ended September 30, 2024 vs. nine months ended September 30, 2023

Corporate expenses increased by $171 million, or 24%, in the nine months ended September 30, 2024, compared with the nine months ended September 30, 2023, primarily due to higher compensation-related costs, a settlement received from a third-party for underpayment of royalties in the prior year period, unfavorable foreign exchange and investments in information technology.

Other unallocated expenses increased by $20 million, or 10%, in the nine months ended September 30, 2024, compared with the nine months ended September 30, 2023, primarily due to unfavorable foreign exchange, higher manufacturing costs, higher inventory obsolescence, scrap and other charges, partially offset by lower freight 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 and divestiture-related costs

Adjusted net income is calculated prior to considering transaction, integration and disintegration costs associated with significant business combinations, net asset acquisitions and divestitures. These incremental costs are excluded as they are incurred to acquire and integrate, or dispose and disintegrate, certain businesses as a result of the acquisition or disposal decision and are unique to each transaction. We have made no adjustments for the resulting synergies from these transactions.

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, net asset acquisition or divestiture result primarily from the need to eliminate duplicate assets, activities or employees––a natural result of acquiring or disposing of 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 and disintegration costs associated with a business combination, asset acquisition or divestiture 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, integration or disintegration 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 or divestiture-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 or divestiture-related cost-reduction and productivity initiatives; amounts related to disposals of products or facilities that do not qualify as discontinued operations as defined by U.S. GAAP; certain asset impairment charges; adjustments related to the resolution of certain tax positions; significant currency devaluation; the impact of adopting certain significant, event-driven tax legislation; or charges related to legal matters. See Notes to Condensed Consolidated Financial Statements—Note 15. Commitments and Contingencies. Our normal, ongoing defense costs or settlements of and accruals on legal matters made in the normal course of our business would not be considered certain significant items.

Reconciliation

A reconciliation of net income attributable to Zoetis, as reported under U.S. GAAP, to adjusted net income follows:


	Three Months Ended					Nine Months Ended
	September 30,				%	September 30,				%
(MILLIONS OF DOLLARS)	2024		2023		Change	2024		2023		Change
GAAP reported net income attributable to Zoetis	$	682	$	596	14	$	1,905	$	1,819	5
Purchase accounting adjustments—net of tax	27		30		(10)	83		98		(15)
Acquisition and divestiture-related costs—net of tax	5		3		67	9		7		29
Certain significant items—net of tax	2		—		*	64		(36)		*
Non-GAAP adjusted net income(a)	$	716	$	629	14	$	2,061	$	1,888	9

*Calculation not meaningful

(a) The effective tax rate on adjusted pretax income was 20.8% and 19.6% for the three months ended September 30, 2024 and 2023, respectively.

The higher effective tax rate for the three months ended September 30, 2024, compared with the three months ended September 30, 2023, was primarily attributable to a less favorable jurisdictional mix of earnings (which includes the impact of the location of earnings and repatriation costs) and higher net discrete tax expenses, partially offset by a higher benefit in the U.S. related to foreign-derived intangible income. Jurisdictional mix of earnings can vary depending on repatriation decisions, operating fluctuations in the normal course of business and the impact of non-deductible and non-taxable items.

The effective tax rate on adjusted pretax income was 20.3% and 20.5% for the nine months ended September 30, 2024 and 2023, respectively.

The lower effective tax rate for the nine months ended September 30, 2024, compared with the nine months ended September 30, 2023, was primarily attributable to a higher benefit in the U.S. related to foreign-derived intangible income and a lower net discrete tax expenses, partially offset by a less 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 Ended					Nine Months Ended
	September 30,				%	September 30,				%
	2024		2023		Change	2024		2023		Change
Earnings per share—diluted(a):
GAAP reported EPS attributable to Zoetis —diluted	$	1.50	$	1.29	16	$	4.18	$	3.93	6
Purchase accounting adjustments—net of tax	0.06		0.06		—	0.18		0.21		(14)
Acquisition and divestiture-related costs—net of tax	0.01		0.01		—	0.02		0.02		—
Certain significant items—net of tax	0.01		—		*	0.14		(0.08)		*
Non-GAAP adjusted EPS—diluted	$	1.58	$	1.36	16	$	4.52	$	4.08	11

Calculation not meaningful

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

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


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(MILLIONS OF DOLLARS)	2024		2023		2024		2023
Interest expense, net of capitalized interest	$	57	$	59	$	174	$	180
Interest income	23		23		79		77
Income taxes	191		153		526		487
Depreciation	79		76		242		220
Amortization	7		9		25		27

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


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(MILLIONS OF DOLLARS)	2024		2023		2024		2023
Purchase accounting adjustments:
Amortization and depreciation	$	35	$	39	$	107	$	118
Cost of sales	—		—		—		6

Total purchase accounting adjustments—pre-tax	35		39		107		124
Income taxes(a)	8		9		24		26
Total purchase accounting adjustments—net of tax	27		30		83		98
Acquisition and divestiture-related costs:
Acquisition-related costs	—		3		1		7
Divestiture-related costs(b)	7		—		11		—
Restructuring costs	—		—		—		1


Total acquisition and divestiture-related costs—pre-tax	7		3		12		8
Income taxes(a)	2		—		3		1
Total acquisition and divestiture-related costs—net of tax	5		3		9		7
Certain significant items:


Other restructuring charges and cost-reduction/productivity initiatives(c)	(2)		12		39		36

Certain asset impairment charges(d)	—		11		11		21
Loss on assets held for sale(e)	—		—		22		—


Net gain on sale of business(f)	—		—		—		(101)
Other	3		—		5		(1)
Total certain significant items—pre-tax	1		23		77		(45)
Income taxes(a)	(1)		23		13		(9)
Total certain significant items—net of tax	2		—		64		(36)
Total purchase accounting adjustments, acquisition and divestiture-related costs, and certain significant items—net of tax	$	34	$	33	$	156	$	69

(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. For the three and nine months ended September 30, 2023, income taxes in Certain significant items also includes 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.

(b) Represents costs related to the planned sale of our medicated feed additive product portfolio, certain water soluble products and related assets.

(c) For the nine months ended September 30, 2024, primarily consisted of employee termination costs related to organizational structure refinements, 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 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.

(d) For the nine months ended September 30, 2024, represents certain asset impairment charges related to our aquaculture business.

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

businesses.

(e) 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.

(f) 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 Ended				Nine Months Ended
	September 30,				September 30,
(MILLIONS OF DOLLARS)	2024		2023		2024		2023
Cost of sales:
Purchase accounting adjustments	$	1	$	1	$	3	$	10

Inventory write-offs	—		2		—		2


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

Selling, general & administrative expenses:
Purchase accounting adjustments	3		4		9		18



Other	2		—		2		—
Total Selling, general & administrative expenses	5		4		11		18

Research & development expenses:
Purchase accounting adjustments	1		1		2		1
Total Research & development expenses	1		1		2		1

Amortization of intangible assets:
Purchase accounting adjustments	30		33		93		95
Total Amortization of intangible assets	30		33		93		95

Restructuring charges and certain acquisition and divestiture-related costs:
Acquisition-related costs	—		3		1		7
Divestiture-related costs	7		—		11		—
Employee termination costs	(2)		8		39		33

Asset impairments	—		1		—		1
Exit costs	—		4		—		4
Total Restructuring charges and certain acquisition and divestiture-related costs	5		16		51		45

Other (income)/deductions—net:

Net gain on sale of business	—		—		—		(101)

Asset impairment charges	—		8		11		18
Loss on assets held for sale	—		—		22		—
Other	—		—		2		(1)
Total Other (income)/deductions—net	—		8		35		(84)

Provision for taxes on income	9		32		40		18

Total purchase accounting adjustments, acquisition and divestiture-related costs, and certain significant items—net of tax	$	34	$	33	$	156	$	69

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, 2024 vs. December 31, 2023

For a discussion about the changes in Cash and cash equivalents, Short-term borrowings and Long-term debt, net of discount and issuance costs, see “Analysis of financial condition, liquidity and capital resources” below.

Accounts receivable, less allowance for doubtful accounts increased primarily as a result of higher net sales in the period.

Inventories decreased primarily due to a reclassification of certain assets to Assets held for sale and higher sales than anticipated for certain products, partially offset by the build-up of certain products for increased demand*.*

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Assets held for sale and Liabilities associated with assets held for sale primarily reflects the reclassification of certain accounts related to the planned sale of our medicated feed additive product portfolio, certain water soluble products and related assets. See Note 5. Acquisitions and Divestitures of the Notes to Condensed Consolidated Financial Statements.

Property, plant and equipment increased primarily as a result of capital spending, partially offset by depreciation expense and a reclassification of certain assets to Assets held for sale.

Identifiable intangible assets, less accumulated amortization decreased primarily as a result of amortization expense and a reclassification of certain assets to Assets held for assets. See Note 11. Goodwill and Other Intangible Assets of the Notes to Condensed Consolidated Financial Statements.

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.

Accrued expenses increased primarily due to employee termination costs related to organizational structure refinements and the timing of payments for other expenses.

Accrued compensation and related items decreased primarily due to the payments of 2023 annual incentive bonuses, payments for sales incentive bonuses and savings plan contributions to eligible employees, as well as the timing of the bi-weekly payroll, partially offset by the accrual of 2024 annual incentive bonuses, sales incentive bonuses and savings plan contributions to eligible employees.

Other current liabilities increased primarily due to an increase in deferred revenue.

Other noncurrent liabilities decreased primarily due to the reversal of certain employee termination costs as a result of a change in strategy from our 2015 operational efficiency initiative, the mark-to-market adjustment of derivative instruments and the reclassification of certain liabilities to Liabilities associated with assets held for sale.

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)	2024		2023		Change
Net cash provided by (used in):
Operating activities	$	2,048	$	1,456	$	592
Investing activities	(441)		(567)		126
Financing activities	(1,915)		(2,712)		797
Effect of exchange-rate changes on cash and cash equivalents	(19)		(4)		(15)
Net decrease in cash and cash equivalents	$	(327)	$	(1,827)	$	1,500

Operating activities

Nine months ended September 30, 2024 vs. nine months ended September 30, 2023

Net cash provided by operating activities was $2,048 million for the nine months ended September 30, 2024, compared with $1,456 million for the nine months ended September 30, 2023. The increase in operating cash flows was primarily attributable to higher inventory build-up of certain products in the prior period for increased demand and to mitigate potential supply constraints, as well as higher net income adjusted by non-cash items.

Investing activities

Nine months ended September 30, 2024 vs. nine months ended September 30, 2023

Our net cash used in investing activities was $441 million for the nine months ended September 30, 2024, compared with net cash used in investing activities of $567 million for the nine months ended September 30, 2023. The net cash used in investing activities for the nine months ended September 30, 2024 was primarily due to capital expenditures. 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.

Financing activities

Nine months ended September 30, 2024 vs. nine months ended September 30, 2023

Our net cash used in financing activities was $1,915 million for the nine months ended September 30, 2024, compared with net cash used in financing activities of $2,712 million for the nine months ended September 30, 2023. The net cash used in financing activities for the nine months ended September 30, 2024 was primarily attributable to the purchase of treasury shares and related payment of excise taxes, 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, 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.

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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.

Selected measures of liquidity and capital resources

Certain relevant measures of our liquidity and capital resources follow:


	September 30,		December 31,
(MILLIONS OF DOLLARS)	2024		2023
Cash and cash equivalents	$	1,714	$	2,041
Accounts receivable, net(a)	1,411		1,304
Short-term borrowings	—		3

Long-term debt	6,574		6,564
Working capital	4,580		4,454
Ratio of current assets to current liabilities	3.69:1		3.36:1

(a) Accounts receivable are usually collected over a period of 45 to 75 days*.* For the nine months ended September 30, 2024 compared with December 31, 2023, 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. 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, 2024 and December 31, 2023. There were no amounts drawn under the credit facility as of September 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 September 30, 2024, we had access to $56 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 September 30, 2024 and $3 million of borrowings outstanding related to these facilities as of December 31, 2023.

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 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 financing in the future.

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

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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.

Our outstanding debt securities are as follows:


Description	Principal Amount	Interest Rate	Terms
2015 Senior Notes due 2025	$750 million	4.500%	Interest due semi annually, not subject to amortization, aggregate principal due on November 13, 2025
2022 Senior Notes due 2025	$600 million	5.400%	Interest due semi annually, not subject to amortization, aggregate principal due on November 14, 2025
2017 Senior Notes due 2027	$750 million	3.000%	Interest due semi annually, not subject to amortization, aggregate principal due on September 12, 2027
2018 Senior Notes due 2028	$500 million	3.900%	Interest due semi annually, not subject to amortization, aggregate principal due on August 20, 2028
2020 Senior Notes due 2030	$750 million	2.000%	Interest due semi annually, not subject to amortization, aggregate principal due on May 15, 2030
2022 Senior Notes due 2032	$750 million	5.600%	Interest due semi annually, not subject to amortization, aggregate principal due on November 16, 2032
2013 Senior Notes due 2043	$1,150 million	4.700%	Interest due semi annually, not subject to amortization, aggregate principal due on February 1, 2043
2017 Senior Notes due 2047	$500 million	3.950%	Interest due semi annually, not subject to amortization, aggregate principal due on September 12, 2047
2018 Senior Notes due 2048	$400 million	4.450%	Interest due semi annually, not subject to amortization, aggregate principal due on August 20, 2048
2020 Senior Notes due 2050	$500 million	3.000%	Interest due semi annually, not subject to amortization, aggregate principal due on May 15, 2050

Credit ratings

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

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


	Commercial Paper	Long-term Debt		Date of Last Action
Name of Rating Agency	Rating	Rating	Outlook
Moody’s	P-2	Baa1	Positive	March 2024
S&P	A-2	BBB	Stable	December 2016

Share repurchase program

In December 2021, our Board of Directors authorized a $3.5 billion multi-year share repurchase program. As of September 30, 2024, there was $200 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. Purchases of Zoetis shares may be made at the discretion of management, depending on market conditions, business needs and available liquidity. Share repurchases may be executed through various means, including open market or privately negotiated transactions. During the first nine months of 2024, 7.3 million shares were repurchased for $1,295 million, which excludes a $12 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, 2024 and December 31, 2023, 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, 2024 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, competing products, future operating or financial performance, future results of current and anticipated products and services, product and supply chain disruptions, strategies, sales efforts, expenses, production efficiencies, production margins, anticipated timing of generic market entries, anticipated timing of divestitures, integration of acquired businesses, interest rates, tax rates, changes in tax regimes and laws, foreign exchange rates, growth in emerging markets, the outcome of

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contingencies, such as legal proceedings or investigations, plans related to share repurchases and dividends, government regulation and financial results. These statements are not guarantees of future performance, actions or events. Forward-looking statements are subject to risks and uncertainties, many of which are beyond our control, and are based on assumptions that could prove to be inaccurate. Among the factors that could cause actual results to differ materially from past results and future plans and projected future results are the following:

the possible impact and timing of competing products, including generic alternatives, on our products and our ability to compete against such products;
unanticipated safety, quality or efficacy concerns or issues about our products;
the decline in global economic conditions, including the regional conflict in the Middle East, economic weakness in China and inflation;
the economic, political, legal and business environment of the foreign jurisdictions in which we do business;
consolidation of our customers and distributors;
changes in the distribution channel for companion animal products;
disruptive innovations and advances in medical practices and technologies;
an outbreak of infectious disease carried by animals;
failure to successfully acquire businesses, license rights or products, integrate businesses, form and manage alliances or divest businesses;
restrictions and bans on the use of and consumer preferences regarding antibacterials in food-producing animals;
perceived adverse effects linked to the consumption of food derived from animals that utilize our products or animals generally;
increased regulation or decreased governmental support relating to the raising, processing or consumption of food-producing animals;
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;
product launch delays, inventory shortages, recalls or unanticipated costs caused by manufacturing problems and capacity imbalances;
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;
illegal distribution and/or sale of our products or the misuse or off-label use of our products;
legal factors, including product liability claims, antitrust litigation and governmental investigations, including tax disputes, environmental concerns, laws and regulations regarding data privacy, 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;
fluctuations in foreign exchange rates and potential currency controls;
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;
failure to protect our intellectual property rights or to operate our business without infringing the intellectual property rights of others;
a cyberattack, information security breach or other misappropriation of our data;
failure to generate sufficient cash to service our substantial indebtedness; and
the other factors set forth under “Risk Factors” in Item 1A. of Part I of our 2023 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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