UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended
	September 30, 2019
	or
☐	TRANSITION REPORT PURSUANT TO SECTION 13
	OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from __________ to __________

Commission File Number: 001-35797

Zoetis Inc.

(Exact name of registrant as specified in its charter)

Delaware			46-0696167
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)
10 Sylvan Way,	Parsippany,	New Jersey	07054
(Address of principal executive offices)			(Zip Code)

(973)-822-7000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01 per share	ZTS	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

At November 1, 2019, there were 476,299,250 shares of common stock outstanding.

TABLE OF CONTENTS

		Page
PART I — FINANCIAL INFORMATION		1
Item 1.	Financial Statements	1
	Condensed Consolidated Statements of Income (Unaudited)	1
	Condensed Consolidated Statements of Comprehensive Income (Unaudited)	2
	Condensed Consolidated Balance Sheets (Unaudited)	3
	Condensed Consolidated Statements of Equity (Unaudited)	4
	Condensed Consolidated Statements of Cash Flows (Unaudited)	6
	Notes to Condensed Consolidated Financial Statements (Unaudited)	7
	Review Report of Independent Registered Public Accounting Firm	29
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	52
Item 4.	Controls and Procedures	52
PART II — OTHER INFORMATION		53
Item 1.	Legal Proceedings	53
Item 1A.	Risk Factors	53
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	54
Item 3.	Defaults Upon Senior Securities	54
Item 4.	Mine Safety Disclosures	54
Item 5.	Other Information	54
Item 6.	Exhibits	54
SIGNATURES		55

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

ZOETIS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(MILLIONS OF DOLLARS AND SHARES, EXCEPT PER SHARE DATA)	2019			2018			2019			2018
Revenue	$	1,584		$	1,480		$	4,586		$	4,261
Costs and expenses:
Cost of sales	479			473			1,462			1,367
Selling, general and administrative expenses	391			367			1,166			1,064
Research and development expenses	112			108			325			307
Amortization of intangible assets	38			32			115			78
Restructuring charges and certain acquisition-related costs	6			47			33			54
Interest expense, net of capitalized interest	56			54			167			147
Other (income)/deductions—net	(26		)	(19		)	(46		)	(28		)
Income before provision for taxes on income	528			418			1,364			1,272
Provision for taxes on income	95			71			248			193
Net income before allocation to noncontrolling interests	433			347			1,116			1,079
Less: Net loss attributable to noncontrolling interests	—			—			—			(4		)
Net income attributable to Zoetis Inc.	$	433		$	347		$	1,116		$	1,083
Earnings per share attributable to Zoetis Inc. stockholders:
Basic	$	0.91		$	0.72		$	2.33		$	2.24
Diluted	$	0.90		$	0.71		$	2.31		$	2.22
Weighted-average common shares outstanding:
Basic	477.8			482.0			478.7			483.9
Diluted	481.5			485.8			482.3			487.7
Dividends declared per common share	$	—		$	—		$	0.328		$	0.252

See notes to condensed consolidated financial statements.

1 |

ZOETIS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(MILLIONS OF DOLLARS)	2019			2018			2019			2018
Net income before allocation to noncontrolling interests	$	433		$	347		$	1,116		$	1,079
Other comprehensive income, net of taxes and reclassification adjustments:
Unrealized losses on derivatives for cash flow hedges, net	(4		)	(1		)	(3		)	(1		)
Unrealized gains on derivatives for net investment hedges, net	23			—			28			—
Foreign currency translation adjustments, net	(49		)	(75		)	(95		)	(113		)
Total other comprehensive loss, net of tax	(30		)	(76		)	(70		)	(114		)
Comprehensive income before allocation to noncontrolling interests	403			271			1,046			965
Less: Comprehensive loss attributable to noncontrolling interests	—			—			—			(4		)
Comprehensive income attributable to Zoetis Inc.	$	403		$	271		$	1,046		$	969

See notes to condensed consolidated financial statements.

2 |

ZOETIS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	September 30,			December 31,
	2019			2018
(MILLIONS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)	(Unaudited)
Assets
Cash and cash equivalents(a)	$	1,815		$	1,602
Short term investments	12			99
Accounts receivable, less allowance for doubtful accounts of $25 in 2019 and $24 in 2018	1,030			1,036
Inventories	1,439			1,391
Other current assets	322			271
Total current assets	4,618			4,399
Property, plant and equipment, less accumulated depreciation of $1,725 in 2019 and $1,599 in 2018	1,813			1,658
Operating lease right of use assets	193			—
Goodwill	2,550			2,519
Identifiable intangible assets, less accumulated amortization	1,935			2,046
Noncurrent deferred tax assets	72			61
Other noncurrent assets	91			94
Total assets	$	11,272		$	10,777
Liabilities and Equity
Short-term borrowings	$	—		$	9
Accounts payable	284			313
Dividends payable	—			79
Accrued expenses	451			487
Accrued compensation and related items	217			266
Income taxes payable	52			35
Other current liabilities	48			34
Total current liabilities	1,052			1,223
Long-term debt, net of discount and issuance costs	6,447			6,443
Noncurrent deferred tax liabilities	473			474
Operating lease liabilities	169			—
Other taxes payable	255			265
Other noncurrent liabilities	198			187
Total liabilities	8,594			8,592
Commitments and contingencies (Note 16)
Stockholders' equity:
Preferred stock, $0.01 par value: 1,000,000,000 authorized, none issued	—			—
Common stock, $0.01 par value: 6,000,000,000 authorized; 501,891,243 and 501,891,243 shares issued; 476,745,789 and 479,562,326 shares outstanding at September 30, 2019, and December 31, 2018, respectively	5			5
Treasury stock, at cost, 25,145,454 and 22,328,917 shares of common stock at September 30, 2019, and December 31, 2018, respectively	(1,876		)	(1,487		)
Additional paid-in capital	1,031			1,026
Retained earnings	4,217			3,270
Accumulated other comprehensive loss	(699		)	(629		)
Total equity	2,678			2,185
Total liabilities and equity	$	11,272		$	10,777

^(a)  As of September 30, 2019, and December 31, 2018, includes $4 million and $5 million, respectively, of restricted cash.

See notes to condensed consolidated financial statements.

3 |

ZOETIS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(UNAUDITED)

Three months ended September 30, 2019
	Zoetis
																Accumulated			Equity
										Additional						Other			Attributable to
		Common Stock			Treasury Stock					Paid-in			Retained			Comprehensive			Noncontrolling			Total
(MILLIONS OF DOLLARS AND SHARES)		Shares (a)	Amount		Shares (a)		Amount			Capital			Earnings			Loss			Interests			Equity
Balance, June 30, 2019		501.9	$	5	24.1		$	(1,732	)	$	1,019		$	3,788		$	(669	)	$	—		$	2,411
Net income		—	—		—		—			—			433			—			—			433
Other comprehensive loss		—	—		—		—			—			—			(30		)	—			(30		)
Share-based compensation awards		—	—		(0.2	)	6			11			(4		)	—			—			13
Treasury stock acquired		—	—		1.2		(150		)	—			—			—			—			(150		)
Employee benefit plan contribution from Pfizer Inc.(b)		—	—		—		—			1			—			—			—			1
Balance, September 30, 2019		501.9	$	5	25.1		$	(1,876	)	$	1,031		$	4,217		$	(699	)	$	—		$	2,678
Three months ended September 30, 2018
	Zoetis
																Accumulated			Equity
										Additional						Other			Attributable to
		Common Stock			Treasury Stock					Paid-in			Retained			Comprehensive			Noncontrolling			Total
(MILLIONS OF DOLLARS AND SHARES)		Shares (a)	Amount		Shares (a)		Amount			Capital			Earnings			Loss			Interests			Equity
Balance, June 30, 2018		501.9	$	5	19.6		$	(1,215	)	$	1,001		$	2,722		$	(543	)	$	12		$	1,982
Net income		—	—		—		—			—			347			—			—			347
Other comprehensive loss		—	—		—		—			—			—			(76		)	—			(76		)
Acquisition of a noncontrolling interest(c)		—	—		—		—			(14		)	—			—			(12		)	(26		)
Share-based compensation awards		—	—		(0.3	)	13			22			(2		)	—			—			33
Treasury stock acquired		—	—		1.6		(143		)	—			—			—			—			(143		)
Employee benefit plan contribution from Pfizer Inc.(b)		—	—		—		—			1			—			—			—			1
Balance, September 30, 2018		501.9	$	5	20.9		$	(1,345	)	$	1,010		$	3,067		$	(619	)	$	—		$	2,118

^(a)  Shares may not add due to rounding.

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

^(c)  Represents the consolidation of a European livestock monitoring company.

See notes to condensed consolidated financial statements.

4 |

ZOETIS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY - Continued

(UNAUDITED)

Nine months ended September 30, 2019
	Zoetis
																Accumulated			Equity
										Additional						Other			Attributable to
		Common Stock			Treasury Stock					Paid-in			Retained			Comprehensive			Noncontrolling			Total
(MILLIONS OF DOLLARS AND SHARES)		Shares (a)	Amount		Shares (a)		Amount			Capital			Earnings			Loss			Interests			Equity
Balance, December 31, 2018		501.9	$	5	22.3		$	(1,487	)	$	1,026		$	3,270		$	(629	)	$	—		$	2,185
Net income		—	—		—		—			—			1,116			—			—			1,116
Other comprehensive loss		—	—		—		—			—			—			(70		)	—			(70		)
Share-based compensation awards		—	—		(1.6	)	61			3			(12		)	—						52
Treasury stock acquired		—	—		4.4		(450		)	—			—			—			—			(450		)
Employee benefit plan contribution from Pfizer Inc.(b)		—	—		—		—			2			—			—			—			2
Dividends declared		—	—		—		—			—			(157		)	—			—			(157		)
Balance, September 30, 2019		501.9	$	5	25.1		$	(1,876	)	$	1,031		$	4,217		$	(699	)	$	—		$	2,678
Nine months ended September 30, 2018
	Zoetis
																Accumulated			Equity
										Additional						Other			Attributable to
		Common Stock			Treasury Stock					Paid-in			Retained			Comprehensive			Noncontrolling			Total
(MILLIONS OF DOLLARS AND SHARES)		Shares (a)	Amount		Shares (a)		Amount			Capital			Earnings			Loss			Interests			Equity
Balance, December 31, 2017		501.9	$	5	15.8		$	(852	)	$	1,013		$	2,109		$	(505	)	$	16		$	1,786
Net income/(loss)		—	—		—		—			—			1,083			—			(4		)	1,079
Other comprehensive loss		—	—		—		—			—			—			(114		)	—			(114		)
Acquisition of a noncontrolling interest (c)		—	—		—		—			(14		)	—			—			(12		)	(26		)
Share-based compensation awards		—	—		(1.4	)	55			9			(3		)	—			—			61
Treasury stock acquired		—	—		6.6		(548		)	—			—			—			—			(548		)
Employee benefit plan contribution from Pfizer Inc.(b)		—	—		—		—			2			—			—			—			2
Dividends declared		—	—		—		—			—			(122		)	—			—			(122		)
Balance, September 30, 2018		501.9	$	5	20.9		$	(1,345	)	$	1,010		$	3,067		$	(619	)	$	—		$	2,118

^(a)  Shares may not add due to rounding.

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

^(c)  Represents the consolidation of a European livestock monitoring company.

See notes to condensed consolidated financial statements.

5 |

ZOETIS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Nine Months Ended
	September 30,
(MILLIONS OF DOLLARS)	2019			2018
Operating Activities
Net income before allocation to noncontrolling interests	$	1,116		$	1,079
Adjustments to reconcile net income before noncontrolling interests to net cash provided by operating activities:
Depreciation and amortization expense	303			207
Share-based compensation expense	51			36
Asset write-offs and asset impairments	6			4
Net gain on sale of assets	(20		)	—
Provision for losses on inventory	44			37
Deferred taxes(a)	(30		)	(155		)
Employee benefit plan contribution from Pfizer Inc.	2			2
Other non-cash adjustments	(11		)	(17		)
Other changes in assets and liabilities, net of acquisitions and divestitures:
Accounts receivable	(18		)	37
Inventories	(103		)	29
Other assets	(39		)	(77		)
Accounts payable	(28		)	(39		)
Other liabilities	(68		)	(31		)
Other tax accounts, net(a)	8			94
Net cash provided by operating activities	1,213			1,206
Investing Activities
Capital expenditures	(294		)	(200		)
Acquisition of Abaxis, net of cash acquired	—			(1,884		)
Other acquisitions	(137		)	(110		)
Proceeds from maturities and redemptions of investments	89			—
Net proceeds on swaps designated as net investment hedges	37			—
Net proceeds from sale of assets	20			8
Other investing activities	(6		)