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Table of Contents

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
March 31, 2020
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 classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.01 per shareZTSNew 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 filerAccelerated filerNon-accelerated filerSmaller reporting companyEmerging 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 May 1, 2020, there were 474,940,772 shares of common stock outstanding.



Table of Contents
TABLE OF CONTENTS
Page
Item 1.
Condensed Consolidated Statements of Income (Unaudited)
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
Condensed Consolidated Balance Sheets (Unaudited)
Condensed Consolidated Statements of Equity (Unaudited)
Condensed Consolidated Statements of Cash Flows (Unaudited)
Notes to Condensed Consolidated Financial Statements (Unaudited)
Review Report of Independent Registered Public Accounting Firm
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 2.
Item 3.Defaults Upon Senior Securities
Item 4.Mine Safety Disclosures
Item 5.Other Information
Item 6.




Table of Contents
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements


ZOETIS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)

Three Months Ended
March 31,
(MILLIONS OF DOLLARS AND SHARES, EXCEPT PER SHARE DATA)20202019
Revenue$1,534  $1,455  
Costs and expenses:
Cost of sales
459  518  
Selling, general and administrative expenses
389  369  
Research and development expenses
107  102  
Amortization of intangible assets
40  38  
Restructuring charges and certain acquisition-related costs9  5  
Interest expense, net of capitalized interest
53  56  
Other (income)/deductions—net
(20) (14) 
Income before provision for taxes on income497  381  
Provision for taxes on income74  69  
Net income $423  $312  
Earnings per share
 Basic$0.89  $0.65  
 Diluted$0.88  $0.65  
Weighted-average common shares outstanding:
 Basic475.6  479.6  
 Diluted479.0  483.1  
Dividends declared per common share$0.200  $0.164  

See notes to condensed consolidated financial statements.
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ZOETIS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)

Three Months Ended
March 31,
(MILLIONS OF DOLLARS)20202019
Net income$423  $312  
Other comprehensive (loss)/income, net of taxes:
Unrealized losses on derivatives for cash flow hedges, net
(28)   
Unrealized gains on derivatives for net investment hedges, net
17  8  
Foreign currency translation adjustments, net
(44) 23  
Total other comprehensive (loss)/income, net of tax(55) 31  
Comprehensive income $368  $343  



See notes to condensed consolidated financial statements.
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ZOETIS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31,December 31,
20202019
(MILLIONS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)(Unaudited)
Assets
Cash and cash equivalents(a)
$1,951  $1,934  
Accounts receivable, less allowance for doubtful accounts of $21 in 2020 and $21 in 2019965  1,086  
Inventories1,481  1,410  
Other current assets375  318  
Total current assets4,772  4,748  
Property, plant and equipment, less accumulated depreciation of $1,769 in 2020 and $1,737 in 20191,977  1,940  
Operating lease right of use assets182  189  
Goodwill2,583  2,592  
Identifiable intangible assets, less accumulated amortization1,821  1,890  
Noncurrent deferred tax assets88  88  
Other noncurrent assets105  98  
Total assets$11,528  $11,545  
Liabilities and Equity
Current portion of long-term debt$500  $500  
Accounts payable265  301  
Dividends payable95  95  
Accrued expenses476  543  
Accrued compensation and related items212  276  
Income taxes payable123  36  
Other current liabilities50  55  
Total current liabilities1,721  1,806  
Long-term debt, net of discount and issuance costs5,963  5,947  
Noncurrent deferred tax liabilities421  434  
Operating lease liabilities159  164  
Other taxes payable260  257  
Other noncurrent liabilities251  229  
Total liabilities8,775  8,837  
Commitments and contingencies (Note 16)
Stockholders' equity:
Common stock, $0.01 par value: 6,000,000,000 authorized; 501,891,243 and 501,891,243 shares issued; 474,865,353 and 475,582,210 shares outstanding at March 31, 2020, and December 31, 2019, respectively5  5  
Treasury stock, at cost, 27,025,890 and 26,363,033 shares of common stock at March 31, 2020, and December 31, 2019, respectively(2,252) (2,042) 
Additional paid-in capital
1,017  1,044  
Retained earnings
4,764  4,427  
Accumulated other comprehensive loss
(781) (726) 
Total equity2,753  2,708  
Total liabilities and equity$11,528  $11,545  
(a) As of March 31, 2020, and December 31, 2019, includes $1 million and $2 million, respectively, of restricted cash.
See notes to condensed consolidated financial statements.
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ZOETIS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(UNAUDITED)

Three months ended March 31, 2020
Accumulated
AdditionalOther
Common StockTreasury StockPaid-inRetainedComprehensiveTotal
(MILLIONS OF DOLLARS AND SHARES)
Shares (a)
Amount
Shares (a)
AmountCapitalEarningsLossEquity
Balance December 31, 2019501.9  $5  26.4  $(2,042) $1,044  $4,427  $(726) $2,708  
Net income—  —  —  —  —  423  —  423  
Other comprehensive loss—  —  —  —  —  —  (55) (55) 
Share-based compensation awards (b)
—  —  (1.2) 40  (28) 9  —  21  
Treasury stock acquired (c)
—  —  1.8  (250) —  —  —  (250) 
Employee benefit plan contribution from Pfizer Inc. (d)
—  —  —  —  1  —  —  1  
Dividends declared—  —  —  —  —  (95) —  (95) 
Balance, March 31, 2020501.9  $5  27.0  $(2,252) $1,017  $4,764  $(781) $2,753  
Three months ended March 31, 2019
Accumulated
AdditionalOther
Common StockTreasury StockPaid-inRetainedComprehensiveTotal
(MILLIONS OF DOLLARS AND SHARES)
Shares (a)
Amount
Shares (a)
AmountCapitalEarningsLossEquity
Balance December 31, 2018501.9  $5  22.3  $(1,487) $1,026  $3,270  $(629) $2,185  
Net income—  —  —  —  —  312  —  312  
Other comprehensive income—  —  —  —  —  —  31  31  
Share-based compensation awards (b)—  —  (1.1) 44  (19) (8) —  17  
Treasury stock acquired (c)—  —  1.7  (150) —  —  —  (150) 
Employee benefit plan contribution from Pfizer Inc.(d)—  —  —  —  1  —  —  1  
Dividends declared—  —  —  —  —  (79) —  (79) 
Balance, March 31, 2019501.9  $5  22.9  $(1,593) $1,008  $3,495  $(598) $2,317  
(a) Shares may not add due to rounding.
(b) Includes the issuance of shares of Zoetis Inc. common stock and the reacquisition of shares of treasury stock associated with exercises of employee share-based awards. Also includes the reacquisition of shares of treasury stock associated with the vesting of employee share-based awards to satisfy tax withholding requirements. For additional information, see Note 13. Share-based Payments and Note 14. Stockholders' Equity.
(c) Reflects the acquisition of treasury shares in connection with the share repurchase program. For additional information see Note 14. Stockholders' Equity.
(d)  Represents contributed capital from Pfizer Inc. associated with service credit continuation for certain Zoetis Inc. employees in Pfizer Inc.'s U.S. qualified defined benefit and U.S. retiree medical plans.




See notes to condensed consolidated financial statements.
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ZOETIS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 31,
(MILLIONS OF DOLLARS)20202019
Operating Activities
Net income $423  $312  
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense110  98  
Share-based compensation expense16  18  
Asset write-offs and asset impairments  1  
Net gain on sale of assets(17)   
Provision for losses on inventory13  14  
Deferred taxes(9) (16) 
Employee benefit plan contribution from Pfizer Inc.1  1  
Other changes in assets and liabilities, net of acquisitions and divestitures:
    Accounts receivable109  75  
    Inventories(97) 17  
    Other assets(65) 24  
    Accounts payable(35) (79) 
    Other liabilities(128) (103) 
    Other tax accounts, net87  27  
Net cash provided by operating activities408  389  
Investing Activities
Capital expenditures(94) (63) 
Other acquisitions(6)   
Proceeds from maturities and redemptions of investments  36  
Net proceeds on swaps designated as net investment hedges24    
Net proceeds from sale of assets20    
Other investing activities(1) 4  
Net cash used in investing activities(57) (23) 
Financing Activities
Decrease in short-term borrowings, net  (9) 
Payment of contingent consideration related to previously acquired assets  (8) 
Share-based compensation-related proceeds, net of taxes paid on withholding shares17  3  
Purchases of treasury stock(250) (150) 
Cash dividends paid(95) (79) 
Net cash used in financing activities(328) (243) 
Effect of exchange-rate changes on cash and cash equivalents(6) 3  
Net increase in cash and cash equivalents17  126  
Cash and cash equivalents at beginning of period1,934  1,602  
Cash and cash equivalents at end of period$1,951  $1,728  
Supplemental cash flow information
Cash paid during the period for:
  Income taxes$22  $29  
  Interest, net of capitalized interest95  96  
Non-cash transactions:
     Capital expenditures2  5  
  Dividends declared, not paid95  79  
See notes to condensed consolidated financial statements.
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ZOETIS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Organization
Zoetis Inc. (including its subsidiaries, collectively, Zoetis, the company, we, us or our) is a global leader in the discovery, development, manufacture and commercialization of animal health medicines, vaccines and diagnostic products with a focus on both livestock and companion animals. We organize and operate our business in two geographic regions: the United States (U.S.) and International.
We directly market our products in approximately 45 countries across North America, Europe, Africa, Asia, Australia and South America. Our products are sold in more than 100 countries, including developed markets and emerging markets. We have a diversified business, marketing products across eight core species: cattle, swine, poultry, fish and sheep (collectively, livestock) and dogs, cats and horses (collectively, companion animals); and within seven major product categories: vaccines, anti-infectives, parasiticides, other pharmaceuticals, dermatology, medicated feed additives and animal health diagnostics.
2. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements were prepared following the requirements of the Securities and Exchange Commission (SEC) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by accounting principles generally accepted in the United States of America (U.S. GAAP) can be condensed or omitted. Balance sheet amounts and operating results for subsidiaries operating outside the U.S. are as of and for the three-month periods ended February 29, 2020 and February 28, 2019.
Revenue, expenses, assets and liabilities can vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be representative of those for the full year.
Certain reclassifications of prior year information have been made to conform to the current year's presentation.
We are responsible for the unaudited condensed consolidated financial statements included in this Form 10-Q. The condensed consolidated financial statements include all normal and recurring adjustments that are considered necessary for the fair presentation of our financial position and operating results. The information included in this interim report should be read in conjunction with the financial statements and accompanying notes included in our 2019 Annual Report on Form 10-K.
3. Accounting Standards
Recently Adopted Accounting Standards
In August 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Topic 350-40), an accounting standards update which expands the scope of costs associated with cloud computing arrangements that must be capitalized. Under the new guidance, costs associated with implementing a cloud computing arrangement that is a service contract must be capitalized and expensed over the term of the hosting arrangement. We adopted this guidance as of January 1, 2020, the required effective date, on a prospective basis. The adoption did not have a significant impact on our consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (Topic 326), an accounting standards update which requires an entity to measure and recognize expected credit losses for certain financial instruments, including trade receivables, as an allowance that reflects the entity's current estimate of credit losses expected to be incurred. For available-for-sale debt securities with unrealized losses, the standard requires allowances to be recorded instead of reducing the amortized cost of the investment. We adopted this guidance as of January 1, 2020, the required effective date, on a prospective basis. The adoption did not have a significant impact on our consolidated financial statements.
Recently Issued Accounting Standards
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The new guidance provides temporary optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions that reference the London Interbank Offered Rate (LIBOR) or another reference rate expected to be discontinued because of reference rate reform. Adoption of the provisions of ASU 2020-04 are optional and effective as of March 12, 2020, but only available through December 31, 2022. We are currently evaluating the impact that the new guidance will have on our consolidated financial statements and related disclosures, as well as the timing of the potential adoption.
4. Revenue
A. Revenue from Product Sales
We offer a diversified portfolio of products which allows us to capitalize on local and regional customer needs. Generally, our products are promoted to veterinarians and livestock producers by our sales organization which includes sales representatives and technical and veterinary operations specialists, and then sold directly by us or through distributors, retailers and e-commerce outlets. The depth of our product portfolio enables us to address the varying needs of customers in different species and geographies. Many of our top selling product lines are distributed
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across both of our operating segments, leveraging our research and development (R&D) operations and manufacturing and supply chain network.
Over the course of our history, we have focused on developing a diverse portfolio of animal health products, including medicines, vaccines and diagnostics, complemented by biodevices, genetic tests and a range of services. We refer to a single product in all brands, or its dosage forms for all species, as a product line. We have approximately 300 comprehensive product lines, including products for both livestock and companion animals across each of our major product categories.
In the fourth quarter of 2019, the company modified the list of major product categories to include a category for dermatology products, which was previously included within other pharmaceutical products. The prior period presentation has been revised to reflect the new product categories.
Our major product categories are:
vaccines: biological preparations that help prevent diseases of the respiratory, gastrointestinal and reproductive tracts or induce a specific immune response;
anti-infectives: products that prevent, kill or slow the growth of bacteria, fungi or protozoa;
parasiticides: products that prevent or eliminate external and internal parasites such as fleas, ticks and worms;
other pharmaceutical products: pain and sedation, antiemetic, reproductive, and oncology products;
dermatology products: products that relieve itch associated with allergic conditions and atopic dermatitis;
medicated feed additives: products added to animal feed that provide medicines to livestock; and
animal health diagnostics: portable blood and urine analysis systems and point-of-care diagnostic products, including instruments and reagents, rapid immunoassay tests, reference laboratory kits and blood glucose monitors.
Our remaining revenue is derived from other non-pharmaceutical product categories, such as nutritionals and agribusiness, as well as products and services in smaller but fast growing areas, including biodevices, genetic tests and precision livestock farming.
Our livestock products primarily help prevent or treat diseases and conditions to enable the cost-effective production of safe, high-quality animal protein. Human population growth and increasing standards of living are important long-term growth drivers for our livestock products in three major ways. First, population growth and increasing standards of living drive increased demand for improved nutrition, particularly animal protein. Second, population growth leads to increased natural resource constraints driving a need for enhanced productivity. Finally, as standards of living improve, there is increased focus on food quality and safety.
Our companion animal products help extend and improve the quality of life for pets; increase convenience and compliance for pet owners; and help veterinarians improve the quality of their care and the efficiency of their businesses. Growth in the companion animal medicines, vaccines and diagnostics sector is driven by economic development, related increases in disposable income and increases in pet ownership and spending on pet care. Companion animals are also living longer, receiving increased medical treatment and benefiting from advances in animal health medicines and vaccines.
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The following tables present our revenue disaggregated by geographic area, species, and major product category:
Revenue by geographic area
Three Months Ended
March 31,
(MILLIONS OF DOLLARS) 20202019
United States  $786  $718  
Australia  43  48  
Brazil  63  60  
Canada  40  41  
China  66  60  
France  29  32  
Germany  34  37  
Italy  21  28  
Japan  41  37  
Mexico  32  28  
Spain  28  27  
United Kingdom  55  57  
Other developed markets  87  84  
Other emerging markets  189  179  
1,514  1,436  
Contract manufacturing & human health  20  19  
Total Revenue  $1,534  $1,455  
Revenue by major species
Three Months Ended
March 31,
(MILLIONS OF DOLLARS)20202019
U.S.
Companion animal$499  $445  
Livestock287  273  
786  718  
International
Companion animal298  284  
Livestock430  434  
728  718  
Contract manufacturing & human health20  19  
Total Revenue$1,534  $1,455  
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Revenue by species
Three Months Ended
March 31,
(MILLIONS OF DOLLARS)20202019
Companion Animal:
Dogs and Cats$746  $688  
Horses51  41  
797  729  
Livestock:
Cattle370  380  
Swine157  149  
Poultry148  139  
Fish26  23  
Sheep and other16  16  
717  707  
Contract manufacturing & human health20  19  
Total Revenue$1,534  $1,455  
Revenue by major product category
Three Months Ended
March 31,
(MILLIONS OF DOLLARS)20202019
Vaccines$349  $358  
Anti-infectives280  286  
Parasiticides255  231  
Other pharmaceuticals197  190  
Dermatology197  159  
Medicated feed additives125  112  
Animal health diagnostics60  60  
Other non-pharmaceuticals51  40  
1,514  1,436  
Contract manufacturing & human health20  19  
Total Revenue$1,534  $1,455  
B. Revenue from Contracts with Customers
Contract liabilities reflected within Other current liabilities as of December 31, 2019 and December 31, 2018, and subsequently recognized as revenue during the first three months of 2020 and 2019 were approximately $3 million and $1 million, respectively. Contract liabilities as of March 31, 2020 and December 31, 2019 were approximately $10 million and $11 million, respectively.
Estimated future revenue expected to be generated from long-term contracts with unsatisfied performance obligations as of March 31, 2020 is not material.
5. Acquisitions and Divestitures
A. Acquisitions
Other Acquisitions
In the first quarter of 2020, we acquired the net assets of Ethos Diagnostic Science, a veterinary reference laboratory business with labs across the U.S. This transaction did not have a significant impact on our consolidated financial statements.

During 2019, we completed the acquisitions of Platinum Performance, a nutrition-focused animal health business for companion animals and Phoenix Lab and ZNLabs, both full service veterinary reference laboratory companies with networks of labs across the U.S. These transactions did not have a significant impact on our consolidated financial statements.
B. Divestitures
During the three months ended March 31, 2020, we received cash proceeds of $20 million resulting from a payment received pursuant to an agreement related to the 2016 sale of certain U.S. manufacturing sites.
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6. Restructuring Charges and Other Costs Associated with Acquisitions, Cost-Reduction and Productivity Initiatives
In connection with our cost-reduction/productivity initiatives, we typically incur costs and charges associated with site closings and other facility rationalization actions, workforce reductions and the expansion of shared services, including the development of global systems. In connection with our acquisition activity, we typically incur costs and charges associated with executing the transactions, integrating the acquired operations, which may include expenditures for consulting and the integration of systems and processes, product transfers and restructuring the consolidated company, which may include charges related to employees, assets and activities that will not continue in the consolidated company. All operating functions can be impacted by these actions, including sales and marketing, manufacturing and R&D, as well as functions such as information technology, shared services and corporate operations.
The components of costs incurred in connection with restructuring initiatives, acquisitions and cost-reduction/productivity initiatives are as follows:
Three Months Ended
March 31,
(MILLIONS OF DOLLARS)20202019
Restructuring charges and certain acquisition-related costs:
Integration costs(a)
$6  $1  
Restructuring charges(b):
Employee termination costs3