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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
September 30, 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 October 30, 2020, there were 475,267,819 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 EndedNine Months Ended
September 30,September 30,
(MILLIONS OF DOLLARS AND SHARES, EXCEPT PER SHARE DATA)2020201920202019
Revenue$1,786 $1,584 $4,868 $4,586 
Costs and expenses:
Cost of sales
546 479 1,456 1,462 
Selling, general and administrative expenses
424 391 1,206 1,166 
Research and development expenses
112 112 330 325 
Amortization of intangible assets
40 38 120 115 
Restructuring charges and certain acquisition-related costs5 6 22 33 
Interest expense, net of capitalized interest
62 56 173 167 
Other (income)/deductions—net
 (26)(15)(46)
Income before provision for taxes on income597 528 1,576 1,364 
Provision for taxes on income118 95 298 248 
Net income before allocation to noncontrolling interests479 433 1,278 1,116 
Less: Net loss attributable to noncontrolling interests  (1) 
Net income attributable to Zoetis Inc.$479 $433 $1,279 $1,116 
Earnings per share attributable to Zoetis Inc. stockholders:
 Basic$1.01 $0.91 $2.69 $2.33 
 Diluted$1.00 $0.90 $2.67 $2.31 
Weighted-average common shares outstanding:
 Basic475.5 477.8 475.5 478.7 
 Diluted478.5 481.5 478.5 482.3 
Dividends declared per common share$ $ $0.400 $0.328 

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

Three Months EndedNine Months Ended
September 30,September 30,
(MILLIONS OF DOLLARS)2020201920202019
Net income before allocation to noncontrolling interests$479 $433 $1,278 $1,116 
Other comprehensive income (loss), net of taxes:
Unrealized gains/(losses) on derivatives for cash flow hedges, net5 (4)(27)(3)
Unrealized (losses)/gains on derivatives for net investment hedges, net
(30)23 (27)28 
Foreign currency translation adjustments, net
147 (49)46 (95)
    Benefit plans: Actuarial loss, net(1) (1) 
Total other comprehensive income (loss), net of tax121 (30)(9)(70)
Comprehensive income before allocation to noncontrolling interests600 403 1,269 1,046 
Less: Comprehensive loss attributable to noncontrolling interests  (1) 
Comprehensive income attributable to Zoetis Inc.$600 $403 $1,270 $1,046 



See notes to condensed consolidated financial statements.
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ZOETIS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30,December 31,
20202019
(MILLIONS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)(Unaudited)
Assets
Cash and cash equivalents(a)
$3,654 $1,934 
Accounts receivable, less allowance for doubtful accounts of $20 in 2020 and $21 in 2019
1,012 1,086 
Inventories1,626 1,410 
Other current assets465 318 
Total current assets6,757 4,748 
Property, plant and equipment, less accumulated depreciation of $1,894 in 2020 and $1,737 in 2019
2,099 1,940 
Operating lease right of use assets194 189 
Goodwill2,690 2,592 
Identifiable intangible assets, less accumulated amortization1,794 1,890 
Noncurrent deferred tax assets97 88 
Other noncurrent assets94 98 
Total assets$13,725 $11,545 
Liabilities and Equity
Short-term borrowings$1 $ 
Current portion of long-term debt1,100 500 
Accounts payable357 301 
Dividends payable 95 
Accrued expenses516 543 
Accrued compensation and related items214 276 
Income taxes payable145 36 
Other current liabilities67 55 
Total current liabilities2,400 1,806 
Long-term debt, net of discount and issuance costs6,595 5,947 
Noncurrent deferred tax liabilities410 434 
Operating lease liabilities167 164 
Other taxes payable263 257 
Other noncurrent liabilities283 229 
Total liabilities10,118 8,837 
Commitments and contingencies (Note 15)
Stockholders' equity:
Common stock, $0.01 par value: 6,000,000,000 authorized; 501,891,243 and 501,891,243 shares issued; 475,242,731 and 475,528,210 shares outstanding at September 30, 2020, and December 31, 2019, respectively
5 5 
Treasury stock, at cost, 26,648,512 and 26,363,033 shares of common stock at September 30, 2020, and December 31, 2019, respectively
(2,234)(2,042)
Additional paid-in capital
1,040 1,044 
Retained earnings
5,526 4,427 
Accumulated other comprehensive loss
(735)(726)
Total Zoetis Inc. equity3,602 2,708 
Equity attributable to noncontrolling interests5  
Total equity3,607 2,708 
Total liabilities and equity$13,725 $11,545 
(a)    As of September 30, 2020, and December 31, 2019, includes $3 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 September 30, 2020
Zoetis
AccumulatedEquity
AdditionalOtherAttributable to
Common StockTreasury StockPaid-inRetainedComprehensiveNoncontrollingTotal
(MILLIONS OF DOLLARS AND SHARES)
Shares (a)
Amount
Shares (a)
AmountCapitalEarningsLossInterestsEquity
Balance, June 30, 2020501.9 $5 26.9 $(2,245)$1,030 $5,048 $(856)$5 $2,987 
Net income     479   479 
Other comprehensive income      121  121 
Share-based compensation awards (b)
  (0.3)11 9 (1)  19 
Employee benefit plan contribution from Pfizer Inc. (d)
    1    1 
Balance, September 30, 2020501.9 $5 26.6 $(2,234)$1,040 $5,526 $(735)$5 $3,607 
Three months ended September 30, 2019
Zoetis
AccumulatedEquity
AdditionalOtherAttributable to
Common StockTreasury StockPaid-inRetainedComprehensiveNoncontrollingTotal
(MILLIONS OF DOLLARS AND SHARES)
Shares (a)
Amount
Shares (a)
AmountCapitalEarningsLossInterestsEquity
Balance, June 30, 2019501.9 $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 (b)
— — (0.2)6 11 (4)— — 13 
Treasury stock acquired (c)
— — 1.2 (150)— — — — (150)
Employee benefit plan contribution from Pfizer Inc.(d)
— — — — 1 — — — 1 
Balance, September 30, 2019501.9 $5 25.1 $(1,876)$1,031 $4,217 $(699)$ $2,678 
(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 12. Share-based Payments and Note 13. Stockholders' Equity.
(c)    Reflects the acquisition of treasury shares in connection with the share repurchase program. For additional information, see Note 13. 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 EQUITY - Continued
(UNAUDITED)
Nine months ended September 30, 2020
Zoetis
AccumulatedEquity
AdditionalOtherAttributable to
Common StockTreasury StockPaid-inRetainedComprehensiveNoncontrollingTotal
(MILLIONS OF DOLLARS AND SHARES)
Shares (a)
Amount
Shares (a)
AmountCapitalEarningsLossInterestsEquity
Balance December 31, 2019501.9 $5 26.4 $(2,042)$1,044 $4,427 $(726)$ $2,708 
Net income     1,279  (1)1,278 
Other comprehensive loss      (9) (9)
Consolidation of noncontrolling interests
       6 6 
Share-based compensation awards (b)
  (1.6)58 (6)10   62 
Treasury stock acquired (c)
  1.8 (250)    (250)
Employee benefit plan contribution from Pfizer Inc. (d)
    2    2 
Dividends declared     (190)  (190)
Balance, September 30, 2020501.9 $5 26.6 $(2,234)$1,040 $5,526 $(735)$5 $3,607 
Nine months ended September 30, 2019
Zoetis
AccumulatedEquity
AdditionalOtherAttributable to
Common StockTreasury StockPaid-inRetainedComprehensiveNoncontrollingTotal
(MILLIONS OF DOLLARS AND SHARES)
Shares (a)
Amount
Shares (a)
AmountCapitalEarningsLossInterestsEquity
Balance December 31, 2018501.9 $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 (b)
— — (1.6)61 3 (12)— — 52 
Treasury stock acquired (c)
— — 4.4 (450)— — — — (450)
Employee benefit plan contribution from Pfizer Inc.(d)
— — — — 2 — — — 2 
Dividends declared— — — — — (157)— — (157)
Balance, September 30, 2019501.9 $5 25.1 $(1,876)$1,031 $4,217 $(699)$ $2,678 
(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 12. Share-based Payments and Note 13. Stockholders' Equity.
(c)    Reflects the acquisition of treasury shares in connection with the share repurchase program. For additional information see Note 13. 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)
Nine Months Ended
September 30,
(MILLIONS OF DOLLARS)20202019
Operating Activities
Net income before allocation to noncontrolling interests$1,278 $1,116 
Adjustments to reconcile net income before noncontrolling interests to net cash provided by operating activities:
Depreciation and amortization expense332 303 
Share-based compensation expense46 51 
Asset write-offs and asset impairments12 6 
Net gain on sale of assets(19)(20)
Provision for losses on inventory56 44 
Deferred taxes(40)(30)
Employee benefit plan contribution from Pfizer Inc.2 2 
Loss on treasury locks(6) 
Other non-cash adjustments9 (11)
Other changes in assets and liabilities, net of acquisitions and divestitures:
    Accounts receivable69 (18)
    Inventories(294)(103)
    Other assets(150)(39)
    Accounts payable49 (28)
    Other liabilities(49)(68)
    Other tax accounts, net113 8 
Net cash provided by operating activities1,408 1,213 
Investing Activities
Capital expenditures(301)(294)
Other acquisitions(108)(137)
Proceeds from maturities and redemptions of investments 89 
Settlement on swaps designated as net investment hedges(8)37 
Net proceeds from sale of assets21 20 
Other investing activities1 (6)
Net cash used in investing activities(395)(291)
Financing Activities
Increase/(decrease) in short-term borrowings, net1 (9)
Proceeds from issuance of long-term debt—senior notes, net of discount1,240  
Payment of contingent consideration related to previously acquired assets (9)
Acquisition of a noncontrolling interest, net of cash acquired3  
Share-based compensation-related proceeds, net of taxes paid on withholding shares23 2 
Purchases of treasury stock(250)(450)
Cash dividends paid(285)(235)
Payment of debt issuance costs(12) 
Net cash provided by/(used in) financing activities720 (701)
Effect of exchange-rate changes on cash and cash equivalents(13)(8)
Net increase in cash and cash equivalents1,720 213 
Cash and cash equivalents at beginning of period1,934 1,602 
Cash and cash equivalents at end of period$3,654 $1,815 
Supplemental cash flow information
Cash paid during the period for:
  Income taxes$305 $293 
  Interest, net of capitalized interest217 220 
 Amounts included in the measurement of lease liabilities 31 28 
Non-cash transactions:
     Capital expenditures3 5 
     Lease obligations obtained in exchange for right-of-use assets 38 230 
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, dermatology, other pharmaceuticals, 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 nine-month periods ended August 31, 2020 and August 31, 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 is optional and effective as of March 12, 2020, but is 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;
dermatology products: products that relieve itch associated with allergic conditions and atopic dermatitis;
other pharmaceutical products: pain and sedation, antiemetic, reproductive, and oncology products;
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 EndedNine Months Ended
September 30,September 30,
(MILLIONS OF DOLLARS)2020201920202019
United States$996 $844 $2,605 $2,342 
Australia60 53 154 150 
Brazil62 72 181 206 
Canada50 47 144 142 
Chile24 22 72 64 
China66 40 198 156 
France29 24 82 83 
Germany38 35 112 111 
Italy28