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ZOETIS

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ZOETIS : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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08/06/2019 | 02:57pm EDT
Overview of our business
We are 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. For more than 65 years, we
have been committed to enhancing the health of animals and bringing solutions to
our customers who raise and care for them.
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 livestock and companion animal
customers in order to capitalize on local and regional trends and customer
needs. See Notes to Condensed Consolidated Financial Statements - Note 17.
Segment Information.
We directly market our products to veterinarians and livestock producers located
in approximately 45 countries in developed and emerging markets 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. 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.
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 they remain relevant for our
customers.
A summary of our 2019 performance compared with the comparable 2018 period
follows:
                                                                                        % Change
                                            Three Months Ended                             Related to
                                                 June 30,                          Foreign
(MILLIONS OF DOLLARS)                       2019             2018       Total     Exchange       Operational(a)
Revenue                               $     1,547$   1,415        9          (5 )              14
Net income attributable to Zoetis             371               384       (3 )         -                (3 )
Adjusted net income(a)                        436               375       16          (1 )              17


                                                                                    % Change
                                           Six Months Ended                            Related to
                                               June 30,                        Foreign
(MILLIONS OF DOLLARS)                     2019           2018       Total     Exchange       Operational(a)
Revenue                               $     3,002$   2,781        8          (4 )              12
Net income attributable to Zoetis             683           736       (7 )        (1 )              (6 )
Adjusted net income(a)                        860           740       16          (2 )              18

(a) Operational growth and adjusted net income are non-GAAP financial measures.

See the Non-GAAP financial measures section of this Management's Discussion

and Analysis (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 2018 Annual Report on Form 10-K. Set
forth below are updates to certain of the factors disclosed in our 2018 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: weather patterns, herd management
decisions, economic conditions, regulatory actions, competitive dynamics,
disease outbreaks, product and geographic mix, timing of price increases and
timing of investment decisions.
Disease Outbreaks
Sales of our livestock products could 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.



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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
six months ended June 30, 2019, approximately 45% 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 euro,
Brazilian real, Chinese renminbi, Canadian dollar, Australian dollar, U.K. pound
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 six months ended June 30, 2019,
approximately 55% of our total revenue was in U.S. dollars. Our year-over-year
total revenue growth was unfavorably impacted by approximately 4% from changes
in foreign currency values relative to the U.S. dollar.
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 Growth
We believe that it is important to not only understand overall revenue and
earnings growth, but also "operational growth." Operational growth is a non-GAAP
financial measure defined as revenue or earnings growth 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 growth.
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-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 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.

                                                                            30 |
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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                        Six Months Ended
                                        June 30,                  %              June 30,                  %
(MILLIONS OF DOLLARS)              2019           2018       Change         2019           2018       Change
Revenue                       $     1,547$   1,415          9     $     3,002$   2,781          8
Costs and expenses:
Cost of sales                         465            447          4             983           894         10
% of revenue                         30.1 %         31.6 %                     32.7 %        32.1 %
Selling, general and
administrative expenses               406            359         13             775           697         11
% of revenue                           26 %           25 %                       26 %          25 %
Research and development
expenses                              111            102          9             213           199          7
% of revenue                            7 %            7 %                        7 %           7 %
Amortization of intangible
assets                                 39             23         70              77            46         67
Restructuring charges and
certain acquisition-related
costs                                  22              5          *              27             7          *
Interest expense, net of
capitalized interest                   55             46         20             111            93         19
Other
(income)/deductions-net                (6 )           (4 )       50             (20 )          (9 )        *
Income before provision for
taxes on income                       455            437          4             836           854         (2 )
% of revenue                           29 %           31 %                       28 %          31 %
Provision for taxes on
income                                 84             55         53             153           122         25
Effective tax rate                   18.5 %         12.6 %                     18.3 %        14.3 %
Net income before
allocation to
noncontrolling interests              371            382         (3 )           683           732         (7 )
Less: Net loss attributable
to noncontrolling interests             -             (2 )     (100 )             -            (4 )     (100 )
Net income attributable to
Zoetis                        $       371$     384         (3 )   $       683$     736         (7 )
% of revenue                           24 %           27 %                       23 %          26 %


* Calculation not meaningful.
Certain amounts and percentages may reflect rounding adjustments.
Revenue
Three months ended June 30, 2019 vs. three months ended June 30, 2018
Total revenue increased by $132 million, or 9%, in the three months ended June
30, 2019, compared with the three months ended June 30, 2018, an increase of
$192 million, or 14%, on an operational basis. Operational revenue growth was
comprised primarily of the following:
• the acquisition of Abaxis which contributed approximately 5%;


• increased volume from in-line products of approximately 4%, primarily

driven by our key dermatology products of approximately 2%;

• price growth of approximately 4%; and

• volume growth from new products of approximately 1%.



Foreign exchange decreased reported revenue growth by approximately 5%.
Six months ended June 30, 2019 vs. six months ended June 30, 2018
Total revenue increased by $221 million, or 8%, in the six months ended June 30,
2019, compared with the six months ended June 30, 2018, an increase of $339
million, or 12%, on an operational basis. Operational revenue growth was
comprised primarily of the following:
• the acquisition of Abaxis which contributed approximately 5%;


• price growth of approximately 4%;

• increased volume from in-line products of approximately 2%, primarily

driven by our key dermatology products; and

• volume growth from new products of approximately 1%.

Foreign exchange decreased reported revenue growth by approximately 4%.


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Costs and Expenses
Cost of sales
                           Three Months Ended                   Six Months Ended
                                June 30,                 %          June 30,               %
(MILLIONS OF DOLLARS)      2019           2018      Change      2019         2018     Change
Cost of sales           $    465$    447          4   $    983$ 894         10
% of revenue                30.1 %         31.6 %                32.7 %      32.1 %


Certain amounts and percentages may reflect rounding adjustments.
Three months ended June 30, 2019 vs. three months ended June 30, 2018
Cost of sales as a percentage of revenue decreased from 31.6% to 30.1% in the
three months ended June 30, 2019, compared with the three months ended June 30,
2018, primarily as a result of:
• favorable foreign exchange;


• price increases;


• favorable product mix;

• continued cost improvements and efficiencies in our manufacturing network,



partially offset by:
• the inclusion of Abaxis.


Six months ended June 30, 2019 vs. six months ended June 30, 2018
Cost of sales as a percentage of revenue increased from 32.1% to 32.7% in the
six months ended June 30, 2019, compared with the six months ended June 30,
2018, primarily as a result of:
• a change in estimate related to inventory costing; and


• the inclusion of Abaxis,


partially offset by:
• price increases;

• favorable foreign exchange;

• favorable product mix; and

• continued cost improvements and efficiencies in our manufacturing network.

Selling, general and administrative expenses

                                  Three Months Ended                          Six Months Ended
                                       June 30,                    %              June 30,                   %
(MILLIONS OF DOLLARS)            2019             2018        Change        2019             2018       Change
Selling, general and
administrative expenses     $       406$       359         13   $       775$      697         11
% of revenue                         26 %              25 %                     26 %             25 %


Certain amounts and percentages may reflect rounding adjustments.
Three months ended June 30, 2019 vs. three months ended June 30, 2018
Selling, general & administrative (SG&A) expenses increased by $47 million, or
13%, in the three months ended June 30, 2019, compared with the three months
ended June 30, 2018, primarily as a result of:
• the inclusion of Abaxis; and


• an increase in certain compensation-related expenses,



partially offset by:
• favorable foreign exchange.


Six months ended June 30, 2019 vs. six months ended June 30, 2018
Selling, general & administrative (SG&A) expenses increased by $78 million, or
11%, in the six months ended June 30, 2019, compared with the six months ended
June 30, 2018, primarily as a result of:
• the inclusion of Abaxis; and


• an increase in certain compensation-related expenses,



partially offset by:
• favorable foreign exchange.



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Research and development
expenses
                                  Three Months Ended                          Six Months Ended
                                       June 30,                    %              June 30,                   %
(MILLIONS OF DOLLARS)            2019             2018        Change        2019             2018       Change
Research and development
expenses                    $       111$       102          9   $       213$      199          7
% of revenue                          7 %               7 %                      7 %              7 %


Certain amounts and percentages may reflect rounding adjustments.
Three months ended June 30, 2019 vs. three months ended June 30, 2018
R&D expenses increased by $9 million, or 9%, in the three months ended June 30,
2019, compared with the three months ended June 30, 2018, primarily as a result
of:
• increased spending driven by project investments;


• the inclusion of Abaxis; and

• an increase in certain compensation-related expenses,



partially offset by:
• favorable foreign exchange.


Six months ended June 30, 2019 vs. six months ended June 30, 2018
R&D expenses increased by $14 million, or 7%, in the six months ended June 30,
2019, compared with the six months ended June 30, 2018, primarily as a result
of:
• increased spending driven by project investments;


• the inclusion of Abaxis; and

• an increase in certain compensation-related expenses,



partially offset by:
• favorable foreign exchange.


Amortization of
intangible assets
                                  Three Months Ended                         Six Months Ended
                                       June 30,                   %              June 30,                   %
(MILLIONS OF DOLLARS)            2019            2018        Change        2019            2018        Change
Amortization of
intangible assets           $         39     $        23         70   $         77     $        46         67


Certain amounts and percentages may reflect rounding adjustments.
Three months ended June 30, 2019 vs. three months ended June 30, 2018
Amortization of intangible assets increased by $16 million, or 70%, in the three
months ended June 30, 2019, compared with the three months ended June 30, 2018
as a result of certain intangible assets acquired in July 2018 as part of the
acquisition of Abaxis.
Six months ended June 30, 2019 vs. six months ended June 30, 2018
Amortization of intangible assets increased by $31 million, or 67%, in the six
months ended June 30, 2019, compared with the six months ended June 30, 2018 as
a result of certain intangible assets acquired in July 2018 as part of the
acquisition of Abaxis.
Restructuring charges and certain acquisition-related costs
                                  Three Months Ended                         Six Months Ended
                                       June 30,                   %              June 30,                   %
(MILLIONS OF DOLLARS)            2019            2018        Change        2019            2018        Change
Restructuring charges and
certain
acquisition-related costs   $         22     $         5          *   $         27     $         7          *


* Calculation not meaningful.
Certain amounts and percentages may reflect rounding adjustments.
Our acquisition-related costs primarily relate to restructuring charges for
employees, assets and activities that will not continue in the future, as well
as integration costs. The majority of these net restructuring charges are
related to termination costs, but we also exited a number of distributor and
other contracts and performed certain facility rationalization efforts. Our
integration costs are generally comprised of consulting costs related to the
integration of systems and processes, as well as product transfer costs.

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For additional information regarding restructuring charges and
acquisition-related costs, see Notes to Condensed Consolidated Financial
Statements- Note 6. Restructuring Charges and Other Costs Associated with
Acquisitions, Cost-Reduction and Productivity Initiatives.
Three months ended June 30, 2019 vs. three months ended June 30, 2018
Restructuring charges and certain acquisition-related costs increased by $17
million in the three months ended June 30, 2019 compared with the three months
ended June 30, 2018, primarily due to integration costs and employee termination
costs incurred in the three months ended June 30, 2019, as a result of the
acquisition of Abaxis in the third quarter of 2018.
Six months ended June 30, 2019 vs. six months ended June 30, 2018
Restructuring charges and certain acquisition-related costs increased by $20
million in the six months ended June 30, 2019 compared with the six months ended
June 30, 2018, primarily due to integration costs and employee termination costs
incurred in the six months ended June 30, 2019, as a result of the acquisition
of Abaxis in the third quarter of 2018.
Interest expense, net of capitalized interest
                                   Three Months Ended                        Six Months Ended
                                        June 30,                   %             June 30,                  %
(MILLIONS OF DOLLARS)              2019            2018       Change       2019            2018       Change
Interest expense, net of
capitalized interest          $         55     $       46         20   $       111$       93         19


Certain amounts and percentages may reflect rounding adjustments.
Three months ended June 30, 2019 vs. three months ended June 30, 2018
Interest expense, net of capitalized interest, increased by $9 million, or 20%
in the three months ended June 30, 2019, compared with the three months ended
June 30, 2018, as a result of the issuance of $1.5 billion aggregate principal
amount of our senior notes in August 2018.
Six months ended June 30, 2019 vs. six months ended June 30, 2018
Interest expense, net of capitalized interest, increased by $18 million, or 19%
in the six months ended June 30, 2019, compared with the six months ended June
30, 2018, as a result of the issuance of $1.5 billion aggregate principal amount
of our senior notes in August 2018.
Other (income)/deductions-net
                                   Three Months Ended                  Six Months Ended
                                        June 30,                %          June 30,               %
(MILLIONS OF DOLLARS)              2019          2018      Change      2019

2018 Change Other (income)/deductions-net $ (6 )$ (4 ) 50 $ (20 )$ (9 ) *



* Calculation not meaningful.
Certain amounts and percentages may reflect rounding adjustments.
Three months ended June 30, 2019 vs. three months ended June 30, 2018
The change in Other (income)/deductions-net from income of $4 million in the
three months ended June 30, 2018, to income of $6 million in the three months
ended June 30, 2019, is primarily a result of higher interest income due to
higher short-term interest rates and higher cash balances for the three months
ended June 30, 2019.
Six months ended June 30, 2019 vs. six months ended June 30, 2018
The change in Other (income)/deductions-net from income of $9 million in the six
months ended June 30, 2018, to income of $20 million in the six months ended
June 30, 2019, is primarily a result of higher interest income due to higher
short-term interest rates and higher cash balances for the six months ended June
30, 2019, as well as higher foreign currency losses for the six months ended
June 30, 2018.
Provision for taxes on income
                                   Three Months Ended                  Six Months Ended
                                        June 30,                %          June 30,               %
(MILLIONS OF DOLLARS)              2019          2018      Change      2019         2018     Change
Provision for taxes on income   $    84$    55          53   $    153$ 122         25
Effective tax rate                 18.5 %        12.6 %                 18.3 %      14.3 %

Certain amounts and percentages may reflect rounding adjustments. Three months ended June 30, 2019 vs. three months ended June 30, 2018 Our effective tax rate was 18.5% for the three months ended June 30, 2019, compared with 12.6% for the three months ended June 30, 2018. The higher effective tax rate for the three months ended June 30, 2019, was primarily attributable to:


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• a $33 million net discrete tax benefit recorded in the second quarter of

2018, associated with a measurement-period adjustment related to the

provisional one-time mandatory deemed repatriation tax on the company's

       undistributed non-U.S. earnings pursuant to the Tax Act enacted on
       December 22, 2017;

• the impact of the GILTI tax, a new provision of the Tax Act, which became

effective for the company in the first quarter of 2019; and

• changes in the jurisdictional mix of earnings, which includes the impact

of the location of earnings from operations and repatriation costs. The

jurisdictional mix of earnings can vary as a result of repatriation

decisions and operating fluctuations in the normal course of business and

the impact of non-deductible items,

partially offset by: • an $8 million net discrete tax benefit recorded in the second quarter of

2019; and

• a $2 million and $1 million discrete tax benefit recorded in the second

quarter of 2019 and 2018, respectively, related to the excess tax benefits

for share-based payments.



Six months ended June 30, 2019 vs. six months ended June 30, 2018
Our effective tax rate was 18.3% for the six months ended June 30, 2019,
compared with 14.3% for the six months ended June 30, 2018. The higher effective
tax rate for the six months ended June 30, 2019, was primarily attributable to:
•      a $35 million net discrete tax benefit recorded in the first half of 2018,

associated with a measurement-period adjustment related to the provisional

one-time mandatory deemed repatriation tax on the company's undistributed

       non-U.S. earnings pursuant to the Tax Act enacted on December 22, 2017;


•      the impact of the GILTI tax, a new provision of the Tax Act, which became

effective for the company in the first quarter of 2019;

• changes in the jurisdictional mix of earnings, which includes the impact

of the location of earnings from operations and repatriation costs. The

jurisdictional mix of earnings can vary as a result of repatriation

decisions and operating fluctuations in the normal course of business and

the impact of non-deductible items; and

• a $4 million and $8 million discrete tax benefit recorded in the first

half of 2019 and 2018, respectively, related to a remeasurement of

deferred taxes as a result of a change in non-U.S. statutory tax rates,

partially offset by: • a $16 million net discrete tax benefit recorded in the first half of 2019; and

• a $15 million and $8 million discrete tax benefit recorded in the first

half of 2019 and 2018, respectively, related to the excess tax benefits

       for share-based payments.





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Operating Segment Results
On a global basis, the mix of revenue between livestock and companion animal
products was as follows:
                                                                                  % Change
                                         Three Months Ended                            Related to
                                              June 30,                            Foreign
(MILLIONS OF DOLLARS)                    2019             2018        Total
     Exchange     Operational
U.S.
Livestock                          $       280$    271           3           -                 3
Companion animal                           500              406          23           -                23
                                           780              677          15           -                15
International
Livestock                                  444              463          (4 )        (8 )               4
Companion animal                           298              265          12          (9 )              21
                                           742              728           2          (8 )              10

Total
Livestock                                  724              734          (1 )        (4 )               3
Companion animal                           798              671          19          (3 )              22
Contract manufacturing & human
health diagnostics                          25               10           *           *                 *
                                   $     1,547$  1,415           9          (5 )              14


* Calculation not meaningful.
Certain amounts and percentages may reflect rounding adjustments.
                                                                                 % Change
                                         Six Months Ended                             Related to
                                             June 30,                          Foreign
(MILLIONS OF DOLLARS)                   2019           2018        Total      Exchange       Operational
U.S.
Livestock                           $       553$    563          (2 )         -              (2 )
Companion animal                            945          748          26           -              26
                                          1,498        1,311          14           -              14
International
Livestock                                   878          941          (7 )        (8 )             1
Companion animal                            582          513          13          (9 )            22
                                          1,460        1,454           -          (8 )             8

Total
Livestock                                 1,431        1,504          (5 )        (5 )             -
Companion animal                          1,527        1,261          21          (4 )            25
Contract manufacturing & human
health diagnostics                           44           16           *           *               *
                                    $     3,002$  2,781           8          (4 )            12


* Calculation not meaningful.
Certain amounts and percentages may reflect rounding adjustments.


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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
                                              June 30,                           Foreign
(MILLIONS OF DOLLARS)                   2019             2018         Total     Exchange    Operational
U.S.
Revenue                            $       780$      677          15           -              15
Cost of Sales                              158              140          13           -              13
Gross Profit                               622              537          16           -              16
Gross Margin                              79.7 %           79.3 %
Operating Expenses                         127              116           9           -               9
Other (income)/deductions                    -                -           -           -               -
U.S. Earnings                              495              421          18           -              18

International
Revenue                                    742              728           2          (8 )            10
Cost of Sales                              218              229          (5 )       (13 )             8
Gross Profit                               524              499           5          (6 )            11
Gross Margin                              70.6 %           68.5 %
Operating Expenses                         146              147          (1 )       (10 )             9
Other (income)/deductions                    -                2           *           *               *
International Earnings                     378              350           8          (4 )            12

Total operating segments                   873              771          13          (2 )            15

Other business activities                  (79 )            (82 )        (4 )
Reconciling Items:
Corporate                                 (178 )           (139 )        28
Purchase accounting adjustments            (58 )            (23 )         *
Acquisition-related costs                  (22 )              -           *
Certain significant items                   (3 )             (7 )       (57 )
Other unallocated                          (78 )            (83 )        (6 )
Income before provision for
taxes on income                    $       455$      437           4


* Calculation not meaningful.
Certain amounts and percentages may reflect rounding adjustments.

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                                                                              % Change
                                        Six Months Ended                           Related to
                                            June 30,                          Foreign
(MILLIONS OF DOLLARS)                  2019           2018         Total     Exchange    Operational
U.S.
Revenue                            $     1,498$   1,311          14           -              14
Cost of Sales                              305           280           9           -               9
Gross Profit                             1,193         1,031          16           -              16
Gross Margin                              79.6 %        78.6 %
Operating Expenses                         237           212          12           -              12
Other (income)/deductions                    -             -           -           -               -
U.S. Earnings                              956           819          17           -              17

International
Revenue                                  1,460         1,454           -          (8 )             8
Cost of Sales                              428           463          (8 )       (12 )             4
Gross Profit                             1,032           991           4          (7 )            11
Gross Margin                              70.7 %        68.2 %
Operating Expenses                         278           280          (1 )       (10 )             9
Other (income)/deductions                    -             3           *           *               *
International Earnings                     754           708           6          (5 )            11

Total operating segments                 1,710         1,527          12          (2 )            14

Other business activities                 (159 )        (163 )        (2 )
Reconciling Items:
Corporate                                 (340 )        (292 )        16
Purchase accounting adjustments           (124 )         (46 )         *
Acquisition-related costs                  (27 )          (1 )         *
Certain significant items                  (73 )         (10 )         *
Other unallocated                         (151 )        (161 )        (6 )
Income before provision for
taxes on income                    $       836$     854          (2 )


* Calculation not meaningful.
Certain amounts and percentages may reflect rounding adjustments.
Three months ended June 30, 2019 vs. three months ended June 30, 2018U.S. operating segment
U.S. segment revenue increased by $103 million, or 15%, in the three months
ended June 30, 2019, compared with the three months ended June 30, 2018,
reflecting growth of approximately $94 million in companion animal products and
growth of approximately $9 million in livestock products.
•      Companion animal revenue growth was driven primarily by the inclusion of

Abaxis, the key dermatology portfolio, and a number of in-line products

including Simparica®, Clavamox®, Cerenia®and ProHeart 6®.

• Livestock revenue increased primarily due to growth in sales of poultry

products, driven by increased sales of alternatives to antibiotic

medicated feed additive products. Swine product sales grew as a result of

promotional activity, offset by a decline in sales of cattle products.



U.S. segment earnings increased by $74 million, or 18%, in the three months
ended June 30, 2019, compared with the three months ended June 30, 2018,
primarily due to revenue growth and improved gross margins, partially offset by
higher operating expenses.
International operating segment
International segment revenue increased by $14 million, or 2%, in the three
months ended June 30, 2019, compared with the three months ended June 30, 2018.
Operational revenue increased by $73 million, or 10%, driven by growth of
approximately $56 million in companion animal products and increases of
approximately $17 million in livestock products.

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•      Companion animal operational revenue growth resulted primarily from
       increased sales of the key dermatology portfolio across multiple
       international markets, growth of parasiticide products, including
       Simparica®and Stronghold Plus®, and the inclusion of Abaxis.

• Livestock operational revenue increased, driven by growth in poultry

products due to sales of vaccines and medicated feed additives, and growth

in cattle products driven by the prior year impact of the national

trucking strike in Brazil. Swine products were flat despite the negative

impact of African Swine Fever in China.



Additionally, International segment revenue was unfavorably impacted by foreign
exchange, which decreased revenue by approximately $59 million, or 8%, primarily
driven by the depreciation of the euro, Brazilian real, Argentine peso,
Australian dollar, Chinese renminbi and Turkish lira.
International segment earnings increased by $28 million, or 8%, in the three
months ended June 30, 2019, compared with the three months ended June 30, 2018.
Operational earnings growth was $44 million, or 12%, primarily due to higher
revenue and improved gross margin, partially offset by higher operating
expenses.
Six months ended June 30, 2019 vs. six months ended June 30, 2018U.S. operating segment
U.S. segment revenue increased by $187 million, or 14%, in the six months ended
June 30, 2019, compared with the six months ended June 30, 2018, reflecting
growth of approximately $197 million in companion animal products and declines
of approximately $10 million in livestock products.
•      Companion animal revenue growth was driven primarily by the inclusion of

Abaxis, increased sales of the key dermatology portfolio and a number of

in-line products including Simparica ®, Revolution® /Revolution Plus,

Cerenia®and Proheart 6®.

• Livestock revenue declined due to decreased sales of cattle and swine

products, offset by increases in poultry products. Cattle and swine

products were both impacted by the timing of distributor purchasing

patterns for medicated feed additive products. For poultry, growth was

driven by increased sales of alternatives to antibiotic medicated feed

additive products.



U.S. segment earnings increased by $137 million, or 17%, in the six months ended
June 30, 2019, compared with the six months ended June 30, 2018, primarily due
to revenue growth and improved gross margins, partially offset by higher
operating expenses.
International operating segment
International segment revenue increased by $6 million, in the six months ended
June 30, 2019, compared with the six months ended June 30, 2018. Operational
revenue increased by $123 million, or 8%, driven by growth of approximately $112
million in companion animal products and growth of approximately $11 million in
livestock products.
•      Companion animal operational revenue growth resulted primarily from
       increased sales of the key dermatology portfolio across multiple
       international markets, growth of parasiticide products, including
       Simparica® and Stronghold Plus®, and the inclusion of Abaxis.


•      Livestock operational revenue growth was driven by increased sales in

poultry and cattle. Poultry products increased due to sales of vaccines

and medicated feed additives. Cattle products also contributed to growth

driven by the prior year impact of the national trucking strike in Brazil,

       partially offset by a reduction in customer inventory in Brazil. Swine
       products declined due to the negative impact of African Swine Fever in
       China.


Additionally, International segment revenue was unfavorably impacted by foreign
exchange, which decreased revenue by approximately $117 million, or 8%,
primarily driven by the depreciation of the euro, Brazilian real, Argentine
peso, Turkish lira, Australian dollar and U.K. pound.
International segment earnings increased by $46 million, or 6%, in the six
months ended June 30, 2019, compared with the six months ended June 30, 2018.
Operational earnings growth was $81 million, or 11%, primarily due to higher
revenue and improved gross margin, partially offset by higher operating
expenses.
Other business activities
Other business activities includes our Client Supply Services (CSS) contract
manufacturing results, our human health diagnostics 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 June 30, 2019 vs. three months ended June 30, 2018
Other business activities net loss decreased by $3 million, or 4%, in the three
months ended June 30, 2019, compared with the three months ended June 30, 2018,
reflecting revenue from the acquired Abaxis human health diagnostic business,
partially offset by an increase in R&D costs due to an increase in project
investments, the inclusion of Abaxis expenses and compensation-related costs.

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Six months ended June 30, 2019 vs. six months ended June 30, 2018
Other business activities net loss decreased by $4 million, or 2%, in the six
months ended June 30, 2019, compared with the six months ended June 30, 2018,
reflecting revenue from the acquired Abaxis human health diagnostic business,
partially offset by an increase in R&D costs due to an increase in project
investments, the inclusion of Abaxis expenses and compensation-related 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 business

technology, facilities, legal, finance, human resources, business

development 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 (i) Purchase accounting

adjustments, which includes expenses associated with the amortization of

fair value adjustments to inventory, intangible assets, and property,

plant and equipment; (ii) Acquisition-related activities, which includes

       costs for acquisition and integration; and (iii) Certain significant
       items, which includes non-acquisition-related restructuring charges,
       certain asset impairment charges, certain legal and commercial
       settlements, and costs associated with cost reduction/productivity
       initiatives; 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 business technology and

finance that specifically support our global manufacturing operations;

(iii) certain supply chain and global logistics costs; and (iv) certain

procurement costs.



Three months ended June 30, 2019 vs. three months ended June 30, 2018
Corporate expenses increased by $39 million, or 28%, in the three months ended
June 30, 2019, compared with the three months ended June 30, 2018, primarily due
to higher interest expense, net of capitalized interest, associated with the
additional debt issued in August 2018, an increase in certain compensation costs
not allocated to our operating segments and consulting charges, partially offset
by favorable foreign exchange.
Other unallocated expenses declined by $5 million, or 6%, in the three months
ended June 30, 2019, compared with the three months ended June 30, 2018,
primarily due to the favorable impact of foreign exchange, partially offset by
inventory charges and the inclusion of Abaxis expenses.
Six months ended June 30, 2019 vs. six months ended June 30, 2018
Corporate expenses increased by $48 million, or 16%, in the six months ended
June 30, 2019, compared with the six months ended June 30, 2018, primarily due
to higher interest expense, net of capitalized interest, associated with the
additional debt issued in August 2018, consulting charges, and an increase in
certain compensation costs not allocated to our operating segments, partially
offset by favorable foreign exchange.
Other unallocated expenses declined by $10 million, or 6%, in the six months
ended June 30, 2019, compared with the six months ended June 30, 2018, primarily
due to the favorable impact of foreign exchange, partially offset by the
inclusion of Abaxis expenses and inventory charges.
See Notes to Condensed Consolidated Financial Statements-Note 17. 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 the acquisition of Abaxis
(acquired in July 2018), the Pharmaq business (acquired in November 2015),
certain assets of Abbott Animal Health (acquired in February 2015), King Animal
Health (KAH) (acquired in 2011), Fort Dodge Animal Health (FDAH) (acquired in
2009), and Pharmacia Animal Health business (acquired in 2003), 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.

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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-related costs
Adjusted net income is calculated prior to considering transaction and
integration costs associated with significant business combinations or net asset
acquisitions because these costs are unique to each transaction and represent
costs that were incurred to acquire and integrate certain businesses as a result
of the acquisition decision. We have made no adjustments for the resulting
synergies.
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 result primarily from the need to eliminate
duplicate assets, activities or employees--a natural result of acquiring 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 costs associated with a business combination 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 and
integration activities can be lengthy. For example, due to the regulated nature
of the animal health medicines and vaccines 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 FDA and/or other
regulatory authorities.
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-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-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 intangible asset impairments; 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 16. 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                        

Six Months Ended

                                       June 30,                  %                 June 30,                  %
(MILLIONS OF DOLLARS)             2019           2018       Change            2019             2018       Change
GAAP reported net income
attributable to Zoetis        $       371$     384         (3 )   $       683$     736       (7 )
Purchase accounting
adjustments-net of tax                 45            19          *              91                 31        *
Acquisition-related
costs-net of tax                       18             -          *              22                  1        *
Certain significant
items-net of tax                        2           (28 )        *              64                (28 )      *
Non-GAAP adjusted net
income(a)                     $       436$     375         16     $    

860 $ 740 16

*Calculation not meaningful. Certain amounts and percentages may reflect rounding adjustments. (a) The effective tax rate on adjusted pretax income is 19.0% and 20.1% for the

three months ended June 30, 2019, and June 30, 2018, respectively. The lower

effective tax rate for the three months ended June 30, 2019, compared with

the three months ended June 30, 2018, was primarily attributable to (i)

changes in the jurisdictional mix of earnings, which includes the impact of

the location of earnings as well as repatriation costs, (ii) an $8 million

net discrete tax benefit recorded in the second quarter of 2019, (iii) a $2

million and $1 million discrete tax benefit recorded in the second quarter

     of 2019 and 2018, respectively,



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related to the excess tax benefits for share-based payments; partially offset by
the impact of the GILTI tax, a new provision to the Tax Act, which became
effective for the company in the first quarter of 2019.
The effective tax rate on adjusted pretax income is 18.9% and 19.2% for the six
months ended June 30, 2019, and June 30, 2018, respectively. The lower effective
tax rate for the six months ended June 30, 2019, compared with the six months
ended June 30, 2018, was primarily attributable to (i) changes in the
jurisdictional mix of earnings, which includes the impact of the location of
earnings as well as repatriation costs, (ii) a $9 million net discrete tax
benefit recorded in the first half of 2019, related to changes in other tax
items, (iii) a $15 million and $8 million discrete tax benefit recorded in the
first half of 2019 and 2018, respectively, related to the excess tax benefits
for share-based payments; partially offset by the impact of the GILTI tax, a new
provision to the Tax Act, which became effective for the company in the first
quarter of 2019.
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                           Six Months Ended
                                          June 30,                    %               June 30,                   %
                                      2019             2018      Change           2019            2018      Change
Earnings per
share-diluted(a):
GAAP reported EPS
attributable to
Zoetis-diluted                 $      0.77$   0.79         (3 )   $      1.41$   1.51         (7 )
Purchase accounting
adjustments-net of tax                0.09              0.04          *            0.19            0.06          *
Acquisition-related
costs-net of tax                      0.04                 -          *            0.05               -          *
Certain significant
items-net of tax                         -             (0.06 )        *            0.13           (0.06 )        *
Non-GAAP adjusted
EPS-diluted                    $      0.90$   0.77         17     $      1.78$   1.51         18

* Calculation not meaningful. Certain amounts and percentages may reflect rounding adjustments. (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               Six Months Ended
                                                    June 30,                        June 30,
(MILLIONS OF DOLLARS)                          2019            2018           2019            2018
Interest expense, net of capitalized
interest                                  $         55     $       46$       111$       93
Interest income                                      9              8              19             14
Income taxes                                       102             94             200            175
Depreciation                                        37             37              75             70
Amortization                                         6              4              11              8



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

                                               Three Months Ended             Six Months Ended
                                                    June 30,                      June 30,
(MILLIONS OF DOLLARS)                          2019           2018           2019           2018
Purchase accounting adjustments:
Amortization and depreciation(a)          $         52     $      21$       104$      42
Cost of sales(b)                                     5             2              19             4
Research & development                               1             -               1             -
Total purchase accounting
adjustments-pre-tax                                 58            23             124            46
Income taxes(c)                                     13             4              33            15
Total purchase accounting
adjustments-net of tax                              45            19              91            31
Acquisition-related costs:
Integration costs                                    8             -               9             1
Restructuring costs                                 14             -              18             -
Total acquisition-related costs-pre-tax             22             -              27             1
Income taxes                                         4             -               5             -
Total acquisition-related costs-net of
tax                                                 18             -              22             1
Certain significant items:
Operational efficiency initiative(d)                 -             1               -             1
Supply network strategy(d)                           3             3               5             5
Other restructuring charges and
cost-reduction/productivity
initiatives(e)                                       -             3               -             3
Other(f)                                             -             -              68             1
Total certain significant items-pre-tax              3             7              73            10
Income taxes(c)                                      1            35               9            38
Total certain significant items-net of
tax                                                  2           (28 )            64           (28 )

Total purchase accounting adjustments,
acquisition-related costs, and certain
significant items-net of tax              $         65     $      (9 )   $  

177 $ 4



Certain amounts may reflect rounding adjustments.
(a)   Amortization and depreciation expenses related to Purchase accounting

adjustments with respect to identifiable intangible assets and property,

plant and equipment.

(b) Amortization and depreciation expense, as well as fair value adjustments to

acquired inventory.

(c) 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.

Income taxes in Purchase accounting adjustments also includes a tax benefit

related to a remeasurement of deferred taxes as a result of a change in

non-U.S. statutory tax rates, for both the six months ended June 30, 2019,

and June 30, 2018.



Income taxes in Certain significant items also includes a net tax benefit
related to a measurement-period adjustment to the provisional one-time mandatory
deemed repatriation tax on the company's undistributed non-U.S. earnings,
pursuant to the Tax Act, for the three and six months ended June 30, 2018.
(d) Represents consulting fees, product transfer costs, employee termination
costs and exit costs related to cost-reduction and productivity initiatives.
(e) For the three and six months ended June 30, 2018, represents employee
termination costs in Europe as a result of initiatives to better align our
organizational structure.
(f)  For the six months ended June 30, 2019, primarily represents a change in
     estimate related to inventory costing.



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The classification of the above items excluded from adjusted net income are as
follows:
                                               Three Months Ended              Six Months Ended
                                                    June 30,                       June 30,
(MILLIONS OF DOLLARS)                          2019           2018            2019            2018
Cost of sales:
Purchase accounting adjustments           $          5     $       2     $         19     $        4
Consulting fees                                      3             2                5              3
Other                                                -             -               68              -
  Total Cost of sales                                8             4               92              7

Selling, general & administrative
expenses:
Purchase accounting adjustments                     18             2               36              3
Other                                                -             -                -              1
  Total Selling, general &
administrative expenses                             18             2               36              4

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

Amortization of intangible assets:
Purchase accounting adjustments                     34            19               68             38
  Total Amortization of intangible
assets                                              34            19               68             38

Restructuring charges/(reversals) and
certain acquisition-related costs:
Integration costs                                    8             -                9              1
Employee termination costs                          14             4               18              5
Exit costs                                           -             1                -              1
  Total Restructuring
charges/(reversals) and certain
acquisition-related costs                           22             5               27              7

Provision for taxes on income                       18            39               47             53

Total purchase accounting adjustments,
acquisition-related costs, and certain
significant items-net of tax              $         65     $      (9 )   $  

177 $ 4



Certain amounts may reflect rounding adjustments.
Analysis of the condensed consolidated statements of comprehensive income
Substantially all changes in other comprehensive income for the periods
presented are related to foreign currency translation adjustments. These 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. The gains and losses
associated with these changes are deferred on the balance sheet in Accumulated
other comprehensive loss until realized.
Analysis of the condensed consolidated balance sheets
June 30, 2019 vs. December 31, 2018
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.
Short-term investments decreased as a result of maturities of debt securities.
Other current assets increased primarily as a result of the timing of income tax
payments.
The net change in Operating lease right of use assets, and Operating lease
liability relates to the adoption of the new lease accounting standard, which
became effective January 1, 2019. See Notes to Condensed Consolidated Financial
Statements-Note 3. Accounting Standards and Note 10. Leases.
Identifiable intangible assets, less accumulated amortization decreased due to
amortization expense and the impact of foreign exchange.
Accounts payable decreased as a result of the timing of payments.
Accrued expenses decreased primarily as a result of payment of accrued expenses,
including accrued interest and employee termination costs associated with the
acquisition of Abaxis.

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Accrued compensation and related items decreased primarily due to payment of
2018 annual bonuses to eligible employees and 2018 employee savings plan
contributions, partially offset by the pro rata accrual of similar items for
2019.
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, and the impact of the
remeasurement of deferred taxes as a result of a change in tax rates.
Other current liabilities increased primarily due to short-term lease
liabilities as a result of the adoption of the new lease accounting standard,
which became effective January 1, 2019, partially offset by the payments of
contingent consideration related to the 2016 acquisition of certain intangible
assets related to our livestock product portfolio and the 2018 acquisition of a
manufacturing business in Ireland. See Notes to Condensed Consolidated Financial
Statements-Note 3. Accounting Standards and Note 10. Leases.
For an analysis of the changes in Total Equity, see the Condensed Consolidated
Statements of Equity and Notes to Condensed Consolidated Financial Statements-
Note 14. Stockholders' Equity.
Analysis of the condensed consolidated statements of cash flows
                                                          Six Months Ended
                                                              June 30,                     %
(MILLIONS OF DOLLARS)                                    2019            2018         Change
Net cash provided by (used in):
Operating activities                                $       707$     656            8
Investing activities                                        (82 )          (121 )        (32 )
Financing activities                                       (469 )          (533 )        (12 )
Effect of exchange-rate changes on cash and cash
equivalents                                                  (3 )            (8 )        (63 )
Net increase (decrease) in cash and cash
equivalents                                         $       153$      (6 )          *


*Calculation not meaningful.
Certain amounts and percentages may reflect rounding adjustments.
Operating activities
Six months ended June 30, 2019 vs. six months ended June 30, 2018
Net cash provided by operating activities was $707 million for the six months
ended June 30, 2019, and $656 million for the six months ended June 30, 2018.
The increase in net income after non-cash adjustments was partially offset by
timing of payments in the ordinary course of business.
Investing activities
Six months ended June 30, 2019 vs. six months ended June 30, 2018
Our net cash used in investing activities was $82 million for the six months
ended June 30, 2019, compared with net cash used in investing activities of $121
million for the six months ended June 30, 2018. The net cash used in investing
activities for 2019 was primarily due to purchases of property, plant and
equipment, partially offset by proceeds from maturities of debt securities and
proceeds from cross-currency interest rate swaps. The net cash used in investing
activities for 2018 was primarily due to purchases of property, plant and
equipment, partially offset by additional proceeds from the 2017 sale of our
manufacturing site in Guarulhos, Brazil.
Financing activities
Six months ended June 30, 2019 vs. six months ended June 30, 2018
Our net cash used in financing activities was $469 million for the six months
ended June 30, 2019, compared with net cash used in financing activities of $533
million for the six months ended June 30, 2018. The net cash used in financing
activities for 2019 was primarily attributable to the purchase of treasury
shares, the payment of dividends, the payment of short-term borrowings, and the
payments of contingent consideration related to the 2016 acquisition of certain
intangible assets related to our livestock product portfolio and the 2018
acquisition of a manufacturing business in Ireland. The net cash used in
financing activities for 2018 was primarily attributable to the purchase of
treasury shares and the payment of dividends.
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 future
cash needs, this may be subject to the environment in which we operate. Risks to
our ability to meet future funding requirements include global economic
conditions described in the following paragraph.
Global financial markets may be impacted by macroeconomic, business and
financial volatility. As markets change, we will continue to monitor our
liquidity position, but there can be no assurance that a challenging economic
environment or an economic downturn will not impact our liquidity or our ability
to obtain future financing.

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Selected measures of liquidity and capital resources Certain relevant measures of our liquidity and capital resources follow:

                                                    June 30,      December 31,
(MILLIONS OF DOLLARS)                                 2019            2018
Cash and cash equivalents                          $    1,755$       1,602
Accounts receivable, net(a)                               994            1,036
Long-term debt, net of discount and issuance costs      6,446            

6,443

Working capital                                         3,409            

3,176

Ratio of current assets to current liabilities 4.17:1 3.60:1

(a) Accounts receivable are usually collected over a period of 45 to 75 days.

For the six months ended June 30, 2019, compared with December 31, 2018, the

number of days that accounts receivables are outstanding remained

approximately the same. 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 2016, 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). In December
2018, the maturity for the amended and restated credit facility was extended
through December 2023. 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. The credit facility also contains a clause which adds
back to Adjusted Consolidated EBITDA, any operational efficiency restructuring
charge (defined as charges recorded by the company during the period commencing
on October 1, 2016 and ending December 31, 2019, related to operational
efficiency initiatives), provided that for any twelve-month period such charges
added back to Adjusted Consolidated EBITDA shall not exceed $100 million in the
aggregate.
The credit facility also contains a financial covenant requiring that we
maintain a minimum interest coverage ratio (the ratio of EBITDA at the end of
the period to interest expense for such period) of 3.50:1. In addition, the
credit facility contains other customary covenants.
We were in compliance with all financial covenants as of June 30, 2019 and
December 31, 2018. There were no amounts drawn under the credit facility as of
June 30, 2019 or December 31, 2018.
We have additional lines of credit and other credit arrangements with a group of
banks and other financial intermediaries for general corporate purposes. We
maintain cash and cash equivalent balances in excess of our outstanding
short-term borrowings. As of June 30, 2019, we had access to $73 million of
lines of credit which expire at various times through 2019, and are generally
renewed annually. There were no borrowings outstanding related to these
facilities as of June 30, 2019 and $9 million of borrowings outstanding related
to these facilities as of December 31, 2018.
Domestic and international short-term funds
Many of our operations are conducted outside the United States. The amount of
funds held in the United States 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
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 would
not impact our ability to obtain financing in the future.
Debt
On August 20, 2018, we issued $1.5 billion aggregate principal amount of our
senior notes (2018 senior notes), with an original issue discount of $4 million.
These notes are comprised of $300 million aggregate principal amount of floating
rate senior notes due 2021 (the "2018 floating rate senior notes"), and $300
million aggregate principal amount of 3.250% senior notes due 2021, $500 million
aggregate principal amount of 3.900% senior notes due 2028 and $400 million
aggregate principal amount of 4.450% senior notes due 2048 (collectively, the
"2018 fixed rate senior notes"). Net proceeds from this offering were partially
used to pay down and terminate a revolving credit agreement and repay
outstanding commercial paper, which were borrowed to finance a portion of the
cash consideration for the acquisition of Abaxis (see Notes to

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Condensed Consolidated Financial Statements- Note 5. Acquisitions and
Divestitures). The remainder of the net proceeds will be used for general
corporate purposes.
On September 12, 2017, we issued $1.25 billion aggregate principal amount of our
senior notes (2017 senior notes), with an original issue discount of $7 million.
These notes are comprised of $750 million aggregate principal amount of 3.000%
senior notes due 2027 and $500 million aggregate principal amount of 3.950%
senior notes due 2047. Net proceeds from this offering were partially used in
October 2017 to repay, prior to maturity, the aggregate principal amount of $750
million, and a make-whole amount and accrued interest of $4 million, of our
1.875% senior notes due 2018. The remainder of the net proceeds were used for
general corporate purposes.
On November 13, 2015, we issued $1.25 billion aggregate principal amount of our
senior notes (2015 senior notes), with an original issue discount of $2 million.
On January 28, 2013, we issued $3.65 billion aggregate principal amount of our
senior notes (2013 senior notes) in a private placement, with an original issue
discount of $10 million.
The 2013, 2015, 2017 and 2018 senior notes are governed by an indenture and
supplemental indenture (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 (if not cured
or waived), the 2013, 2015, 2017 and 2018 senior notes may be declared
immediately due and payable.
Pursuant to the indenture, we are able to redeem the 2013, 2015 and 2017 senior
notes and the 2018 fixed rate 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. Pursuant to our tax matters agreement
with Pfizer, we will not be permitted to redeem the 2013 senior notes due 2023
pursuant to this optional redemption provision, except under limited
circumstances. Upon the occurrence of a change of control of us and a downgrade
of the 2013, 2015, 2017 and 2018 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 2013, 2015, 2017 and 2018 senior notes at a
price equal to 101% of the aggregate principal amount of the 2013, 2015, 2017
and 2018 senior notes together with accrued and unpaid interest to, but
excluding, the date of repurchase.
The components of our long-term debt follow:
                 Principal   Interest
  Description     Amount       Rate                      Terms
                                        Interest due semi annually, not subject
2015 Senior      $500                   to amortization, aggregate principal due
Notes due 2020   million      3.450%    on November 13, 2020
2018 Floating              Three-month  Interest due quarterly, not subject to
Rate Senior      $300       USD LIBOR   amortization, aggregate principal due on
Notes due 2021   million    plus 0.44%  August 20, 2021
                                        Interest due semi annually, not subject
2018 Senior      $300                   to amortization, aggregate principal due
Notes due 2021   million      3.250%    on August 20, 2021
                                        Interest due semi annually, not subject
2013 Senior      $1,350                 to amortization, aggregate principal due
Notes due 2023   million      3.250%    on February 1, 2023
                                        Interest due semi annually, not subject
2015 Senior      $750                   to amortization, aggregate principal due
Notes due 2025   million      4.500%    on November 13, 2025
                                        Interest due semi annually, not subject
2017 Senior      $750                   to amortization, aggregate principal due
Notes due 2027   million      3.000%    on September 12, 2027
                                        Interest due semi annually, not subject
2018 Senior      $500                   to amortization, aggregate principal due
Notes due 2028   million      3.900%    on August 20, 2028
                                        Interest due semi annually, not subject
2013 Senior      $1,150                 to amortization, aggregate principal due
Notes due 2043   million      4.700%    on February 1, 2043
                                        Interest due semi annually, not subject
2017 Senior      $500                   to amortization, aggregate principal due
Notes due 2047   million      3.950%    on September 12, 2047
                                        Interest due semi annually, not subject
2018 Senior      $400                   to amortization, aggregate principal due
Notes due 2048   million      4.450%    on August 20, 2048


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.

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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
Name of Rating Agency     Rating     Rating   Outlook    Last Action
Moody's                    P-2        Baa1    Stable     August 2017
S&P                        A-2        BBB     Stable    December 2016


Share Repurchase Program
In December 2016, the company's Board of Directors authorized a $1.5 billion
share repurchase program. As of June 30, 2019, there was approximately $1
million remaining under this authorization. In December 2018, the company's
Board of Directors authorized an additional $2.0 billion share repurchase
program, all of which is remaining under this authorization. Purchases of Zoetis
shares may be made at the discretion of management, depending on market
conditions and business needs. Share repurchases may be executed through various
means, including open market or privately negotiated transactions. During the
first six months of 2019, approximately 3 million shares were repurchased.
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 June 30, 2019, or December 31, 2018, recorded amounts for the estimated
fair value of these indemnifications are not significant.
New accounting standards
Recently Issued Accounting Standards Not Adopted as of June 30, 2019
A description of recently issued accounting standards is contained in Note 3.
Accounting Standards of the Notes to Condensed Consolidated Financial
Statements.
Forward-looking statements and factors that may affect future results
This report contains "forward-looking" statements. 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
2019 financial guidance, future actions, business plans or prospects,
prospective products, product approvals or products under development, product
supply disruptions, R&D costs, timing and likelihood of success, future
operating or financial performance, future results of current and anticipated
products and services, strategies, sales efforts, expenses, production
efficiencies, production margins, anticipated timing of generic market entries,
integration of acquired businesses, interest rates, tax rates, changes in tax
regimes and laws, foreign exchange rates, growth in emerging markets, the
outcome of contingencies, such as legal proceedings, 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:
• unanticipated safety, quality or efficacy concerns about our products;


• issues with any of our top products;


•      failure of our R&D, acquisition and licensing efforts to generate new
       products and product lifecycle innovations;

• the possible impact and timing of competing products, including generic

       alternatives, on our products and our ability to compete against such
       products;

• disruptive innovations and advances in medical practices and technologies;

• consolidation of our customers and distributors;

• changes in the distribution channel for companion animal products;

• 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;



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• perceived adverse effects on human health linked to the consumption of

food derived from animals that utilize our products;

• adverse global economic conditions;


•      increased regulation or decreased governmental support relating to the
       raising, processing or consumption of food-producing animals;

• fluctuations in foreign exchange rates and potential currency controls;

• changes in tax laws and regulations;

• legal factors, including product liability claims, antitrust litigation

and governmental investigations, including tax disputes, environmental

concerns, 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;


•      failure to protect our intellectual property rights or to operate our

business without infringing the intellectual property rights of others;

• product launch delays, inventory shortages, recalls or unanticipated costs

caused by manufacturing problems and capacity imbalances;

• an outbreak of infectious disease carried by animals;

• adverse weather conditions and the availability of natural resources;

• the economic, political, legal and business environment of the foreign

jurisdictions in which we do business;

• a cyber-attack, information security breach or other misappropriation of

our data;

• quarterly fluctuations in demand and costs;

• governmental laws and regulations affecting domestic and foreign

operations, including without limitation, tax obligations and changes

affecting the tax treatment by the United States of income earned outside

       the United States that may result from pending and possible future
       proposals; and


•      governmental laws and regulations affecting our interactions with
       veterinary healthcare providers.


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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