ZTS 10-Q — Smart Summary

• Business description: Zoetis is described as a global leader in the animal health industry, focused on the discovery, development, manufacture and commercialization of medicines, vaccines, diagnostic products and services, biodevices, genetic tests and precision animal health.
• Operating structure: The company organizes and operates in 2 geographic regions: the United States (U.S.) and International; products are directly marketed in approximately 45 countries across North America, Europe, Africa, Asia, Australia and South America, and sold in more than 100 countries.
• Product and species scope: Operations span 8 core species — dogs, cats and horses (companion animals) and cattle, swine, poultry, fish and sheep (livestock) — across 7 major product categories: parasiticides, vaccines, dermatology, anti-infectives, pain and sedation, other pharmaceutical and animal health diagnostics.

• Fiscal Year Alignment: Effective January 1, 2026, Zoetis eliminated the one-month financial reporting lag for subsidiaries operating outside the U.S. (previously a November 30 year-end) and adjusted their year-end to December 31, representing a retrospective change in accounting principle applied to all prior periods.
• Income statement recast (Q1 2025): Revenue decreased $22M (from $2,220 to $2.2B), income before provision for taxes on income decreased $37M (from $810 to $773M), net income attributable to Zoetis Inc. decreased $29M (from $631 to $602M), and both basic and diluted EPS decreased $0.07 (from $1.41 to $1.34).
• Balance sheet recast (December 31, 2025): Total assets increased $23M to $15.5B, total liabilities decreased $61M to $12.1B, and total equity increased $84M to $3.4B; total equity as of January 1, 2025 increased $74M to $4.8B.
• Cash flow recast (Q1 2025): Net cash provided by operating activities decreased $72M to $515M, and net cash used in investing activities increased $28M to $203M; net cash used in financing activities was unchanged at $677M.

• Contract liabilities: Contract liabilities as of March 31, 2026 and December 31, 2025 were $21M and $16M, respectively; amounts reflected within Other current liabilities as of December 31, 2025 and 2024 that were subsequently recognized as revenue during the first three months of 2026 and 2025 were $10M and $3M, respectively.
• Remaining performance obligations: Estimated future revenue expected to be generated from long-term contracts with unsatisfied performance obligations as of March 31, 2026 is not material.

• Company to acquire Neogen Corporation's animal genomics business (pending, 2026): Entered into a definitive agreement with Neogen Corporation in the first quarter of 2026 to acquire Neogen's animal genomics business; the transaction is subject to customary closing conditions and satisfaction of regulatory requirements, with completion expected in the second half of 2026; no consideration amount was disclosed.
• Company acquired Veterinary Pathology Group (VPG) (completed 2025): Acquired VPG, described as a leading veterinary diagnostic laboratory group with multiple locations across the U.K. and Ireland; the transaction did not have a material impact on the consolidated financial statements and no consideration amount was disclosed.

• Restructuring and acquisition-related costs (three months ended March 31, 2026): Total restructuring charges and certain acquisition and divestiture-related costs were $22M for Q1 2026 (vs. $0 in Q1 2025), comprising $20M in employee termination costs, net — primarily related to organizational structure refinements — and $2M in acquisition-related costs.
• Restructuring accrual rollforward: The accrual increased from $25M at December 31, 2025 to $33M at March 31, 2026, reflecting a $20M provision and ($12M) in utilization and other (including foreign currency translation adjustments); at both period-ends, the accrual was split between Accrued expenses ($31M and $23M, respectively) and Other noncurrent liabilities ($2M).

Net other income: Other (income)/deductions—net was ($20M) in Q1 2026 versus ($15M) in Q1 2025, with the larger net income position driven primarily by a $6M net gain on asset sales in the current period versus none in the prior year.

• Foreign currency loss: Foreign currency loss declined to $6M from $10M year-over-year, primarily driven by costs related to hedging and exposures to certain emerging and developed market currencies.

• Effective tax rate: The effective tax rate was 20.7% for the three months ended March 31, 2026, down from 22.1% for the three months ended March 31, 2025, primarily due to a more favorable jurisdictional mix of earnings (including the impact of the location of pre-tax earnings, tax impact of permanent differences and repatriation decisions).
• Deferred tax asset: As of March 31, 2026, the total net deferred income tax asset was $461M, comprising Noncurrent deferred tax assets of $591M offset by Noncurrent deferred tax liabilities of $130M; as of December 31, 2025, the comparable figures were $499M net, with $636M in assets and $137M in liabilities. A remaining deferred income tax benefit from a 2024 U.S. cash-maximization initiative (related to a prepayment from a related foreign entity in Belgium qualifying as foreign-derived intangible income) is included in Other current assets as of March 31, 2026 in the amount of $14M.
• Uncertain tax positions: As of March 31, 2026, net tax liabilities for uncertain tax positions were $223M (exclusive of $56M in related interest and penalties), included in Other taxes payable, compared with $222M (exclusive of $52M) as of December 31, 2025.
• IRS audit exposure: The company is under IRS audit for tax years 2017 and 2018; the IRS issued a Revenue Agent Report (RAR) in September 2024 related to the one-time mandatory deemed repatriation tax on the 2018 U.S. Federal Income Tax return, and as of March 31, 2026 the additional tax liability proposed under the RAR is approximately $450M (excluding interest and penalties). Management disagrees with the IRS position and believes the existing accrual remains appropriate, but notes the outcome cannot be predicted with certainty and any adverse resolution could be material.
• OBBBA legislation: The One Big Beautiful Bill Act was enacted on July 4, 2025 and did not have a material impact on 2025 financial results, including the effective tax rate and deferred tax assets and liabilities; management does not expect a material impact in 2026 and future periods.

Convertible senior notes: In December 2025, the company completed a private offering of $2B aggregate principal amount of 0.250% convertible senior notes due June 15, 2029, at an initial conversion price of approximately $148.20 per share; net proceeds of $2B (after $30M in purchaser discounts and expenses) were used to fund $187M in capped call transactions, $248M to repurchase approximately 2.1 million shares, and the remaining $1.5B for additional common stock repurchases completed as of March 31, 2026.

• Capped calls: In connection with the convertible notes, the company entered into capped call transactions with a strike price of approximately $148.20 per share and initial cap prices of approximately $211.72 per share, covering approximately 13.5 million shares; the $187M cost, net of $42M in deferred tax assets, was recorded as a decrease to Additional paid-in capital and classified as an equity transaction under ASC 815 with no subsequent remeasurement.
• 2025 senior notes and refinancing: On August 18, 2025, the company issued $850M of 4.150% senior notes due 2028 and $1B of 5.000% senior notes due 2035 (with a $2M original issue discount), using proceeds to redeem the $600M 5.400% 2022 senior notes due 2025 and the $750M 4.500% 2015 senior notes due 2025.
• Long-term debt fair value and interest expense: Total long-term debt gross principal was $9.2B as of both March 31, 2026 and December 31, 2025, with a fair value of $8.6B and $8.8B, respectively, determined using Level 2 inputs; interest expense (net of capitalized interest) was $62M for the three months ended March 31, 2026 vs. $54M for the three months ended March 31, 2025, with capitalized interest of $10M and $11M, respectively.
• Derivatives — net positions and collateral: Total net fair value of all derivatives was ($50M) as of March 31, 2026 vs. ($75M) as of December 31, 2025; at March 31, 2026, $50M of collateral was posted (none received), while at December 31, 2025, $70M of collateral was posted; net gains on foreign currency forward-exchange contracts not designated as hedging instruments were $9M for the three months ended March 31, 2026 vs. $30M for the three months ended March 31, 2025.

• Goodwill movement: Goodwill rose from $2.8B at December 31, 2025 to $2.8B at March 31, 2026, with the $4M increase entirely in the International segment and attributable to foreign currency translation; gross goodwill was $3.3B and $3.3B at those respective dates, against accumulated impairment losses of $536M unchanged at both dates.
• Finite-lived intangibles: Net finite-lived intangible assets declined from $781M at December 31, 2025 to $745M at March 31, 2026, driven by amortization across developed technology rights ($557M net), brands and tradenames ($109M net), and other ($79M net).
• Indefinite-lived intangibles: Net indefinite-lived assets were $214M at March 31, 2026 (vs. $217M at December 31, 2025), composed of brands and tradenames ($67M), in-process research and development ($141M), and product rights ($6M).
• Amortization expense: Total amortization expense for finite-lived intangible assets was $39M for the three months ended March 31, 2026, compared to $40M for the three months ended March 31, 2025.

• Total share-based compensation expense: $25M for the three months ended March 31, 2026, up from $17M in the prior-year period, with less than $1M capitalized to inventory in both periods; components were stock options/stock appreciation rights ($4M vs. $3M), RSUs/DSUs ($16M vs. $11M), and PSUs ($5M vs. $3M).
• Stock option grants: 437,889 options granted in Q1 2026 at a weighted-average exercise price of $129.13 and weighted-average fair value of $32.64, using Black-Scholes-Merton with assumptions of 3.64% risk-free rate, 1.63% expected dividend yield, 28.81% expected volatility, and 4.4-year expected term; options granted beginning in 2023 vest on a graded basis over three years with a 10-year contractual term.
• RSU grants: 819,928 RSUs granted in Q1 2026 at a weighted-average grant date fair value of $128.64 per RSU, with graded vesting over three years from grant date for awards granted beginning in 2023.
• PSU grants: 183,488 PSUs granted in Q1 2026 at a weighted-average grant date fair value of $156.44 per PSU, earned in two tranches over a three-year performance period based on (1) Relative TSR vs. the S&P 500 Health Care index (valued via Monte Carlo using Zoetis volatility of 26.3% and index average of 30.7%) and (2) three-year average annual operational revenue growth; payout ranges from 0% to 200% of target.

• Share authorization: Zoetis is authorized to issue 6 billion shares of common stock and 1 billion shares of preferred stock.
• Repurchase program: The Board authorized a multi-year share repurchase program of up to $6B in August 2024; as of March 31, 2026, $1.8B remained under this authorization.
• AOCI movement (Q1 2026): Accumulated other comprehensive loss improved from ($804M) at December 31, 2025 to ($772M) at March 31, 2026, driven by net investment hedge gains of $14M and currency translation adjustment improvement of $20M, partially offset by cash flow hedge losses of ($2M).
• AOCI movement (Q1 2025): Accumulated other comprehensive loss improved from ($1B) at December 31, 2024 to ($922M) at March 31, 2025, primarily due to currency translation adjustment gains of $132M, partially offset by net investment hedge losses of ($33M) and cash flow hedge losses of ($13M).

Antidilutive options: Stock options excluded from the diluted EPS computation as antidilutive were not material for the three months ended March 31, 2026 and 2025.

Convertible senior notes: The convertible senior notes require principal settlement in cash, with any conversion premium payable in cash, shares of common stock, or a combination; accordingly, they affect diluted EPS only when the average share price exceeds the conversion price.

Legal Proceedings

• Ulianopolis, Brazil (complaint filed February 2012): Municipality of Ulianopolis sued FDSAL (a Zoetis entity) and five others over environmental impacts from waste at a local incineration facility; Phase II testing began October 14, 2024, with parties collaborating on waste removal options.

Segment structure: The company operates 2 reportable geographic segments — U.S. and International — each with responsibility for its commercial activities and offering a diversified product portfolio across parasiticides, vaccines, dermatology, anti-infectives, pain and sedation, other pharmaceutical, and animal health diagnostics for companion animal and livestock customers.

• CODM definition: The Chief Executive Officer and Chief Financial Officer jointly serve as the CODM, using segment results and expected future results to allocate human and capital resources.
• Unallocated items: Costs not allocated to segments include Other business activities (Client Supply Services contract manufacturing, human health business, and dedicated veterinary medicine R&D), Corporate (IT, facilities, legal, finance, HR, business development, certain diagnostic costs, interest income and expense), Purchase accounting adjustments (amortization of fair value adjustments to inventory, intangibles, and PP&E), Acquisition and divestiture-related costs, Certain significant items (restructuring charges, asset impairments, legal and commercial settlements, divestiture-related gains/losses), and Other unallocated (certain global manufacturing overhead, supply chain and global logistics costs, and certain procurement costs).
• No segment assets reported: Assets are managed on a total company basis; the CODM does not regularly review asset information by operating segment and no asset information is reported by segment.

• Business description: Zoetis is a global animal health company focused on discovery, development, manufacture and commercialization of medicines, vaccines, diagnostic products and services, biodevices, genetic tests and precision animal health, with approximately 300 product lines sold in over 100 countries across companion animal and livestock species.
• Segment structure: Operations are managed through 2 geographic segments — United States and International — each offering products for companion animal and livestock customers; products are directly marketed in approximately 45 countries across North America, Europe, Africa, Asia, Australia and South America.
• Q1 2026 performance: Revenue of $2.3B grew 3% total (4% operationally, -1% from foreign exchange) versus $2.2B in Q1 2025; net income attributable to Zoetis was essentially flat at $601M vs. $602M (0% total, 1% operational, -1% FX); adjusted net income (non-GAAP) grew 2% to $646M from $633M (1% operational, 1% FX).

• Variability drivers: Quarterly results are subject to variability from tariffs and trade protection measures, global macroeconomic conditions, competitive dynamics, geopolitical tensions, inflation, global supply chain disruption, supply availability, distributor inventory stocking levels, weather patterns, herd management decisions, regulatory actions, disease outbreaks, product and geographic mix, timing of price increases, and operational changes related to the 2026 elimination of the one-month financial reporting lag for non-U.S. subsidiaries.
• Tariff exposure: Starting in early 2025, the U.S. government announced additional tariffs on certain goods imported into the U.S. from numerous countries, with multiple nations countering with reciprocal tariffs and other actions; final tariffs and their applicability to the business remain uncertain, and such actions may negatively impact demand and increase some product costs.
• Monitoring posture: Management states it will continue to actively monitor the situation and evaluate actions to moderate and/or minimize the effects of tariffs and trade protection measures.

Disease outbreak risk: Sales of livestock products have been and may continue to be adversely affected by animal disease outbreaks, which can reduce regional or global sales of animal-derived food products, trigger heightened export restrictions or import prohibitions, and reduce demand for the company's products.

• Production disruption: An outbreak of highly contagious disease near main production sites could require an immediate halt to production or force the company to incur substantial expenses procuring raw materials or products elsewhere.
• Offsetting upside: Sales of products that treat specific disease outbreaks may increase as a partial offset to the negative demand effects.

• Currency exposure: For the three months ended March 31, 2026, approximately 47% of revenue was denominated in foreign currencies and approximately 53% was in U.S. dollars; the company sells products in more than 100 countries across currencies including the Australian dollar, Brazilian real, British pound, Canadian dollar, Chinese renminbi, and euro.
• FX impact on revenue growth: Year-over-year total revenue growth was favorably impacted by approximately 4% from changes in foreign currency values relative to the U.S. dollar for the three months ended March 31, 2026.
• Risk management approach: Foreign exchange risk is managed in part through operational means, including matching same-currency revenue to same-currency costs and same-currency assets to same-currency liabilities; for highly inflationary economies, monetary items are translated at balance sheet date rates with adjustments recorded in Other (income)/deductions––net, and non-monetary items are translated at historical rates.

• Fiscal Year Alignment change: Effective January 1, 2026, the company eliminated the historical one-month financial reporting lag for International Subsidiaries (which previously had a November 30 year-end) and aligned their year-end to December 31, treated as a change in accounting principle applied retrospectively to all periods since January 1, 2024; prior-period statements for Q1 2025, December 31, 2025 balance sheet, and future comparative periods have been or will be recast accordingly.
• December 2025 exclusion: As a result of the alignment, the International Subsidiaries' results for December 2025 will not be included in consolidated results for fiscal year 2026, but will be reflected in the retrospective recast of prior periods.
• Q4 2025 revenue pull-forward: Operational changes connected to the Fiscal Year Alignment accelerated sales timing into the reported fourth quarter of 2025, producing an approximate 2.5% to 3.5% increase in International segment sales in that quarter — a trend management does not expect to recur at the end of fiscal year 2026.
• Q1 2026 timing effects: The operational changes also included a shift in the timing of annual price increases in certain International Subsidiaries (so the price increase and anticipated customer buying preceding it occur in the same calendar year), and processing of certain customer orders from December 2025 was delayed into the first quarter of 2026.

• Revenue: Revenue grew 3% to $2.3B in the three months ended March 31, 2026 from $2.2B in the prior-year period, while net income attributable to Zoetis was essentially flat at $601M vs. $602M (27% of revenue in both periods).
• Cost pressures: Cost of sales rose 4% to $641M (28.3% of revenue vs. 28.1%), and R&D expenses increased 11% to $180M (8% of revenue vs. 7%), while SG&A grew 2% to $588M, holding steady at 26% of revenue in both periods.
• Restructuring and interest: Restructuring charges and certain acquisition and divestiture-related costs were $22M in the current quarter vs. none in the prior-year period; interest expense, net of capitalized interest, rose 15% to $62M from $54M.
• Tax rate and pre-tax income: Income before provision for taxes on income declined 2% to $758M (34% of revenue vs. 35%), while the effective tax rate improved to 20.7% from 22.1%, reducing the provision for taxes on income by 8% to $157M from $171M.

• Revenue change: Total revenue increased by $64M, or 3%, in the three months ended March 31, 2026 vs. three months ended March 31, 2025, but decreased $12M, or 1%, on an operational basis; foreign exchange increased reported revenue growth by approximately $76M, or 4%.
• Operational headwinds: The operational revenue decline was driven by a volume decrease from key franchises of approximately 3% and a volume decrease related to the MFA divestiture (medicated feed additive portfolio, certain water soluble products and related assets) of approximately 1%.
• Operational tailwinds: Partially offsetting those declines were price growth of approximately 2% and volume growth from other in-line products of approximately 1%.

• Cost of sales: Cost of sales increased 4% to $641M for the three months ended March 31, 2026, from $618M in the prior-year period, with cost of sales as a % of revenue rising modestly to 28.3% from 28.1%.

Cost of sales rate: Cost of sales as a % of revenue was 28.3% in the three months ended March 31, 2026, up from 28.1% in the three months ended March 31, 2025, driven by unfavorable foreign exchange, unfavorable product mix, and unfavorable manufacturing and other costs, partially offset by price increases.

SG&A expenses: Selling, general and administrative expenses rose 2% to $588M in the three months ended March 31, 2026, from $574M in the prior-year period, while remaining flat as a % of revenue at 26% in both periods.

• SG&A drivers: SG&A expenses increased by $14M, or 2%, in the three months ended March 31, 2026 vs. the three months ended March 31, 2025, driven by unfavorable foreign exchange and higher compensation-related costs, partially offset by lower depreciation expense and lower advertising and promotion expense.

• R&D expense level: R&D expenses were $180M for the three months ended March 31, 2026, up from $162M in the prior-year period, representing 8% of revenue vs. 7% prior year.
• Drivers of increase: The $18M, or 11%, increase was primarily driven by higher spend in project investments, an increase in certain compensation-related costs to support innovation and portfolio progression, and unfavorable foreign exchange.

Amortization of intangible assets: Decreased 3% to $31M in the three months ended March 31, 2026 from $32M in the comparable prior year period.

Restructuring charges: Restructuring charges and certain acquisition and divestiture-related costs were $22M for the three months ended March 31, 2026, compared to $— million in the prior-year period.

Restructuring charges: Restructuring charges and certain acquisition and divestiture-related costs in the three months ended March 31, 2026 primarily related to employee termination costs due to organizational structure refinements.

Interest expense: Interest expense, net of capitalized interest, rose 15% to $62M in the three months ended March 31, 2026, from $54M in the three months ended March 31, 2025.

Interest expense: Interest expense, net of capitalized interest, increased in the three months ended March 31, 2026 versus the comparable prior year period primarily as a result of a higher average debt balance in the current period.

Other (income)/deductions—net: The change in Other (income)/deductions—net in the three months ended March 31, 2026 versus the comparable prior year period was primarily driven by a gain on sale of a distribution facility in the current period.

• Provision for taxes: Provision for taxes on income decreased 8% to $157M for the three months ended March 31, 2026, from $171M for the three months ended March 31, 2025.
• Effective tax rate: The effective tax rate declined to 20.7% for the three months ended March 31, 2026 from 22.1% for the three months ended March 31, 2025, primarily attributable to a more favorable jurisdictional mix of earnings (which includes the impact of the location of pre-tax earnings, tax impact of permanent differences and repatriation decisions).

• U.S. segment: Revenue declined 8% operationally to $1.1B (from $1.2B), with companion animal down 11% to $865M and livestock up 7% to $225M; U.S. Earnings fell 11% to $697M, with gross margin contracting to 82.2% from 83.2%.
• International segment: Revenue grew 17% in total (9% operationally, 8% foreign exchange) to $1.1B, with companion animal up 15% and livestock up 19%; International Earnings rose 21% to $639M, with gross margin expanding to 70.9% from 70.1%.
• Total earnings: Total operating segment earnings were $1.3B vs. $1.3B prior year; after other business activities of ($141M, corporate costs of ($315M, purchase accounting adjustments of ($28M, certain significant items of ($27M, and other unallocated of ($65M, total earnings were $758M vs. $773M, a decline of 2%.
• Product mix: Total companion animal revenue was essentially flat at $1.5B (down 1% reported, down 4% operationally), while livestock grew 15% to $720M; contract manufacturing & human health declined 23% to $23M.

• Revenue decline: U.S. segment revenue decreased by $93M, or 8%, in the three months ended March 31, 2026, driven by a $108M decrease in companion animal products, partially offset by a $15M increase in livestock products.
• Companion animal headwinds: The decline reflected softer end-market demand, heightened competitive pressure on the dermatology franchise and Simparica Trio, macroeconomic-driven price sensitivity, generic competition on Convenia and Cerenia, and lower sales of Librela.
• Livestock growth: Livestock revenue growth was driven by increased demand for cattle, poultry, and swine products — cattle benefited from improved supply availability and a seasonal promotion; poultry grew on price and vaccine demand; swine grew on improved supply and increased demand for anti-infective products.
• Segment earnings: U.S. segment earnings decreased by $82M, or 11%, in the three months ended March 31, 2026, primarily due to lower gross profit, partially offset by lower operating expenses.

• Revenue growth: International segment revenue increased by $164M in the three months ended March 31, 2026 vs. the three months ended March 31, 2025, with operational revenue up $88M, or 9%, driven by $39M in companion animal products and $49M in livestock products; growth was also positively impacted by operational changes made in connection with the Fiscal Year Alignment.
• Companion animal drivers: Operational revenue growth was driven primarily by increased sales of Simparica Trio and higher demand for vaccines and small animal diagnostics, partially offset by decreased sales of key dermatology products and Librela.
• Livestock drivers: Livestock operational revenue growth reflected increased sales across cattle (mix of volume and price), swine (volume driven by momentum across key brands), poultry (demand, key account penetration, geographic expansion, and price), and fish (increased vaccine sales and pricing).
• FX and earnings: Foreign exchange favorably impacted International segment revenue by $76M, or 8%, primarily driven by the euro, Brazilian real, Australian dollar, Mexican peso, and British pound; segment earnings increased $112M, or 21%, with operational earnings growth of $79M, or 15%, primarily due to higher gross profit partially offset by higher operating expenses.

• Segment composition: Other business activities includes Client Supply Services contract manufacturing results, the human health business, and expenses from the dedicated veterinary medicine R&D organization, research alliances, U.S. regulatory affairs, and other product development operations; non-U.S. market and regulatory R&D costs are generally included in the International segment.
• Net loss increase: Other business activities net loss increased by $8M in the three months ended March 31, 2026 vs. the three months ended March 31, 2025, driven by higher R&D costs related to projects and other strategic investments.

• Corporate expenses: Increased by $37M, or 13%, in the three months ended March 31, 2026 vs. the three months ended March 31, 2025, primarily due to higher compensation-related costs, unfavorable foreign exchange, and higher expenses in global diagnostics.
• Other unallocated expenses: Decreased by $19M, or 23%, in the three months ended March 31, 2026 vs. the three months ended March 31, 2025, primarily due to lower manufacturing costs and other charges and lower inventory obsolescence, partially offset by unfavorable foreign exchange and freight charges.
• Reconciling items composition: Reconciling items include Corporate costs (IT, facilities, legal, finance, HR, business development, certain diagnostic costs, compensation, procurement, interest income/expense), transaction-related items (purchase accounting adjustments, acquisition and divestiture-related costs, certain significant items), and Other unallocated items (overhead from global manufacturing operations, finance costs supporting manufacturing, supply chain and global logistics costs, and certain procurement costs).

• Definition and purpose: Adjusted net income is a non-GAAP measure used by management as an alternative view of performance, with management stating that investors' understanding of performance is enhanced by its disclosure.
• Internal uses: Senior management receives a monthly operating results analysis prepared on an adjusted net income basis, annual budgets are prepared on this basis, and it is used for goal setting and performance measurements.

Definition: Adjusted net income excludes purchase accounting impacts from business combinations and net asset acquisitions, primarily amortization of fair-value step-ups on acquired finite-lived intangible assets and depreciation related to fair value increases/decreases on acquired fixed assets — meaning the measure captures revenue from acquired products without the associated charges.

• Duration and rationale: Management notes these purchase accounting adjustments can extend through 20 or more years, and the exclusion is intended to provide a degree of parity between acquired intangible assets (which carry amortization) and internally developed intangible assets (whose R&D costs were previously expensed).
• Limitations disclosed: Management explicitly cautions that a completely accurate comparison between internally developed and acquired intangibles cannot be achieved through this measure, as it does not account for differences in R&D spend, speed to commercialization, manufacturing costs, or customer reception that would have applied had the intangibles been developed internally.

• Adjusted net income — acquisition/divestiture costs: Adjusted net income excludes transaction, integration, and disintegration costs associated with business combinations, net asset acquisitions, and divestitures, on the basis that these costs are unique to each transaction and incurred to eliminate duplicate assets, activities, or employees; no adjustments are made for resulting synergies.
• Duration of integration/disintegration costs: These costs may occur over several years, with more significant impacts generally ending within three years of the transaction; for regulated businesses such as animal health medicines, vaccines, and diagnostic operations, facility closures can take longer due to required validation, testing, and approval by the U.S. Food and Drug Administration and/or other regulatory authorities.
• Certain significant items — definition and examples: Adjusted net income also excludes "certain significant items," defined as substantive, unusual items evaluated individually on quantitative and qualitative grounds; examples include major non-acquisition/divestiture-related restructuring charges, business process transformation costs, disposal of products or facilities not qualifying as discontinued operations, certain asset impairment charges, tax position adjustments, significant currency devaluation, event-driven tax legislation impacts, and charges related to legal matters, while normal ongoing defense costs and routine legal settlements are excluded from this category.

• GAAP vs. adjusted net income: GAAP net income attributable to Zoetis was $601M for Q1 2026 vs. $602M in Q1 2025 (flat), while non-GAAP adjusted net income rose 2% to $646M from $633M, with total excluded items (net of tax) of $45M vs. $31M in the prior-year period.
• Adjusted EPS: GAAP diluted EPS was $1.42 vs. $1.34 (6% increase); non-GAAP adjusted diluted EPS was $1.53 vs. $1.41 (9% increase), with purchase accounting adjustments contributing $0.05 per share and certain significant items contributing $0.06 per share in Q1 2026.
• Effective tax rate: The adjusted effective tax rate was 20.7% for Q1 2026 vs. 21.9% for Q1 2025, with the decline primarily attributed to a more favorable jurisdictional mix of earnings.
• Certain significant items: Q1 2026 certain significant items pre-tax totaled $27M vs. $6M in Q1 2025, driven primarily by $20M in employee termination costs from organizational structure refinements and $5M in business process transformation program costs (ERP implementation and related digital technology solutions).

OCI drivers: Changes in other comprehensive income are primarily driven by foreign currency translation adjustments (reflecting U.S. dollar strengthening or weakening against currencies in countries where the company operates) and unrealized gains/(losses) on derivative instruments, with the latter recorded in Accumulated other comprehensive income/(loss) and reclassified into earnings depending on the nature and purpose of the financial instrument.

• Accounts receivable: Increased primarily due to timing of net sales in the period, partially offset by timing of customer payments.
• Working capital movements: Accounts payable increased due to timing of vendor and value-added tax payments; accrued expenses decreased primarily from lower accrued contract rebates and timing of interest payments; accrued compensation and related items decreased due to payments of 2025 annual incentive bonuses, savings plan contributions, and sales incentive bonuses, partially offset by accrual of 2026 equivalents.
• Other balance sheet items: Other current assets increased due to higher prepaid expenses (partially offset by lower derivative collateral posted); other noncurrent assets increased due to capitalized cloud computing arrangements implementation costs; other current liabilities increased from mark-to-market adjustments on derivative instruments and higher deferred revenue; other noncurrent liabilities decreased due to mark-to-market adjustments on derivative instruments.
• Tax-related balances: Net changes in noncurrent deferred tax assets, noncurrent deferred tax liabilities, income taxes payable, and other taxes payable primarily reflect adjustments to the income tax provision accrual, timing of income tax payments, and the tax impact of various acquisitions.

• Financing cash outflows: Net cash used in financing activities was $840M for the three months ended March 31, 2026, up from $677M for the three months ended March 31, 2025, a $163M increase in outflows year-over-year.
• Primary drivers: The net cash used in financing activities for both the three months ended March 31, 2026 and 2025 was primarily attributable to the purchase of treasury shares and the payment of dividends.

Liquidity adequacy: Management believes cash and cash equivalents on hand, operating cash flows, and existing financing arrangements will be sufficient to support cash needs for the next twelve months and beyond, subject to the operating environment.

• Risk caveat: Risks to meeting future funding requirements are described in the Global economic conditions section of the filing.

• Receivables collection: Accounts receivable are usually collected over a period of 45 to 75 days, and for both periods ended March 31, 2026 and December 31, 2025, days outstanding remained within this range; management states the allowance for doubtful accounts is appropriate based on past due aging, historical and expected collection patterns, customer financial condition, credit and collection practices, and the economic environment.
• Current ratio: Ratio of current assets to current liabilities was 3.15:1 as of March 31, 2026, compared to 3.12:1 as of December 31, 2025.

• Revolving credit facility: In August 2025, the company entered into a new and restated $1.3B senior unsecured revolving credit facility expiring December 2027, with an option to increase to up to $1.8B subject to certain conditions; no amounts were drawn as of March 31, 2026 or December 31, 2025.
• Financial covenant: The facility requires a maximum total leverage ratio (consolidated net debt to consolidated EBITDA) of 3.50:1, stepping up to 4.00:1 upon a material acquisition and remaining elevated through the fourth full consecutive fiscal quarter following consummation; the company was in compliance with all financial covenants as of March 31, 2026 and December 31, 2025.
• Additional lines of credit: The company had access to $47M of additional lines of credit as of March 31, 2026, expiring at various times and generally renewed annually, with no borrowings outstanding under these facilities as of March 31, 2026 or December 31, 2025.

Liquidity outlook: Management states that challenging economic conditions have not had, nor does it anticipate will have, a significant impact on liquidity, citing operating cash flows, financial assets, access to capital markets, and available lines of credit and revolving credit agreements as sufficient to meet liquidity needs for the foreseeable future.

• Forward-looking caveat: Management cautions there is no assurance that a challenging economic environment or economic downturn will not impact liquidity or the ability to obtain financing in the future.

• Issuance terms: On December 18, 2025, Zoetis completed a private offering of $2B aggregate principal amount of 0.250% convertible senior notes due June 15, 2029 (including $250M from the initial purchasers' option exercised in full), with an initial conversion price of approximately $148.20 per share of common stock; net proceeds were $2B after deducting $30M in initial purchasers' discounts and expenses.
• Use of proceeds: Net proceeds were allocated as follows: (i) $187M to fund capped call transactions, (ii) $248M to repurchase approximately 2.1 million shares of common stock in privately negotiated transactions at pricing, and (iii) the remaining $1.5B for additional common stock repurchases, which were substantially completed as of December 31, 2025.
• Capped call transactions: Concurrent capped calls were entered into with a strike price of approximately $148.20 per share and initial cap prices of approximately $211.72 per share, covering approximately 13.5 million shares; the $187M cost, net of $42M in deferred tax assets, was recorded as a decrease to Additional paid-in capital and classified as an equity transaction under ASC 815 with no subsequent remeasurement.
• Credit facility waiver: On December 17, 2025, Zoetis and lenders entered into the First Waiver to the Revolving Credit Agreement, which waived a technical provision and explicitly permits early conversions of the convertible senior notes pursuant to their terms.

• 2025 senior notes issuance: On August 18, 2025, the company issued $850M of 4.150% senior notes due 2028 and $1B of 5.000% senior notes due 2035, with an original issue discount of $2M; net proceeds were used to redeem in full the $600M 5.400% 2022 senior notes due 2025 (redeemed August 28, 2025) and the $750M 4.500% 2015 senior notes due 2025 (redeemed September 17, 2025), with the remainder for general corporate purposes.
• Outstanding debt stack: 11 series of senior notes outstanding ranging from 0.250% (2025 Convertible Senior Notes due 2029, $2B) to 5.600% (2022 Senior Notes due 2032, $750M), with maturities extending to 2050; all are bullet structures (no amortization) with semi-annual interest payments.
• Indenture covenants: The indenture (trustee: Deutsche Bank Trust Company Americas) limits liens and sale-leaseback transactions, restricts consolidation/merger/asset sales, and includes customary events of default; the company may redeem any series at any time at a make-whole premium plus accrued interest.
• Change of control: Upon a change of control combined with a downgrade below investment grade by both Moody's and S&P, the company may be required to offer to repurchase all outstanding senior notes at 101% of aggregate principal plus accrued and unpaid interest.

• Moody's ratings: Assigned P-2 for commercial paper and A3 for long-term debt, with a Stable outlook; last action taken January 2025.
• S&P ratings: Assigned A-2 for commercial paper and BBB+ for long-term debt, with a Stable outlook; last action taken April 2025.

• Authorization and remaining capacity: The Board of Directors authorized a multi-year share repurchase program of up to $6B in August 2024; as of March 31, 2026, $1.8B remained under this authorization.
• Convertible notes-linked repurchases: In connection with the December 18, 2025 private offering of 0.250% convertible senior notes, approximately 2.1 million shares of Zoetis' common stock (par value $0.01 per share) were purchased in privately negotiated transactions concurrent with pricing, and $1.5B of the remaining offering proceeds were used for additional repurchases completed as of March 31, 2026.
• Q1 2026 activity: During the first three months of 2026, 4.8 million shares were repurchased for $606M, excluding a $6M accrual for excise tax on net share repurchases.

Indemnification obligations: In the ordinary course of business and in connection with the sale of assets and businesses, the company may indemnify counterparties against certain liabilities relating to environmental, tax, employee, product-related matters, and patent-infringement claims; these indemnifications are generally subject to threshold amounts, specified claim periods, and other restrictions and limitations. As of March 31, 2026 and December 31, 2025, recorded amounts for the estimated fair value of these indemnifications are not material, and historically the company has not paid significant amounts under these provisions.