Zoetis Announces Third Quarter 2021 Results

04 Nov 2021
www.biospace.com
Financial StatementAntibodyVaccineAcquisition
Nov. 4, 2021 11:00 UTC Reports Revenue of $2.0 Billion, Growing 11%, and Net Income of $552 Million, or $1.16 per Diluted Share, Increasing 15% and 16%, Respectively, on a Reported Basis for Third Quarter 2021 Reports Adjusted Net Income of $597 Million, or Adjusted Diluted EPS of $1.25, for Third Quarter 2021 Delivers 10% Operational Growth in Revenue and 10% Operational Growth in Adjusted Net Income for Third Quarter 2021 Increases Full Year 2021 Revenue Guidance to $7.700 - $7.750 Billion and Diluted EPS of $4.23 - $4.29 on a Reported Basis, or $4.62 - $4.67 on an Adjusted Basis PARSIPPANY, N.J.--(BUSINESS WIRE)--Zoetis (NYSE: ZTS) today reported its financial results for the third quarter of 2021 and increased its guidance for full year 2021. The company reported revenue of $2.0 billion for the third quarter of 2021, an increase of 11% compared with the third quarter of 2020. Net income for the third quarter of 2021 was $552 million, or $1.16 per diluted share, an increase of 15% and 16%, respectively, on a reported basis. Adjusted net income1 for the third quarter of 2021 was $597 million, or $1.25 per diluted share, both increasing 14% on a reported basis. Adjusted net income for the third quarter of 2021 excludes the net impact of $45 million for purchase accounting adjustments, acquisition-related costs and certain significant items. On an operational2 basis, revenue for the third quarter of 2021 increased 10%, excluding the impact of foreign currency. Adjusted net income for the third quarter of 2021 increased 10% operationally, excluding the impact of foreign currency. EXECUTIVE COMMENTARY “We delivered strong results again this quarter with 10% operational growth for both revenue and adjusted net income, driven by our innovative portfolio of petcare parasiticides, including Simparica Trio®, as well as dermatology products,” said Kristin Peck, Chief Executive Officer of Zoetis. “Additionally, the first full-quarter sales of Librela® and Solensia®, our new monoclonal antibody (mAb) therapies for osteoarthritis (OA) pain in dogs and cats, exceeded our expectations, with both products receiving very positive feedback in the markets where they were launched." “We remain on track for a record-setting year, with updated guidance for operational revenue growth in the range of 14% to 14.5% and adjusted net income in the range of 16.5% to 18% for 2021. We see positive market trends, especially in petcare, continuing into 2022, and we will continue to invest in the innovations and digital solutions that are needed by our customers across the continuum of care,” said Peck. QUARTERLY HIGHLIGHTS Zoetis organizes and manages its commercial operations across two segments: United States (U.S.) and International. Within these segments, the company delivers a diverse portfolio of products for companion animals and livestock, tailored to local trends and customer needs. In the third quarter of 2021: Revenue in the U.S. segment was $1.065 billion, an increase of 7% compared with the third quarter of 2020. Growth was impacted by unfavorable comparisons to the third quarter of 2020, which benefited from a rapid market recovery related to COVID-19 disruptions earlier that year. Sales of companion animal products increased 17%, driven by growth across the parasiticides portfolio, including Simparica Trio for dogs. The company’s key dermatology portfolio also significantly contributed to growth across both the Apoquel® and Cytopoint® brands. Sales of livestock products declined 13% in the quarter, driven by a decrease in cattle product sales as a result of generic competition, an early fall cattle run that favorably impacted the third quarter of 2020, and continued weakness in cattle and dairy markets. Sales of poultry products declined due to the expanded use of lower cost alternatives and generic competition. Sales of swine products declined due to pricing pressure on anti-infectives and vaccines. Revenue in the International segment was $904 million, an increase of 18% on a reported basis and an increase of 14% operationally compared with the third quarter of 2020. Sales of companion animal products increased 29% on a reported basis and 24% operationally. Growth resulted from increased sales of key dermatology products across both the Apoquel and Cytopoint brands. The company’s parasiticides portfolio, including the Simparica® and Revolution®/Stronghold® franchises, also contributed to growth, as well as the first full quarter of sales of Librela and Solensia, the recently launched monoclonal antibody products for osteoarthritis pain. Sales of the broader in-line portfolio, which benefited from increased pet ownership and standards of care, also grew. Sales of livestock products grew 9% on a reported basis and 7% operationally. Sales of cattle products grew due to key account penetration, favorable export market conditions in Brazil, and favorable market conditions in other emerging markets. Growth in the fish portfolio resulted primarily from increased sales of the Alpha Flux® sea lice treatment product and the Alpha Ject LiVac® SRS vaccine in Chile. Sales of both swine and poultry products grew as a result of key account growth and market expansion across parts of Asia, Brazil and Russia. INVESTMENTS IN GROWTH Zoetis continues to enhance its key dermatology portfolio with market expansions and lifecycle innovations. Since its last quarterly earnings announcement, the company received approval in China for Cytopoint (lokivetmab), an injectable monoclonal antibody therapy for atopic dermatitis in dogs. Zoetis also received a positive opinion from the European Medicines Agency’s Committee for Medicinal Products for Veterinary Use (CVMP) for a new chewable version of Apoquel, the company’s industry-leading Janus kinase inhibitorJanus kinase inhibitor which was first introduced in 2013. Upon amendment of the marketing authorization in the European Union (EU), Apoquel chewable tablets will provide veterinarians with a new palatable treatment option for dogs suffering from pruritus associated with allergic dermatitis and clinical manifestations of atopic dermatitis. In other petcare product market expansions, Zoetis received approval in Brazil for Vanguard® I-III (known as Vanguard Intranasal Rapid RESP 3 in other markets). This vaccine helps protect dogs from key pathogens associated with Canine Infectious Respiratory Disease (CIRD), including Bordetella bronchiseptica (Bb), canine parainfluenza virus (CPiV) and canine adenovirus type 2 (CAV-2). In diagnostics, the company recently added digital cytology testing to its Vetscan Imagyst™ platform in the U.S., U.K., Canada, Australia and New Zealand. With the launch of digital cytology, Vetscan Imagyst now offers a network of expert remote pathologists in addition to Artificial Intelligence (AI) technology for fecal testing. As Zoetis continues to develop additional innovative applications for Vetscan Imagyst, it plans to seamlessly integrate even more new capabilities into the platform, helping veterinarians provide the best possible care for dogs and cats. On the livestock side of the business, Zoetis enhanced its aquaculture portfolio with the approval of Alpha Ject Micro® 2000 in the EU. This new micro-dose vaccine has been optimized for use in sea bass to provide robust protection against classical vibriosis and pasteurellosis, two common bacterial infections. FINANCIAL GUIDANCE Zoetis is increasing its full year 2021 guidance, which includes: Revenue between $7.700 billion and $7.750 billion Reported diluted EPS between $4.23 and $4.29 Adjusted diluted EPS between $4.62 and $4.67 This guidance reflects foreign exchange rates as of mid-October. Additional details on guidance are included in the financial tables and will be discussed on the company's conference call this morning. WEBCAST & CONFERENCE CALL DETAILS Zoetis will host a webcast and conference call at 8:30 a.m. (ET) today, during which company executives will review third quarter 2021 results, discuss financial guidance and respond to questions from financial analysts. Investors and the public may access the live webcast by visiting the Zoetis website at . A replay of the webcast will be archived and made available on Nov. 4, 2021. About Zoetis As the world’s leading animal health company, Zoetis is driven by a singular purpose: to nurture our world and humankind by advancing care for animals. After nearly 70 years innovating ways to predict, prevent, detect, and treat animal illness, Zoetis continues to stand by those raising and caring for animals worldwide -- from livestock farmers to veterinarians and pet owners. The company’s leading portfolio and pipeline of medicines, vaccines, diagnostics and technologies make a difference in over 100 countries. A Fortune 500 company, Zoetis generated revenue of $6.7 billion in 2020 with approximately 11,300 employees. For more information, visit . 1 Adjusted net income and its components and adjusted diluted earnings per share (non-GAAP financial measures) are defined as reported net income and reported diluted earnings per share, excluding purchase accounting adjustments, acquisition-related costs and certain significant items. 2 Operational growth (a non-GAAP financial measure) is defined as growth excluding the impact of foreign exchange. DISCLOSURE NOTICES Forward-Looking Statements: This press release contains forward-looking statements, which reflect the current views of Zoetis with respect to: business plans or prospects, future operating or financial performance, future guidance, future operating models; expectations regarding products, product approvals or products under development, expected timing of product launches; the impact of the coronavirus (COVID-19) pandemic and any recovery therefrom on our business, supply chain, customers and employees; expectations regarding the performance of acquired companies and our ability to integrate new businesses; expectations regarding the financial impact of acquisitions; future use of cash and dividend payments; tax rate and tax regimes and any changes thereto; and other future events. These statements are not guarantees of future performance or actions. Forward-looking statements are subject to risks and uncertainties. If one or more of these risks or uncertainties materialize, or if management's underlying assumptions prove to be incorrect, actual results may differ materially from those contemplated by a forward-looking statement. Forward-looking statements speak only as of the date on which they are made. Zoetis expressly disclaims any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. A further list and description of risks, uncertainties and other matters can be found in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, including in the sections thereof captioned “Forward-Looking Statements and Factors That May Affect Future Results” and “Item 1A. Risk Factors,” in our Quarterly Reports on Form 10-Q and in our Current Reports on Form 8-K. Such risks and uncertainties may be amplified by the COVID-19 pandemic and its potential impact on the global economy and our business. These filings and subsequent filings are available online at , , or on request from Zoetis. Use of Non-GAAP Financial Measures: We use non-GAAP financial measures, such as adjusted net income, adjusted diluted earnings per share and operational results (which exclude the impact of foreign exchange), to assess and analyze our results and trends and to make financial and operational decisions. We believe these non-GAAP financial measures are also useful to investors because they provide greater transparency regarding our operating performance. The non-GAAP financial measures included in this press release should not be considered alternatives to measurements required by GAAP, such as net income, operating income, and earnings per share, and should not be considered measures of liquidity. These non-GAAP financial measures are unlikely to be comparable with non-GAAP information provided by other companies. Reconciliation of non-GAAP financial measures and most directly comparable GAAP financial measures are included in the tables accompanying this press release and are posted on our website at . Internet Posting of Information: We routinely post information that may be important to investors in the 'Investors' section of our website at , on our Facebook page at and on Twitter @zoetis. We encourage investors and potential investors to consult our website regularly and to follow us on Facebook and Twitter for important information about us. ZTS-COR ZTS-IR ZTS-FIN ZOETIS INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME(a) (UNAUDITED) (millions of dollars, except per share data) Third Quarter Ended Nine Months Ended September 30, September 30, 2021 2020 % Change 2021 2020 % Change Revenue $ 1,990 $ 1,786 11 $ 5,809 $ 4,868 19 Costs and expenses: Cost of sales 586 546 7 1,703 1,456 17 Selling, general and administrative expenses 504 424 19 1,408 1,206 17 Research and development expenses 132 112 18 370 330 12 Amortization of intangible assets 40 40 — 121 120 1 Restructuring charges and certain acquisition-related costs 9 5 80 39 22 77 Interest expense 56 62 (10) 170 173 (2) Other (income)/deductions–net 4 — * 16 (15 ) * Income before provision for taxes on income 659 597 10 1,982 1,576 26 Provision for taxes on income 107 118 (9) 361 298 21 Net income before allocation to noncontrolling interests 552 479 15 1,621 1,278 27 Less: Net loss attributable to noncontrolling interests — — — (2 ) (1 ) * Net income attributable to Zoetis $ 552 $ 479 15 $ 1,623 $ 1,279 27 Earnings per share—basic $ 1.16 $ 1.01 15 $ 3.42 $ 2.69 27 Earnings per share—diluted $ 1.16 $ 1.00 16 $ 3.40 $ 2.67 27 Weighted-average shares used to calculate earnings per share Basic 474.0 475.5 474.8 475.5 Diluted 476.3 478.5 477.1 478.5 (a) The condensed consolidated statements of income present the third quarter and nine months ended September 30, 2021 and September 30, 2020. Subsidiaries operating outside the United States are included for the third quarter and nine months ended August 31, 2021 and August 31, 2020. * Calculation not meaningful. ZOETIS INC. RECONCILIATION OF GAAP REPORTED TO NON-GAAP ADJUSTED INFORMATION CERTAIN LINE ITEMS (UNAUDITED) (millions of dollars, except per share data) Third Quarter Ended September 30, 2021 GAAP Reported(a) Purchase Accounting Adjustments Acquisition- Related Costs(1) Certain Significant Items(2) Non-GAAP Adjusted(b) Cost of sales $ 586 $ (2 ) $ — $ (1 ) $ 583 Gross profit 1,404 2 — 1 1,407 Selling, general and administrative expenses 504 (8 ) — — 496 Amortization of intangible assets 40 (35 ) — — 5 Restructuring charges and certain acquisition-related costs 9 — (1 ) (8 ) — Other (income)/deductions–net 4 — — (3 ) 1 Income before provision for taxes on income 659 45 1 12 717 Provision for taxes on income 107 10 — 3 120 Net income attributable to Zoetis 552 35 1 9 597 Earnings per common share attributable to Zoetis–diluted 1.16 0.07 — 0.02 1.25 Third Quarter Ended September 30, 2020 GAAP Reported(a) Purchase Accounting Adjustments Acquisition- Related Costs(1) Certain Significant Items(2) Non-GAAP Adjusted(b) Cost of sales $ 546 $ (2 ) $ — $ (1 ) $ 543 Gross profit 1,240 2 — 1 1,243 Selling, general and administrative expenses 424 (12 ) — (5 ) 407 Amortization of intangible assets 40 (34 ) — — 6 Restructuring charges and certain acquisition-related costs 5 — (1 ) (4 ) — Other (income)/deductions–net — — — 1 1 Income before provision for taxes on income 597 48 1 9 655 Provision for taxes on income 118 11 — 2 131 Net income attributable to Zoetis 479 37 1 7 524 Earnings per common share attributable to Zoetis–diluted 1.00 0.08 — 0.02 1.10 (a) The condensed consolidated statements of income present the third quarter ended September 30, 2021 and September 30, 2020. Subsidiaries operating outside the United States are included for the third quarter ended August 31, 2021 and August 31, 2020. (b) Non-GAAP adjusted net income and its components and non-GAAP adjusted diluted EPS are not, and should not be viewed as, substitutes for U.S. GAAP net income and its components and diluted EPS. Despite the importance of these measures to management in goal setting and performance measurement, non-GAAP adjusted net income and its components and non-GAAP adjusted diluted EPS are non-GAAP financial measures that have no standardized meaning prescribed by U.S. GAAP and, therefore, have limits in their usefulness to investors. Because of the non-standardized definitions, non-GAAP adjusted net income and its components and non-GAAP adjusted diluted EPS (unlike U.S. GAAP net income and its components and diluted EPS) may not be comparable to the calculation of similar measures of other companies. Non-GAAP adjusted net income and its components, and non-GAAP adjusted diluted EPS are presented solely to permit investors to more fully understand how management assesses performance. See Notes to Reconciliation of GAAP Reported to Non-GAAP Adjusted Information for notes (1) and (2). ZOETIS INC. RECONCILIATION OF GAAP REPORTED TO NON-GAAP ADJUSTED INFORMATION CERTAIN LINE ITEMS (UNAUDITED) (millions of dollars, except per share data) Nine months ended September 30, 2021 GAAP Reported(a) Purchase Accounting Adjustments Acquisition- Related Costs(1) Certain Significant Items(2) Non-GAAP Adjusted(b) Cost of sales $ 1,703 $ (5 ) $ — $ (7 ) $ 1,691 Gross profit 4,106 5 — 7 4,118 Selling, general and administrative expenses 1,408 (23 ) — — 1,385 Research and development expenses 370 (1 ) — — 369 Amortization of intangible assets 121 (104 ) — — 17 Restructuring charges and certain acquisition-related costs 39 — (8 ) (31 ) — Other (income)/deductions–net 16 — — (6 ) 10 Income before provision for taxes on income 1,982 133 8 44 2,167 Provision for taxes on income 361 30 1 11 403 Net income attributable to Zoetis 1,623 103 7 33 1,766 Earnings per common share attributable to Zoetis–diluted 3.40 0.22 0.01 0.07 3.70 Nine months ended September 30, 2020 GAAP Reported(a) Purchase Accounting Adjustments Acquisition- Related Costs(1) Certain Significant Items(2) Non-GAAP Adjusted(b) Cost of sales $ 1,456 $ (6 ) $ — $ (4 ) $ 1,446 Gross profit 3,412 6 — 4 3,422 Selling, general and administrative expenses 1,206 (47 ) — (11 ) 1,148 Research and development expenses 330 (1 ) — — 329 Amortization of intangible assets 120 (101 ) — — 19 Restructuring charges and certain acquisition-related costs 22 — (15 ) (7 ) — Other (income)/deductions–net (15 ) — — 18 3 Income before provision for taxes on income 1,576 155 15 4 1,750 Provision for taxes on income 298 47 — — 345 Net income attributable to Zoetis 1,279 108 15 4 1,406 Earnings per common share attributable to Zoetis–diluted 2.67 0.23 0.03 0.01 2.94 (a) The condensed consolidated statements of income present the nine months ended September 30, 2021 and September 30, 2020. Subsidiaries operating outside the United States are included for the nine months ended August 31, 2021 and August 31, 2020. (b) Non-GAAP adjusted net income and its components and non-GAAP adjusted diluted EPS are not, and should not be viewed as, substitutes for U.S. GAAP net income and its components and diluted EPS. Despite the importance of these measures to management in goal setting and performance measurement, non-GAAP adjusted net income and its components and non-GAAP adjusted diluted EPS are non-GAAP financial measures that have no standardized meaning prescribed by U.S. GAAP and, therefore, have limits in their usefulness to investors. Because of the non-standardized definitions, non-GAAP adjusted net income and its components and non-GAAP adjusted diluted EPS (unlike U.S. GAAP net income and its components and diluted EPS) may not be comparable to the calculation of similar measures of other companies. Non-GAAP adjusted net income and its components, and non-GAAP adjusted diluted EPS are presented solely to permit investors to more fully understand how management assesses performance. See Notes to Reconciliation of GAAP Reported to Non-GAAP Adjusted Information for notes (1) and (2). ZOETIS INC. NOTES TO RECONCILIATION OF GAAP REPORTED TO NON-GAAP ADJUSTED INFORMATION CERTAIN LINE ITEMS (UNAUDITED) (millions of dollars) (1) Acquisition-related costs include the following: Third Quarter Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Integration costs(a) $ 1 $ 3 $ 6 $ 15 Restructuring charges(b) — (2 ) 2 — Total acquisition-related costs—pre-tax 1 1 8 15 Income taxes(c) — — 1 — Total acquisition-related costs—net of tax $ 1 $ 1 $ 7 $ 15 (a) Integration costs represent external, incremental costs directly related to integrating acquired businesses and primarily include expenditures for consulting and the integration of systems and processes. Included in Restructuring charges and certain acquisition-related costs. (b) Represents exit and employee termination costs, included in Restructuring charges and certain acquisition-related costs. (c) Included in Provision for taxes on income. 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. For the nine months ended September 30, 2020, also includes a tax charge related to a remeasurement of deferred taxes resulting from the integration of acquired businesses. (2) Certain significant items include the following: Third Quarter Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Operational efficiency initiative(a) $ — $ (1 ) $ — $ (18 ) Supply network strategy(b) — 1 2 4 Other restructuring charges and cost-reduction/productivity initiatives(c) 7 4 20 7 Certain asset impairment charges(d) 5 — 19 — Net loss on sale of assets(e) — — 3 — Other(f) — 5 — 11 Total certain significant items—pre-tax 12 9 44 4 Income taxes(g) 3 2 11 — Total certain significant items—net of tax $ 9 $ 7 $ 33 $ 4 (a) For the nine months ended September 30, 2020, represents a net gain resulting from a cash payment received pursuant to an agreement related to the 2016 sale of certain U.S. manufacturing sites, included in Other (income)/deductions-net. (b) Represents product transfer costs, included in Cost of sales, related to cost-reduction and productivity initiatives. (c) For the quarter ended September 30, 2021, primarily represents employee termination costs associated with the realignment of our international operations, included in Restructuring charges and certain acquisition-related costs. For the nine months ended September 30, 2021, primarily represents employee termination costs associated with our international operations and other costs associated with cost-reduction and productivity initiatives, included in Restructuring charges and certain acquisition-related costs. For the quarter and nine months ended September 30, 2020, represents employee termination costs incurred as a result of the CEO transition and other cost-reduction and productivity initiatives, included in Restructuring charges and certain acquisition-related costs. (d) For the quarter ended September 30, 2021, primarily represents asset impairment charges related to a dairy product termination, included in Other (income)/deductions-net. For the nine months ended September 30, 2021, primarily represents asset impairment charges related to the consolidation of manufacturing sites in China, included in Restructuring charges and certain acquisition-related costs, and a certain dairy product termination in Denmark, included in Other (income)/deductions-net. (e) Represents a net loss related to the sale of certain assets of our poultry automation business located in the U.S. and Canada, included in Other (income)/deductions-net. (f) Represents the modification of share-based compensation related to CEO transition costs, included in Selling, general and administrative expenses. (g) Included in Provision for taxes on income. 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. ZOETIS INC. ADJUSTED SELECTED COSTS, EXPENSES AND INCOME(a) (UNAUDITED) (millions of dollars) Third Quarter Ended September 30, % Change 2021 2020 Total Foreign Exchange Operational(b) Adjusted cost of sales $ 583 $ 543 7 % (2) % 9 % as a percent of revenue 29.3 % 30.4 % NA NA NA Adjusted SG&A expenses 496 407 22 % 2 % 20 % Adjusted R&D expenses 132 112 18 % 1 % 17 % Adjusted net income attributable to Zoetis 597 524 14 % 4 % 10 % Nine Months Ended September 30, % Change 2021 2020 Total Foreign Exchange Operational(b) Adjusted cost of sales $ 1,691 $ 1,446 17 % 2 % 15 % as a percent of revenue 29.1 % 29.7 % NA NA NA Adjusted SG&A expenses 1,385 1,148 21 % 2 % 19 % Adjusted R&D expenses 369 329 12 % 1 % 11 % Adjusted net income attributable to Zoetis 1,766 1,406 26 % 3 % 23 % (a) Adjusted cost of sales, adjusted selling, general, and administrative (SG&A) expenses, adjusted research and development (R&D) expenses, and adjusted net income (non-GAAP financial measures) are defined as the corresponding reported U.S. GAAP income statement line items excluding purchase accounting adjustments, acquisition-related costs, and certain significant items. These adjusted income statement line item measures are not, and should not be viewed as, substitutes for the corresponding U.S. GAAP line items. The corresponding GAAP line items and reconciliations of reported to adjusted information are provided in Condensed Consolidated Statements of Income and Reconciliation of GAAP Reported to Non-GAAP Adjusted Information. (b) Operational growth (a non-GAAP financial measure) is defined as growth excluding the impact of foreign exchange. ZOETIS INC. 2021 GUIDANCE Selected Line Items (millions of dollars, except per share amounts) Full Year 2021 Revenue $7,700 to $7,750 Operational growth(a) 14% to 14.5% Adjusted cost of sales as a percentage of revenue(b) Approximately 30% Adjusted SG&A expenses(b) $1,910 to $1,940 Adjusted R&D expenses(b) $500 to $510 Adjusted interest expense and other (income)/deductions-net(b) Approximately $240 Effective tax rate on adjusted income(b) Approximately 18.5% Adjusted diluted EPS(b) $4.62 to $4.67 Adjusted net income(b) $2,200 to $2,225 Operational growth(a)(c) 16.5% to 18% Certain significant items and acquisition-related costs(d) $45 - $50 The guidance reflects foreign exchange rates as of mid-October 2021. Reconciliations of 2021 reported guidance to 2021 adjusted guidance follows: (millions of dollars, except per share amounts) Reported Certain significant items and acquisition-related costs(d) Purchase accounting Adjusted(c) Cost of sales as a percentage of revenue ~ 30.2% ~ (0.1%) ~ (0.1%) ~ 30% SG&A expenses $1,940 to $1,970 ~ $(30) $1,910 to $1,940 R&D expenses $502 to $512 ~ $(2) $500 to $510 Interest expense and other (income)/deductions-net ~ $240 ~ $240 Effective tax rate ~ 18% ~ 0.5% ~ 18.5% Diluted EPS $4.23 to $4.29 $0.09 to $0.10 ~ $0.29 $4.62 to $4.67 Net income attributable to Zoetis $2,010 to $2,040 $45 to $50 ~ $140 $2,200 to $2,225 (a) Operational growth (a non-GAAP financial measure) excludes the impact of foreign exchange. (b) Adjusted net income and its components and adjusted diluted EPS are defined as reported U.S. GAAP net income and its components and reported diluted EPS excluding purchase accounting adjustments, acquisition-related costs and certain significant items. Adjusted cost of sales, adjusted SG&A expenses, adjusted R&D expenses, and adjusted interest expense and other (income)/deductions-net are income statement line items prepared on the same basis, and, therefore, components of the overall adjusted income measure. Despite the importance of these measures to management in goal setting and performance measurement, adjusted net income and its components and adjusted diluted EPS are non-GAAP financial measures that have no standardized meaning prescribed by U.S. GAAP and, therefore, have limits in their usefulness to investors. Because of the non-standardized definitions, adjusted net income and its components and adjusted diluted EPS (unlike U.S. GAAP net income and its components and diluted EPS) may not be comparable to the calculation of similar measures of other companies. Adjusted net income and its components and adjusted diluted EPS are presented solely to permit investors to more fully understand how management assesses performance. Adjusted net income and its components and adjusted diluted EPS are not, and should not be viewed as, substitutes for U.S. GAAP net income and its components and diluted EPS. (c) We do not provide a reconciliation of forward-looking non-GAAP adjusted net income operational growth to the most directly comparable U.S. GAAP reported financial measure because we are unable to calculate with reasonable certainty the foreign exchange impact of unusual gains and losses, acquisition-related expenses, potential future asset impairments and other certain significant items, without unreasonable effort. The foreign exchange impacts of these items are uncertain, depend on various factors, and could have a material impact on U.S. GAAP reported results for the guidance period. (d) Primarily includes certain nonrecurring costs related to acquisitions and other charges. ZOETIS INC. CONSOLIDATED REVENUE BY SEGMENT(a) AND SPECIES (UNAUDITED) (millions of dollars) Third Quarter Ended September 30, % Change 2021 2020 Total Foreign Exchange Operational(b) Revenue: Companion Animal $ 1,202 $ 995 21 % 2 % 19 % Livestock 767 768 — % 2 % (2) % Contract Manufacturing & Human Health 21 23 (9) % — % (9) % Total Revenue $ 1,990 $ 1,786 11 % 1 % 10 % U.S. Companion Animal $ 775 $ 664 17 % — % 17 % Livestock 290 332 (13) % — % (13) % Total U.S. Revenue $ 1,065 $ 996 7 % — % 7 % International Companion Animal $ 427 $ 331 29 % 5 % 24 % Livestock 477 436 9 % 2 % 7 % Total International Revenue $ 904 $ 767 18 % 4 % 14 % Companion Animal: Dogs and Cats $ 1,142 $ 947 21 % 2 % 19 % Horses 60 48 25 % 5 % 20 % Total Companion Animal Revenue $ 1,202 $ 995 21 % 2 % 19 % Livestock: Cattle $ 403 $ 417 (3) % 2 % (5) % Swine 153 151 1 % 1 % — % Poultry 124 129 (4) % 1 % (5) % Fish 56 45 24 % 3 % 21 % Sheep and other 31 26 19 % 3 % 16 % Total Livestock Revenue $ 767 $ 768 — % 2 % (2) % (a) For a description of each segment, see Zoetis' most recent Annual Report on Form 10-K. (b) Operational revenue growth (a non-GAAP financial measure) is defined as revenue growth excluding the impact of foreign exchange. ZOETIS INC. CONSOLIDATED REVENUE BY SEGMENT(a) AND SPECIES (UNAUDITED) (millions of dollars) Nine Months Ended September 30, % Change 2021 2020 Total Foreign Exchange Operational(b) Revenue: Companion Animal $ 3,507 $ 2,674 31 % 2 % 29 % Livestock 2,245 2,134 5 % 2 % 3 % Contract Manufacturing & Human Health 57 60 (5) % 1 % (6) % Total Revenue $ 5,809 $ 4,868 19 % 2 % 17 % U.S. Companion Animal $ 2,227 $ 1,757 27 % — % 27 % Livestock 775 848 (9) % — % (9) % Total U.S. Revenue $ 3,002 $ 2,605 15 % — % 15 % International Companion Animal $ 1,280 $ 917 40 % 7 % 33 % Livestock 1,470 1,286 14 % 3 % 11 % Total International Revenue $ 2,750 $ 2,203 25 % 5 % 20 % Companion Animal: Dogs and Cats $ 3,319 $ 2,524 31 % 2 % 29 % Horses 188 150 25 % 3 % 22 % Total Companion Animal Revenue $ 3,507 $ 2,674 31 % 2 % 29 % Livestock: Cattle $ 1,144 $ 1,107 3 % 1 % 2 % Swine 504 454 11 % 3 % 8 % Poultry 389 412 (6) % 1 % (7) % Fish 132 101 31 % 4 % 27 % Sheep and other 76 60 27 % 10 % 17 % Total Livestock Revenue $ 2,245 $ 2,134 5 % 2 % 3 % (a) For a description of each segment, see Zoetis' most recent Annual Report on Form 10-K. (b) Operational revenue growth (a non-GAAP financial measure) is defined as revenue growth excluding the impact of foreign exchange. ZOETIS INC. CONSOLIDATED REVENUE BY KEY INTERNATIONAL MARKETS (UNAUDITED) (millions of dollars) Third Quarter Ended September 30, % Change 2021 2020 Total Foreign Exchange Operational(a) Total International $ 903.4 $ 766.9 18 % 4 % 14 % Australia 69.8 59.7 17 % 7 % 10 % Brazil 78.1 62.2 26 % 4 % 22 % Canada 55.3 49.7 11 % 8 % 3 % Chile 32.6 23.4 39 % 2 % 37 % China 71.5 65.6 9 % 8 % 1 % France 30.7 29.7 3 % 3 % — % Germany 47.4 38.5 23 % 4 % 19 % Italy 30.4 27.1 12 % 4 % 8 % Japan 43.3 39.0 11 % (3) % 14 % Mexico 31.3 25.9 21 % 12 % 9 % Spain 32.3 30.7 5 % 3 % 2 % United Kingdom 61.1 44.8 36 % 10 % 26 % Other developed markets 126.4 105.3 20 % 5 % 15 % Other emerging markets 193.2 165.3 17 % (3) % 20 % Nine Months Ended September 30, % Change 2021 2020 Total Foreign Exchange Operational(a) Total International $ 2,749.6 $ 2,202.6 25 % 5 % 20 % Australia 196.0 153.8 27 % 14 % 13 % Brazil 227.4 181.3 25 % (12) % 37 % Canada 168.5 143.7 17 % 9 % 8 % Chile 100.2 71.8 40 % 5 % 35 % China 288.9 197.7 46 % 11 % 35 % France 97.7 82.4 19 % 9 % 10 % Germany 135.0 112.1 20 % 8 % 12 % Italy 87.3 62.7 39 % 10 % 29 % Japan 139.9 133.3 5 % — % 5 % Mexico 97.8 83.6 17 % 7 % 10 % Spain 96.6 82.7 17 % 8 % 9 % United Kingdom 173.2 125.4 38 % 10 % 28 % Other developed markets 349.9 282.3 24 % 9 % 15 % Other emerging markets 591.2 489.8 21 % (3) % 24 % (a) Operational revenue growth (a non-GAAP financial measure) is defined as revenue growth excluding the impact of foreign exchange. ZOETIS INC. SEGMENT(a) EARNINGS (UNAUDITED) (millions of dollars) Third Quarter Ended September 30, % Change 2021 2020 Total Foreign Exchange Operational(b) U.S.: Revenue $ 1,065 $ 996 7 % — % 7 % Cost of Sales 199 194 3 % — % 3 % Gross Profit 866 802 8 % — % 8 % Gross Margin 81.3 % 80.5 % Operating Expenses 183 157 17 % — % 17 % Other (income)/deductions-net — — * * * U.S. Earnings $ 683 $ 645 6 % — % 6 % International: Revenue $ 904 $ 767 18 % 4 % 14 % Cost of Sales 273 245 11 % (1) % 12 % Gross Profit 631 522 21 % 5 % 16 % Gross Margin 69.8 % 68.1 % Operating Expenses 152 122 25 % 4 % 21 % Other (income)/deductions-net (4 ) — * * * International Earnings $ 483 $ 400 21 % 6 % 15 % Total Reportable Segments $ 1,166 $ 1,045 12 % 3 % 9 % Other business activities(c) (106 ) (87 ) 22 % Reconciling Items: Corporate(d) (252 ) (222 ) 14 % Purchase accounting adjustments(e) (45 ) (48 ) (6) % Acquisition-related costs(f) (1 ) (1 ) — % Certain significant items(g) (12 ) (9 ) 33 % Other unallocated(h) (91 ) (81 ) 12 % Total Earnings(i) $ 659 $ 597 10 % (a) For a description of each segment, see Zoetis' most recent Annual Report on Form 10-K. (b) Operational growth (a non-GAAP financial measure) is defined as growth excluding the impact of foreign exchange. (c) Other business activities reflect the research and development costs managed by our Research and Development organization as well as our contract manufacturing business and human health business. (d) Corporate includes, among other things, certain costs associated with information technology, administration expenses, interest expense, certain compensation costs, certain procurement costs, and other costs not charged to our operating segments. (e) Purchase accounting adjustments include certain charges related to the amortization of fair value adjustments to inventory, intangible assets and property, plant and equipment not charged to our operating segments. (f) Acquisition-related costs include costs associated with acquiring and integrating newly acquired businesses, such as transaction costs and integration costs. (g) Certain significant items includes substantive, unusual items that, either as a result of their nature or size, would not be expected to occur as part of our normal business on a regular basis. Such items primarily include restructuring charges and implementation costs associated with a shift in our organizational structure and cost-reduction/productivity initiatives that are not associated with an acquisition, certain asset impairment charges, costs associated with the operational efficiency initiative and supply network strategy, and the impact of divestiture-related gains and losses. (h) Includes overhead expenses associated with our manufacturing and supply operations not directly attributable to an operating segment, as well as certain procurement costs. (i) Defined as income before provision for taxes on income. * Calculation not meaningful. ZOETIS INC. SEGMENT(a) EARNINGS (UNAUDITED) (millions of dollars) Nine Months Ended September 30, % Change 2021 2020 Total Foreign Exchange Operational(b) U.S.: Revenue $ 3,002 $ 2,605 15 % — % 15 % Cost of Sales 575 515 12 % — % 12 % Gross Profit 2,427 2,090 16 % — % 16 % Gross Margin 80.8 % 80.2 % Operating Expenses 484 418 16 % — % 16 % Other (income)/deductions-net 2 4 (50) % — % (50) % U.S. Earnings $ 1,941 $ 1,668 16 % — % 16 % International: Revenue $ 2,750 $ 2,203 25 % 5 % 20 % Cost of Sales 833 697 20 % 2 % 18 % Gross Profit 1,917 1,506 27 % 5 % 22 % Gross Margin 69.7 % 68.4 % Operating Expenses 429 364 18 % 5 % 13 % Other (income)/deductions-net (4 ) 1 * * * International Earnings $ 1,492 $ 1,141 31 % 6 % 25 % Total Reportable Segments $ 3,433 $ 2,809 22 % 2 % 20 % Other business activities(c) (301 ) (264 ) 14 % Reconciling Items: Corporate(d) (744 ) (603 ) 23 % Purchase accounting adjustments(e) (133 ) (155 ) (14) % Acquisition-related costs(f) (8 ) (15 ) (47) % Certain significant items(g) (44 ) (4 ) * Other unallocated(h) (221 ) (192 ) 15 % Total Earnings(i) $ 1,982 $ 1,576 26 % (a) For a description of each segment, see Zoetis' most recent Annual Report on Form 10-K. (b) Operational growth (a non-GAAP financial measure) is defined as growth excluding the impact of foreign exchange. (c) Other business activities reflect the research and development costs managed by our Research and Development organization as well as our contract manufacturing business and human health business. (d) Corporate includes, among other things, certain costs associated with information technology, administration expenses, interest expense, certain compensation costs, certain procurement costs, and other costs not charged to our operating segments. (e) Purchase accounting adjustments include certain charges related to the amortization of fair value adjustments to inventory, intangible assets and property, plant and equipment not charged to our operating segments. (f) Acquisition-related costs include costs associated with acquiring and integrating newly acquired businesses, such as transaction costs and integration costs. (g) Certain significant items includes substantive, unusual items that, either as a result of their nature or size, would not be expected to occur as part of our normal business on a regular basis. Such items primarily include certain asset impairment charges, restructuring charges and implementation costs associated with a shift in our organizational structure and cost-reduction/productivity initiatives that are not associated with an acquisition, costs associated with the operational efficiency initiative and supply network strategy, and the impact of divestiture-related gains and losses. (h) Includes overhead expenses associated with our manufacturing and supply operations not directly attributable to an operating segment, as well as certain procurement costs. (i) Defined as income before provision for taxes on income. * Calculation not meaningful.
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