Zoetis ZTS · USD

19. Segment InformationA. Segment InformationWe manage our operations through two geographic regions. Each operating segment has responsibility for its commercial activities. Within each of these operating segments, we offer a diversified product portfolio, including parasiticides, vaccines, dermatology, anti-infectives, pain and sedation, other pharmaceutical and animal health diagnostics, for both companion animal and livestock customers. On October 31, 2024, we completed the divestiture of our medicated feed additive product portfolio, certain water soluble products and related assets, and, as a result, our major product categories no longer include the category of medicated feed additives. See Note 5. Acquisitions and Divestitures.Operating SegmentsOur operating segments are the U.S. and International. The chief operating decision maker (CODM), our Chief Executive Officer and Chief Financial Officer, uses the information provided to compare segment performance with segment resource requests and allocates human and capital resources based on segment’s actual results and expected future results.Other Costs and Business ActivitiesCertain costs are not allocated to our operating segment results, such as costs associated with the following: • Other business activities, includes our CSS contract manufacturing results, our human health 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 commercial segment. • Corporate, includes enabling functions such as information technology, facilities, legal, finance, human resources, business development, certain diagnostic costs and communications, among others. These costs also include certain compensation costs, certain procurement costs and other miscellaneous operating expenses not charged to our operating segments, as well as interest income and expense.

4. Revenue A. Revenue from Product Sales We offer a diversified portfolio of products which allows us to capitalize on local and regional customer needs. Generally, our products are promoted to veterinarians and livestock producers by our sales organization which includes sales representatives and technical and veterinary operations specialists, and then sold directly by us or through distributors, retailers or e-commerce outlets. The depth of our product portfolio enables us to address the varying needs of customers in different species and geographies. Many of our top-selling product lines are distributed across both of our operating segments, leveraging our R&D operations and manufacturing and supply chain network.Over the course of our history, we have focused on developing a diverse portfolio of animal health products, including medicines, vaccines and diagnostics, complemented by biodevices, genetic tests and a range of services. We refer to all different brands of a particular product, or its dosage forms for all species, as a product line. We have approximately 300 comprehensive product lines, including products for both companion animals and livestock within each of our major product categories.On October 31, 2024, we completed the divestiture of our medicated feed additive product portfolio, certain water soluble products and related assets, and, as a result, our major product categories no longer include the category of medicated feed additives. See Note 5. Acquisitions and Divestitures.

18. Commitments and ContingenciesWe and certain of our subsidiaries are subject to numerous contingencies arising in the ordinary course of business. For a discussion of our tax contingencies, see Note 8. Tax Matters.A. Legal ProceedingsOur non-tax contingencies include, among others, the following: • Product liability and other product-related litigation, which can include injury, consumer, off-label promotion, antitrust and breach of contract claims. • Commercial and other matters, which can include product-pricing claims and environmental claims and proceedings. • Patent litigation, which typically involves challenges to the coverage and/or validity of our patents or those of third parties on various products or processes. • Government investigations, which can involve regulation by national, state and local government agencies in the U.S. and in other countries. Certain of these contingencies could result in losses, including damages, fines and/or civil penalties, and/or criminal charges, which could be substantial. We believe that we have strong defenses in these types of matters, but litigation is inherently unpredictable and excessive verdicts do occur. We do not believe that any of these matters will have a material adverse effect on our financial position. However, we could incur judgments, enter into settlements or revise our expectations regarding the outcome of certain matters, and such developments could have a material adverse effect on our results of operations or cash flows in the period in which the amounts are paid.We have accrued for losses that are both probable and reasonably estimable. Substantially all of these contingencies are subject to significant uncertainties and, therefore, determining the likelihood of a loss and/or the measurement of any loss can be complex. Consequently, we are unable to estimate the range of reasonably possible loss in excess of amounts accrued. Our assessments are based on estimates and assumptions that have been deemed reasonable by management, but the assessment process relies on estimates and assumptions that may prove to be incomplete or inaccurate, and unanticipated events and circumstances may occur that might cause us to change those estimates and assumptions. Amounts recorded for legal and environmental contingencies can result from a complex series of judgments about future events and uncertainties and can rely on estimates and assumptions.

15. Share-based Payments The Zoetis 2013 Equity and Incentive Plan, Amended and Restated as of May 19, 2022 (Equity Plan), provides long-term incentives to our employees and non-employee directors. The principal types of share-based awards available under the Equity Plan may include, but are not limited to, stock options, restricted stock and restricted stock units (RSUs), deferred stock units (DSUs), performance-vesting restricted stock units (PSUs), and other equity-based or cash-based awards. Thirty million shares of stock were approved and registered with the Securities and Exchange Commission for grants to participants under the Equity Plan. The shares reserved may be used for any type of award under the Equity Plan. At December 31, 2025, the aggregate number of remaining shares available for future grant under the Equity Plan was approximately 12 million shares.A. Share-Based Compensation ExpenseThe components of share-based compensation expense follow: Year Ended December 31,(MILLIONS OF DOLLARS)202520242023Stock options / stock appreciation rights$12 $11 $8 RSUs / DSUs52 42 37 PSUs19 21 15 Share-based compensation expense—total(a)$83 $74 $60 Tax benefit for share-based compensation expense(10)(9)(8)Share-based compensation expense, net of tax$73 $65 $52 (a) For each of the years ended December 31, 2025, 2024 and 2023, we capitalized up to $1 million of share-based compensation expense to inventory.B. Stock OptionsStock options represent the right to purchase shares of our common stock within a specified period of time at a specified price. The exercise price for a stock option will be not less than 100% of the fair market value of the common stock as of the NYSE market close on the date of grant. Stock options granted may include those intended to be “incentive stock options” within the meaning of Section 422 of the U.S. Internal Revenue Code of 1986 (the Code). Stock options are accounted for using a fair-value-based method at the date of grant in the Consolidated Statements of Income. The values determined through this fair-value-based method generally are amortized on a straight-line basis over the vesting term. Eligible employees may receive Zoetis stock option awards.

10. Leases We have facilities and vehicles under various non-cancellable operating leases with third parties and an equipment finance lease with a third party. The operating leases generally have remaining terms ranging from 1 to 14 years, inclusive of renewal options that are reasonably certain of exercise. The finance lease has a remaining term of 28 years.Supplemental information for our lease portfolio is as follows:As of December 31,(MILLIONS OF DOLLARS, EXCEPT LEASE TERM AND DISCOUNT RATE AMOUNTS)20252024Supplemental Balance Sheet information:Operating lease right-of-use assets$288 $219 Finance lease right of use assets (in Other noncurrent assets)9 9 Total lease assets$297 $228 Lease liabilities:Operating lease liabilities - current (in Other current liabilities)$52 $51 Finance lease liabilities - current (in Other current liabilities)1 1 Operating lease liabilities - noncurrent196 174 Finance lease liabilities - noncurrent (in Other noncurrent liabilities)6 7 Total lease liabilities$255 $233 Weighted-average remaining lease term—operating leases (years)6.876.57Weighted-average remaining lease term—finance leases (years)27.9029.19Weighted-average discount rate—operating leases3.91 %3.65 %Weighted-average discount rate—finance leases4.97 %4.

5. Acquisitions and DivestituresA. AcquisitionsDuring 2025, we acquired Veterinary Pathology Group (VPG), a leading veterinary diagnostic laboratory group with multiple locations across the U.K. and Ireland. This transaction did not have a material impact on our consolidated financial statements. During 2023, we acquired 100% of the issued share capital of PetMedix Ltd (PetMedix), a privately held research and development stage animal health biopharmaceutical company based in the U.K., which develops antibody-based therapeutics for companion animals. The purchase price included upfront cash consideration of $111 million, excluding $19 million of cash acquired, $5 million in cash withheld for customary post-closing adjustments, and contingent consideration up to $100 million based on the achievement of certain milestones. There are additional contingent payments to be made to the seller upon receipt of payments from a third party related to a preexisting collaboration arrangement between PetMedix and the third party. The initial fair value assessment of the contingent consideration and additional contingent payments is not material and the transaction did not have a material impact on our consolidated financial statements. We also completed the acquisition of adivo GmbH (adivo), a privately held research and development stage animal health biopharmaceutical company based in Germany. The transaction did not have a material impact on our consolidated financial statements. B. DivestituresOn October 31, 2024, we completed the divestiture of our medicated feed additive product portfolio, certain water soluble products and related assets to Phibro Animal Health for a net purchase price of $299 million. During 2024, we received $303 million in sales proceeds, less cash sold of $11 million, resulting in $292 million net sales proceeds, and recorded a net pre-tax loss of $25 million within Other (income)/deductions—net, subject to final post-closing adjustments. During the 2025, we paid $4 million, net of proceeds received, and recognized an additional loss of $3 million within Other (income)/deductions—net associated with the final post-closing adjustments.During 2023, we received net cash proceeds of $93 million ($99 million sales proceeds, net of cash sold of $6 million) for the sale of a majority interest in our pet insurance business, Pumpkin Insurance Services.

Management’s Role in Risk OversightOur information security team includes our Executive Vice President, Chief Digital & Technology Officer and our Chief Information Security Officer. Our Executive Vice President, Chief Digital & Technology Officer has over 20 years of information technology experience. Prior to Zoetis, he was the VP, Information Technology at Biogen, overseeing all aspects of Infrastructure, IT Operations, and Enterprise Architecture globally and held various corporate leadership roles at Eli Lilly and Company, including Head of IT Infrastructure and Enabling Functions. He holds a bachelor's degree in information systems and a master of business administration degree. Our Chief Information Security Officer, has over 20 years of experience in Information Security, with a specialized focus on Life Sciences and expertise in aligning cybersecurity strategies with enterprise objectives. He holds a bachelor's degree in electronic commerce and a master's degree in information systems.We have established a cybersecurity governance program with clear roles for the executive management team as well as oversight by the Board of Directors and the Audit Committee. The Zoetis information security team provides regular cyber threat intelligence briefings to management and provides updates to our senior executives on the status of the Company’s security measures and our efforts to identify and mitigate risks from cybersecurity threats. The Zoetis information security team also works closely with the Zoetis Legal team, including the Chief Compliance Officer, to further enhance incident response procedures. For example, we have a corporate crisis management plan in place to govern our response to corporate crises, which could include cyber incidents, and we conduct periodic simulated programs to ensure readiness. This plan also includes a standard framework for categorization of incidents based on risk level and severity, and requires escalation to Zoetis senior management and/or the Audit Committee of the Board of Directors if certain severity levels are met.Role of the Board of Directors and CommitteesThe Board of Directors maintains an active role in the oversight of material risks. The Board of Directors utilizes its various Committees to oversee certain key risks, and has delegated responsibility to the Audit Committee for oversight of the Company’s enterprise risk management process and information security risk management program.

8. Tax Matters A. Taxes on Income On July 4, 2025, the One Big Beautiful Bill Act (OBBBA) was enacted into law in the U.S. The OBBBA includes significant provisions, such as the permanent extension of certain tax provisions that were originally enacted in the 2017 Tax Cuts and Jobs Act and were set to expire on December 31, 2025, modifications to certain international tax provisions and the restoration of tax treatment for certain business provisions, including 100% bonus depreciation for certain qualified property, domestic research and experimental cost expensing, and the business interest expense limitation. The new legislation has multiple effective dates, with certain provisions effective in 2025 and others implemented through 2027. We do not currently expect OBBBA to have a material impact on our financial results, including the effect on our effective tax rate and deferred tax assets and liabilities in 2025 and future periods. The income tax provision in the Consolidated Statements of Income includes tax costs and benefits, such as uncertain tax positions, repatriation decisions and audit settlements, among others.The components of Income before provision for taxes on income follow:Year Ended December 31,(MILLIONS OF DOLLARS)202520242023United States$1,877 $1,867 $1,636 International1,483 1,266 1,300 Income before provision for taxes on income$3,360 $3,133 $2,936 The components of Provision for taxes on income based on the location of the taxing authorities follow:Year Ended December 31,(MILLIONS OF DOLLARS)202520242023United States:Current income taxes:Federal$223 $645 $341 State and local56 65 35 Deferred income taxes:Federal116 (297)(40)State and local14 (42)25 Total U.S. tax provision409 371 361 International:Current income taxes327 265 281 Deferred income taxes(49)1 (46)Total international tax provision278 266 235 Provision for taxes on income$687 $637 $596 Tax Rate Reconciliation The reconciliation of provision for taxes on income computed at the U.S. statutory income tax rate to our effective tax rate by amount and percent follows:Year Ended December 31, 2025(MILLIONS OF DOLLARS)Total%U.S. statutory income tax rate$706 21.0 %United States: State and local taxes, net of federal benefits(a)551.6 % Effect of cross-border tax laws: GILTI1203.6 % Foreign exchange gains/(losses)(57)(1.7)% Other(11)(0.3)% Tax credits: Foreign tax credits(112)(3.3)% Other(28)(0.8)% Changes in valuation allowances49 1.5 % Nontaxable or nondeductible items: Other11 0.