U.S. companion animal revenue increased by $96 million, and International companion animal operational revenue grew by $44 million for the three months ended June 30, 2025. This growth was primarily fueled by increased sales of key dermatology products and the Simparica® franchise, highlighting the success of the company's focus on this high-growth sector.

The divestiture of the medicated feed additive product portfolio on October 31, 2024, led to a 4% volume decrease in total revenue growth for both the three and six months ended June 30, 2025. While impacting livestock revenue negatively, this strategic move contributed to the overall improvement in gross margin percentage.

Research and development expenses remained relatively stable at $172 million for the quarter and $329 million for the six months ended June 30, 2025, representing 7% of revenue. This sustained investment is aimed at supporting innovation and portfolio progression, ensuring future product development and market relevance.

Cost of sales as a percentage of revenue decreased to 26.4% for the quarter and 27.2% for the six months ended June 30, 2025, down from 28.3% and 28.8% respectively in the prior year. This improvement is attributed to the favorable impact of the MFA divestiture, foreign exchange, and price increases, demonstrating effective cost control.

Selling, general and administrative expenses increased by 6% ($36 million) for the quarter and 5% ($52 million) for the six months ended June 30, 2025. This rise was primarily due to higher advertising and promotion expenses, increased compensation-related costs, and other general and administrative costs, indicating strategic investments in sales and marketing infrastructure.

Restructuring charges and certain acquisition and divestiture-related costs decreased by 29% to $30 million for the quarter and 35% to $30 million for the six months ended June 30, 2025. These costs primarily relate to asset impairment and employee termination from a transition to external innovation and site closures, suggesting ongoing efforts to optimize the operational footprint.

The company is currently under IRS income tax audit for 2017 and 2018, with a proposed additional tax liability of approximately $450 million. While management disagrees with the IRS's position, the outcome of tax audits cannot be predicted with certainty, and an unfavorable outcome could materially affect financial statements.

Foreign exchange rates unfavorably impacted total revenue growth by approximately 1% for the quarter and 2% for the six months ended June 30, 2025, primarily due to the Brazilian real, Mexican peso, Argentinian peso, and Turkish lira. This highlights the ongoing exposure to currency fluctuations given that 41% of 6M 2025 revenue was foreign currency denominated.

The business is subject to risks related to new tariffs and trade protection measures implemented by the U.S. and other countries starting in early 2025. While the full impact is uncertain, such actions could negatively affect demand and increase product costs, requiring active monitoring and mitigation strategies.

Zoetis is described as a 'global leader in the animal health industry' and a 'market leader in nearly all of the major regions' where it operates. This strong market position is supported by direct marketing in approximately 45 countries and sales in over 100, indicating a robust competitive footprint.

The company's diversified portfolio of approximately 300 comprehensive product lines across eight core species and seven major product categories (e.g., parasiticides, vaccines, dermatology) allows it to capitalize on diverse customer needs and market trends, providing stability to its overall business.

Price growth contributed approximately 4% to the operational revenue increase for both the three and six months ended June 30, 2025. This ability to implement price increases suggests a strong competitive position and demand for its products in the market.

Cost of sales as a percentage of revenue decreased to 26.4% for the quarter and 27.2% for the six months ended June 30, 2025, compared to 28.3% and 28.8% in the prior year periods. This improvement was primarily due to the favorable impact of the MFA divestiture, foreign exchange, and price increases, indicating enhanced operational efficiency.

Inventories increased from $2,306 million as of December 31, 2024, to $2,439 million as of June 30, 2025. This build-up is intended to support production for the forecasted demand of certain products, which is a proactive measure to ensure supply chain readiness.

Selling, general and administrative expenses increased by $36 million (6%) for the quarter and $52 million (5%) for the six months ended June 30, 2025. This was primarily driven by higher advertising and promotion expenses, compensation-related costs, and other administrative costs, reflecting ongoing investments in the operational infrastructure.

Research and development expenses remained stable at $172 million for the quarter and $329 million for the six months ended June 30, 2025, representing 7% of revenue. This sustained investment supports innovation and portfolio progression, which is crucial for delivering new products and evolving existing lines.

The company is investing in a multi-year business process transformation program, including the implementation of a new enterprise resource planning (ERP) system and related digital technology solutions. This comprehensive program is a significant, global effort aimed at transforming how the company works and contributing to strategic priorities.

Zoetis continues to focus on developing a diverse portfolio of animal health products, including medicines, vaccines, and diagnostics, complemented by biodevices, genetic tests, and services. This broad approach to innovation ensures a wide range of solutions for both companion animals and livestock.

The Board authorized a multi-year share repurchase program of up to $6 billion in August 2024, with $4.9 billion remaining as of June 30, 2025. The company repurchased 4.8 million shares for $781 million during the first six months of 2025, demonstrating management's confidence in the company's valuation and future cash flow generation.

Capital expenditures increased to $327 million for the six months ended June 30, 2025, up from $272 million in the prior year period. This increase indicates investments in property, plant, and equipment to support future growth and operational capabilities.

Dividends declared per common share increased to $0.500 for the three months ended June 30, 2025, from $0.432 in the prior year period. Total cash dividends paid were $447 million for the six months ended June 30, 2025, reflecting a commitment to returning value to shareholders.

The company is involved in a legal proceeding in Ulianopolis, Brazil, concerning alleged environmental impacts from waste at an incineration facility. While management believes it has strong defenses, the lawsuit involves potential cleanup costs and compensatory damages, highlighting environmental risk exposure.

The Board approved an amended Executive Severance Plan on July 31, 2025, increasing severance benefits for named executive officers under qualifying termination scenarios. This update to governance practices aims to align executive incentives and retention with company performance.

New regulations like the EU's ESRS/CSRD and California's Climate Corporate Data Accountability Act are imposing broad climate-related disclosure obligations. Additionally, governmental authorities are increasingly focused on preventing environmental contamination from PFAS, which could result in additional costs for compliance and investments.

The company acknowledges risks related to the 'decline in global macroeconomic conditions, economic weakness in China and inflation,' as well as 'geopolitical tensions with and economic uncertainty in certain markets.' These factors introduce variability and uncertainty into quarterly financial results.

Growth in the companion animal medicines, vaccines, and diagnostics sector is driven by 'economic development, related increases in disposable income and increases in pet ownership and spending on pet care.' This trend provides a favorable market backdrop for Zoetis's largest and growing segment.

The 'One Big Beautiful Bill Act' (OBBBA) enacted on July 4, 2025, includes significant tax provisions, such as the permanent extension of certain 2017 Tax Cuts and Jobs Act provisions and modifications to international tax. The company is currently evaluating the impact on its financial statements, indicating a dynamic regulatory environment.