Item 8. Financial Statements and Supplementary Data.

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Item 8. Financial Statements and Supplementary Data.

INDEX TO FINANCIAL STATEMENTS

Page
Audited Consolidated Financial Statements of Zoetis Inc. and Subsidiaries:
Reports of Independent Registered Public Accounting Firm60
Consolidated Statements of Income for the Years Ended December 31, 2019, 2018 and 201763
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2019, 2018 and 201764
Consolidated Balance Sheets as of December 31, 2019 and 201865
Consolidated Statements of Equity for the Years Ended December 31, 2019, 2018 and 201766
Consolidated Statements of Cash Flows for the Years Ended December 31, 2019, 2018 and 201767
Notes to Consolidated Financial Statements68
Schedule II—Valuation and Qualifying Accounts102

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Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors

Zoetis Inc.:

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Zoetis Inc. and subsidiaries (the “Company”) as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the years in the three‑year period ended December 31, 2019, and the related notes and financial statement schedule II - Valuation and Qualifying Accounts (collectively, the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 13, 2020 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Evaluation of gross unrecognized tax benefits

As discussed in Notes 3 and 8D in the consolidated financial statements, the Company’s tax positions are subject to examination by local taxing authorities in each respective tax jurisdiction, and the resolution of such examinations may span multiple years. Since tax law is complex and often subject to varied interpretations and judgments, it is uncertain whether some of the Company’s tax positions will be sustained upon examination. The Company accounts for income tax contingencies using a benefit recognition model. If a tax position is more likely than not (more than a 50% likelihood) to be sustained upon examination, based solely on the technical merits of the position, a benefit is recognized. As of December 31, 2019, the Company has recorded gross unrecognized tax benefits of $182 million.

We identified the evaluation of gross unrecognized tax benefits as a critical audit matter. Complex auditor judgment was required to assess the valuation of a tax position, which includes interpretation of relevant tax law, identification of relevant tax elements, the estimate of the more likely than not assessment of tax positions being sustained under examination and the estimate of the amount of the gross unrecognized tax benefit.

The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s unrecognized tax benefit process, including (a) interpretation of relevant tax law, (b) evaluation of which of the Company’s tax positions may not be sustained upon examination, and (c) estimation of the gross unrecognized tax benefits. We involved tax professionals, with specialized skills and knowledge, who assisted in:

- Evaluating the Company’s interpretation of relevant tax laws and the potential impact on the unrecognized tax benefits by developing an independent assessment of the tax position’s more likely than not to be sustained under examination determination

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and the estimate of the amount of the gross unrecognized tax benefit, if any, based on our understanding and interpretation of tax laws,

- Reading and evaluating the tax opinion, and

- Assessing the Company’s transfer pricing policies for compliance with applicable laws and regulations.

Assessing deductions from revenue related to the rebates accrual

As discussed in Note 3 to the consolidated financial statements, the Company records an accrual for estimated rebates as a deduction to gross revenue when sales are recognized. Included in the rebates accrual are estimated revenue deductions for future payments to distributors, clinics, veterinarians and pet owners under various programs offered by the Company. The volume of varied rebate programs offered, each with varying terms and conditions covering how the rebate is measured and earned, requires the Company to estimate the accrual using a number of inputs from multiple sources. Accruals for deductions from revenue are recorded as either a reduction in accounts receivable or within accrued expenses, depending on the nature of the contract and method of expected payment. Amounts recorded as a reduction in accounts receivable as of December 31, 2019 are approximately $169 million and accruals for deductions from revenue included in Accrued expenses are approximately $190 million. These amounts include rebate accruals for both the U.S. and international segments.

We identified assessing deductions from revenue related to the rebates accrual for the U.S. segment as a critical audit matter. Because of the variety of programs offered by the Company, in the U.S., the size of the U.S. market, and the length of time between when a sale is made and when the related rebate is paid by the Company significant auditor judgment is required in assessing the estimate of the required rebates accrual. In particular, the identification of which revenue transactions will be subject to a rebate and the relevance and reliability of information used to estimate an individual rebate programs’ accrual required significant auditor judgement.

The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s rebate accrual process for the U.S. segment, including controls related to the identification of revenue transactions subject to a rebate and the relevance and reliability of information used in the estimated rebates accrual. We identified and considered the relevance, reliability and sufficiency of sources of data used by the Company in developing the estimate. We estimated the rebates accrual for a sample of U.S. programs, using a combination of Company internal data, historical information, executed contracts, and third-party data and compared our estimate to the amount recorded by the Company. We evaluated the historical accuracy of the Company’s U.S. rebates accrual by comparing the previously recorded accrual as of December 31, 2018 to the actual amount that ultimately was paid by the Company during 2019.

/s/ KPMG LLP

We have served as the Company’s auditor since 2011.

Short Hills, New Jersey

February 13, 2020

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Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors

Zoetis Inc.:

Opinion on Internal Control Over Financial Reporting

We have audited Zoetis Inc. and subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the years in the three-year period ended December 31, 2019, and the related notes and financial statement schedule II - Valuation and Qualifying Accounts (collectively, the “consolidated financial statements”), and our report dated February 13, 2020 expressed an unqualified opinion on those consolidated financial statements.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ KPMG LLP

Short Hills, New Jersey

February 13, 2020

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ZOETIS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Year Ended December 31,
(MILLIONS OF DOLLARS AND SHARES, EXCEPT PER SHARE DATA)201920182017
Revenue$6,260$5,825$5,307
Costs and expenses:
Cost of sales(a)1,9921,9111,775
Selling, general and administrative expenses(a)1,6381,4841,334
Research and development expenses(a)457432382
Amortization of intangible assets15511791
Restructuring charges and certain acquisition-related costs516819
Interest expense, net of capitalized interest223206175
Other (income)/deductions––net(57)(83)6
Income before provision for taxes on income1,8011,6901,525
Provision for taxes on income301266663
Net income before allocation to noncontrolling interests1,5001,424862
Less: Net loss attributable to noncontrolling interests—(4)(2)
Net income attributable to Zoetis$1,500$1,428$864
Earnings per share attributable to Zoetis Inc. stockholders:
Basic$3.14$2.96$1.76
Diluted$3.11$2.93$1.75
Weighted-average common shares outstanding:
Basic478.128483.063489.918
Diluted481.787486.898493.161
Dividends declared per common share$0.692$0.542$0.441
(a)Exclusive of amortization of intangible assets, except as disclosed in Note 3. Significant Accounting Policies*—Amortization of Intangible Assets, Depreciation and Certain Long-Lived Assets.*

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ZOETIS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Year Ended December 31,
(MILLIONS OF DOLLARS)201920182017
Net income before allocation to noncontrolling interests$1,500$1,424$862
Other comprehensive (loss)/income, net of tax and reclassification adjustments:
Unrealized gain/(loss) on derivatives for cash flow hedges, net(a)4(1)(11)
Unrealized gain on derivatives for net investment hedges, net(a)129—
Foreign currency translation adjustments, net(104)(134)98
Benefit plans: Actuarial (loss)/gain, net(a)(9)28
Total other comprehensive (loss)/income, net of tax(97)(124)95
Comprehensive income before allocation to noncontrolling interests1,4031,300957
Comprehensive loss attributable to noncontrolling interests—(4)—
Comprehensive income attributable to Zoetis$1,403$1,304$957
(a)Presented net of reclassification adjustments and tax impacts, which are not significant in any period presented. Reclassification adjustments related to benefit plans are generally reclassified, as part of net periodic pension cost, into Cost of sales, Selling, general and administrative expenses, and/or Research and development expenses, as appropriate, in the Consolidated Statements of Income.

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ZOETIS INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31,December 31,
(MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA)20192018
Assets
Cash and cash equivalents(a)$1,934$1,602
Short-term investments—99
Accounts receivable, less allowance for doubtful accounts of $21 in 2019 and $24 in 20181,0861,036
Inventories1,4101,391
Other current assets318271
Total current assets4,7484,399
Property, plant and equipment, less accumulated depreciation of $1,737 in 2019 and $1,599 in 20181,9401,658
Operating lease right of use assets189—
Goodwill2,5922,519
Identifiable intangible assets, less accumulated amortization1,8902,046
Noncurrent deferred tax assets8861
Other noncurrent assets9894
Total assets$11,545$10,777
Liabilities and Equity
Short-term borrowings$—$9
Current portion of long-term debt500—
Accounts payable301313
Dividends payable9579
Accrued expenses543487
Accrued compensation and related items276266
Income taxes payable3635
Other current liabilities5534
Total current liabilities1,8061,223
Long-term debt, net of discount and issuance costs5,9476,443
Noncurrent deferred tax liabilities434474
Operating lease liabilities164—
Other taxes payable257265
Other noncurrent liabilities229187
Total liabilities8,8378,592
Commitments and contingencies (Note 18)
Stockholders' equity:
Common stock, $0.01 par value: 6,000,000,000 authorized, 501,891,243 and 501,891,243 shares issued; 475,528,210 and 479,562,326 shares outstanding at December 31, 2019 and 2018, respectively55
Treasury stock, at cost, 26,363,033 and 22,328,917 shares of common stock at December 31, 2019 and 2018, respectively(2,042)(1,487)
Additional paid-in capital1,0441,026
Retained earnings4,4273,270
Accumulated other comprehensive loss(726)(629)
Total equity2,7082,185
Total liabilities and equity$11,545$10,777
(a)As of December 31, 2019 and December 31, 2018, includes $2 million and $5 million, respectively, of restricted cash.

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ZOETIS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

Zoetis
AccumulatedEquity
AdditionalOtherAttributable to
Common StockTreasury StockPaid-inRetainedComprehensiveNoncontrollingTotal
(MILLIONS OF DOLLARS)SharesAmountSharesAmountCapitalEarningsLossInterestsEquity
Balance, December 31, 2016501.9$59.0$(421)$1,024$1,477$(598)$12$1,499
Net income/(loss)——864—(2)862
Other comprehensive income————93295
Consolidation of a noncontrolling interest(a)1818
Purchases of shares from a noncontrolling interest(b)(29)(14)(43)
Share-based compensation awards(c)——(1.6)6915(16)——68
Treasury stock acquired(d)——8.3(500)————(500)
Employee benefit plan contribution from Pfizer Inc.(e)——3———3
Dividends declared———(216)——(216)
Balance, December 31, 2017501.9$515.8$(852)$1,013$2,109$(505)$16$1,786
Net income/(loss)—1,428—(4)1,424
Other comprehensive loss———(124)—(124)
Acquisition of a noncontrolling interest(a)(14)(12)(26)
Share-based compensation awards(c)——(1.7)6324(6)——81
Treasury stock acquired(d)——8.2(698)————(698)
Employee benefit plan contribution from Pfizer Inc.(e)—3———3
Dividends declared——(261)——(261)
Balance, December 31, 2018501.9$522.3$(1,487)$1,026$3,270$(629)$—$2,185
Net income———1,500——1,500
Other comprehensive loss————(97)—(97)
Share-based compensation awards**(c)**——(1.8)7115(13)——73
Treasury stock acquired**(d)**——5.8(626)————(626)
Employee benefit plan contribution from Pfizer Inc.****(e)——3———3
Dividends declared———(330)——(330)
Balance, December 31, 2019501.9$526.4$(2,042)$1,044$4,427$(726)$—$2,708

Shares may not add due to rounding.

(a)For the twelve months ended December 31, 2018 and 2017, represents the acquisition and consolidation of a European livestock monitoring company.
(b)Represents the acquisition of the remaining 55 percent noncontrolling interest in Jilin Zoetis Guoyuan Animal Health Co., Ltd., a variable interest entity previously consolidated by Zoetis as the primary beneficiary.
(c)Includes the issuance of shares of Zoetis Inc. common stock and the reacquisition of shares of treasury stock associated with exercises of employee share-based awards. Also includes the reacquisition of shares of treasury stock associated with the vesting of employee share-based awards to satisfy tax withholding requirements. For additional information, see Note 15. Share-based Payments and Note 16. Stockholders' Equity*.*
(d)Reflects the acquisition of treasury shares in connection with the share repurchase program. For additional information, see Note 16. Stockholders' Equity.
(e)Represents contributed capital from Pfizer Inc. associated with service credit continuation for certain Zoetis Inc. employees in Pfizer Inc.'s U.S. qualified defined benefit and U.S. retiree medical plans. See Note 14. Benefit Plans*.*

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ZOETIS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended December 31,
(MILLIONS OF DOLLARS)201920182017
Operating Activities
Net income before allocation to noncontrolling interests$1,500$1,424$862
Adjustments to reconcile net income before noncontrolling interests to net cash provided by operating activities:
Depreciation and amortization expense412308242
Share-based compensation expense675344
Asset write-offs and asset impairments743
Net (gain)/loss on sales of assets(20)(42)11
Provision for losses on inventory685454
Deferred taxes(a)(79)(112)127
Employee benefit plan contribution from Pfizer Inc.333
Other non-cash adjustments(12)(14)10
Other changes in assets and liabilities, net of acquisitions and divestitures
Accounts receivable(69)(67)(50)
Inventories(104)6119
Other assets(51)(42)(16)
Accounts payable(10)37(10)
Other liabilities9156(38)
Other tax accounts, net(8)6785
Net cash provided by operating activities1,7951,7901,346
Investing Activities
Capital expenditures(460)(338)(224)
Acquisition of Abaxis, net of cash acquired—(1,884)—
Other acquisitions(195)(114)(82)
Proceeds from maturities and redemptions of investments10128—
Net proceeds on swaps designated as net investment hedges37——
Net proceeds from sales of assets215637
Other investing activities(8)(7)(1)
Net cash used in investing activities(504)(2,259)(270)
Financing Activities
(Decrease)/increase in short-term borrowings, net(9)8—
Principal payments on long-term debt——(750)
Proceeds from issuance of long-term debt—senior notes, net of discount and fees—1,4851,231
Payment of contingent consideration related to previously acquired assets(9)(12)(7)
Share-based compensation-related proceeds, net of taxes paid on withholding shares and excess tax benefits71924
Purchases of treasury stock(626)(698)(500)
Cash dividends paid(314)(243)(206)
Acquisition of a noncontrolling interest—(26)(43)
Net cash (used in)/provided by financing activities(951)533(251)
Effect of exchange-rate changes on cash and cash equivalents(8)(26)12
Net increase in cash and cash equivalents33238837
Cash and cash equivalents at beginning of period1,6021,564727
Cash and cash equivalents at end of period$1,934$1,602$1,564
Supplemental cash flow information
Cash paid during the period for:
Income taxes$418$336$455
Interest, net of capitalized interest247190167
Non-cash transactions:
Capital expenditures$7$7$5
Contingent purchase price consideration23—29
Dividends declared, not paid957961

(a) For 2018, reflects the reclassification of the one-time deemed repatriation tax from Noncurrent deferred tax liabilities to Income taxes payable and Other taxes payable to properly reflect the liability, which became a fixed obligation in 2018, payable over eight years.

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ZOETIS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Business Description

Zoetis Inc. (including its subsidiaries, collectively, Zoetis, the company, we, us or our) is a global leader in the discovery, development, manufacture and commercialization of animal health medicines, vaccines and diagnostic products with a focus on both livestock and companion animals. We organize and operate our business in two geographic regions: the United States (U.S.) and International.

We directly market our products in approximately 45 countries across North America, Europe, Africa, Asia, Australia and South America. Our products are sold in more than 100 countries, including developed markets and emerging markets. We have a diversified business, marketing products across eight core species: cattle, swine, poultry, sheep and fish (collectively, livestock) and dogs, cats and horses (collectively, companion animals); and within seven major product categories: vaccines, anti-infectives, parasiticides, other pharmaceutical products, dermatology, medicated feed additives and animal health diagnostics.

We were incorporated in Delaware in July 2012 and prior to that the company was a business unit of Pfizer Inc. (Pfizer).

2. Basis of Presentation

The consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). For subsidiaries operating outside the United States, the consolidated financial information is included as of and for the fiscal year ended November 30 for each year presented. All significant intercompany balances and transactions between the legal entities that comprise Zoetis have been eliminated. For those subsidiaries included in these consolidated financial statements where our ownership is less than 100%, including a variable interest entity consolidated by Zoetis as the primary beneficiary, the noncontrolling interests have been shown in equity as Equity attributable to noncontrolling interests.

3. Significant Accounting Policies

Recently Adopted Accounting Standards

In February 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-02, Income Statement - Reporting Comprehensive Income, (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (ASU 2018-02), which permits companies to reclassify from accumulated other comprehensive income to retained earnings stranded tax effects resulting from the new federal corporate income tax rate. In the period of adoption, a company may choose to either apply the amendments retrospectively to each period in which the effect of the change in federal income tax rate is recognized or to apply the amendments in that reporting period. We adopted the new standard as of January 1, 2019, the required effective date. The company has elected to not reclassify the stranded income tax effects from accumulated other comprehensive income to retained earnings as the amount is insignificant.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes FASB Topic 840, Leases (Topic 840) which requires lessees to recognize most leases on the balance sheet with a corresponding right of use asset. Leases will be classified as financing or operating which will drive the expense recognition pattern. For lessees, the income statement presentation and expense recognition pattern for financing and operating leases is similar to the current model for capital and operating leases, respectively. Companies may elect to exclude short-term leases. The update also requires additional disclosures that will better enable users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. We adopted the new standard as of January 1, 2019, the required effective date, using the effective date transition method. As permitted under the effective date transition method, financial information and disclosure for periods prior to the date of initial application will not be updated. An adjustment to opening retained earnings was not required in conjunction with our adoption. We have elected not to reassess whether expired or existing contracts contain leases, nor did we reassess the classification of existing leases as of the adoption date. We did not use hindsight in our assessment of lease terms as of the effective date. For additional information, see Note 10. Leases*.*

Recently Issued Accounting Standards

In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Topic 350-40), an accounting standards update which expands the scope of costs associated with cloud computing arrangements that must be capitalized. Under the new guidance, costs associated with implementing a cloud computing arrangement that is a service contract must be capitalized and expensed over the term of the hosting arrangement. We will adopt this guidance as of January 1, 2020, the required effective date, on a prospective basis. The adoption is not expected to have a significant impact on our consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (Topic 326), an accounting standards update which requires an entity to measure and recognize expected credit losses for certain financial instruments, including trade receivables, as an allowance that reflects the entity's current estimate of credit losses expected to be incurred. For available-for-sale debt securities with unrealized losses, the standard requires allowances to be recorded instead of reducing the amortized cost of the investment. We will adopt this guidance as of January 1, 2020, the required effective date, on a prospective basis. The adoption is not expected to have a significant impact on our consolidated financial statements.

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Estimates and Assumptions

In preparing the consolidated financial statements, we use certain estimates and assumptions that affect reported amounts and disclosures, including amounts recorded in connection with acquisitions. These estimates and underlying assumptions can impact all elements of our consolidated financial statements. For example, in the Consolidated Statements of Income, estimates are used when accounting for deductions from revenue (such as rebates, sales allowances, product returns and discounts), determining cost of sales, allocating cost in the form of depreciation and amortization, and estimating restructuring charges and the impact of contingencies. On the Consolidated Balance Sheets, estimates are used in determining the valuation and recoverability of assets, such as accounts receivables, inventories, fixed assets, goodwill and other identifiable intangible assets, and estimates are used in determining the reported amounts of liabilities, such as taxes payable, uncertain tax positions, benefit obligations, the impact of contingencies, deductions from revenue and restructuring reserves, all of which also impact the Consolidated Statements of Income.

Our estimates are often based on complex judgments, probabilities and assumptions that we believe to be reasonable but that can be inherently uncertain and unpredictable. If our estimates and assumptions are not representative of actual outcomes, our results could be materially impacted.

As future events and their effects cannot be determined with precision, our estimates and assumptions may prove to be incomplete or inaccurate, or unanticipated events and circumstances may occur that might cause us to change those estimates and assumptions. We are subject to risks and uncertainties that may cause actual results to differ from estimated amounts, such as changes in competition, litigation, legislation and regulations. We regularly evaluate our estimates and assumptions using historical experience and expectations about the future. We adjust our estimates and assumptions when facts and circumstances indicate the need for change. Those changes generally will be reflected in our consolidated financial statements on a prospective basis unless they are required to be treated retrospectively under relevant accounting standards. It is possible that others, applying reasonable judgment to the same facts and circumstances, could develop and support a range of alternative estimated amounts.

Acquisitions

Our consolidated financial statements include the operations of acquired businesses from the date of acquisition. We account for acquired businesses using the acquisition method of accounting, which requires, among other things, that most assets acquired and liabilities assumed be recognized at their estimated fair values as of the acquisition date and that the fair value of acquired in-process research and development (IPR&D) be recorded on the balance sheet. Transaction costs are expensed as incurred. Any excess of the consideration transferred over the assigned values of the net assets acquired is recorded as goodwill. When we acquire net assets that do not constitute a business as defined in U.S. GAAP, no goodwill is recognized.

Amounts recorded for acquisitions can result from a complex series of judgments about future events and uncertainties and can rely on estimates and assumptions. For information about the risks associated with estimates and assumptions, see Estimates and Assumptions.

Leases

We determine if a contract contains a lease at inception. Our current portfolio includes only operating leases which are recorded as a right of use asset, as of the lease commencement date, in an amount equal to the present value of future payments over the lease term. We have elected not to recognize right of use assets and lease liabilities for short-term leases of vehicles and equipment with a lease term of twelve months or less.

Options to extend or terminate a lease are considered in the lease term to the extent that the option is reasonably certain of exercise. A corresponding lease liability is recorded within Other current liabilities and Operating lease liabilities. The present value of future payments is discounted using the rate implicit in the lease, when available. When the implicit rate is not available, as is frequently the case with our lease portfolio, the present value is calculated using our incremental borrowing rate, which is determined on the commencement date. The incremental borrowing rate represents the rate of interest that we would expect to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms. As we do not borrow on a collateralized basis, our non-collateralized borrowing rate is used as an input in deriving the incremental borrowing rate.

Fixed lease payments are recognized on straight-line basis over the lease term, while variable payments are recognized in the period incurred. Variable lease payments include real estate taxes and charges for other non-lease services due to lessors that are not dependent on an index or rate and utilization based charges associated with fleet vehicles.

Our real estate and fleet lease contracts may include fixed consideration attributable to both lease and non-lease components, including non-lease services provided by the vendor, which are accounted for as a single fixed minimum payment. For leases of certain classes of machinery and equipment, contract consideration is allocated to lease and non-lease components on the basis of relative standalone price.

Foreign Currency Translation

For most of our international operations, local currencies have been determined to be the functional currencies. We translate functional currency assets and liabilities to their U.S. dollar equivalents at exchange rates in effect at the balance sheet date and we translate functional currency income and expense amounts to their U.S. dollar equivalents at average exchange rates for the period. The U.S. dollar effects that arise from changing translation rates are recorded in Other comprehensive income/(loss), net of tax. The effects of converting non-functional currency assets and liabilities into the functional currency are recorded in Other (income)/deductions––net. For operations in highly inflationary economies, we translate monetary items at rates in effect at the balance sheet date, with translation adjustments recorded in Other (income)/deductions––net, and we translate non-monetary items at historical rates.

Revenue, Deductions from Revenue and the Allowance for Doubtful Accounts

We recognize revenue from product sales when control of the goods has transferred to the customer, which is typically once the goods have shipped and the customer has assumed title. Revenue reflects the total consideration to which we expect to be entitled (i.e., the transaction price), in exchange for products sold, after considering various types of variable consideration including rebates, sales allowances, product returns and discounts.

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Variable consideration is estimated and recorded at the time that related revenue is recognized. Our estimates reflect the amount by which we expect variable consideration to impact revenue recognized and are generally based on contractual terms or historical experience, adjusted as necessary to reflect our expectations about the future. Our customer payment terms generally range from 45 to 75 days.

Estimates of variable consideration utilize a complex series of judgments and assumptions to determine the amount by which we expect revenue to be reduced, for example;

•for sales returns, we perform calculations in each market that incorporate the following, as appropriate: local returns policies and practices; historic returns as a percentage of revenue; estimated shelf life by product; an estimate of the amount of time between shipment and return or lag time; and any other factors that could impact the estimate of future returns, product recalls, discontinuation of products or a changing competitive environment; and
•for revenue incentives, we use our historical experience with similar incentives programs to estimate the impact of such programs on revenue for the current period.

Although the amounts recorded for these deductions from revenue are dependent on estimates and assumptions, historically our adjustments to actual results have not been material. The sensitivity of our estimates can vary by program, type of customer and geographic location.

Accruals for deductions from revenue are recorded as either a reduction in Accounts receivable or within Accrued expenses, depending on the nature of the contract and method of expected payment. Amounts recorded as a reduction in Accounts receivable as of December 31, 2019 and 2018 are approximately $169 million and $143 million, respectively. As of December 31, 2019, and 2018, accruals for deductions from revenue included in Accrued expenses are approximately $190 million and $146 million, respectively.

A deferral of revenue may be required in the event that we have not satisfied all customer obligations for which we have been compensated. The transaction price is allocated to the individual performance obligations on the basis of relative stand-alone selling price, which is typically based on actual sales prices. Revenue associated with unsatisfied performance obligations are contract liabilities, is recorded within Other current liabilities and Other noncurrent liabilities, and is recognized once control of the underlying products has transferred to the customer. Contract liabilities reflected within Other current liabilities as of the adoption date and subsequently recognized as revenue during 2019 were approximately $11 million. Contract liabilities as of December 31, 2019 were approximately $11 million.

We do not disclose the transaction price allocated to unsatisfied performance obligations related to contracts with an original expected duration of one year or less, or for contracts for which we recognize revenue in line with our right to invoice the customer. Estimated future revenue expected to be generated from long-term contracts with unsatisfied performance obligations as of December 31, 2019 is not material.

Taxes collected from customers relating to product sales and remitted to governmental authorities are excluded from Revenue. Shipping and handling costs incurred after control of the purchased product has transferred to the customer are accounted for as a fulfillment cost, within Selling, general and administrative expenses.

We also record estimates for bad debts. We periodically assess the adequacy of the allowance for doubtful accounts by evaluating the collectability of outstanding receivables based on factors such as past due history, historical and expected collection patterns, the financial condition of our customers, the robust nature of our credit and collection practices and the economic environment.

Amounts recorded for sales deductions and bad debts can result from a complex series of judgments about future events and uncertainties and can rely on estimates and assumptions. For information about the risks associated with estimates and assumptions, see Estimates and Assumptions.

Cost of Sales and Inventories

Inventories are carried at the lower of cost or net realizable value. The cost of finished goods, work-in-process and raw materials is determined using average actual cost. We regularly review our inventories for impairment and adjustments are recorded when necessary.

Selling, General and Administrative Expenses

Selling, general and administrative costs are expensed as incurred. Among other things, these expenses include the internal and external costs of marketing, advertising, and shipping and handling as well as certain costs related to business technology, facilities, legal, finance, human resources, business development, public affairs and procurement, among others.

Advertising expenses relating to production costs are expensed as incurred, and the costs of space in publications are expensed when the related advertising occurs. Advertising and promotion expenses totaled approximately $167 million in 2019, $158 million in 2018 and $154 million in 2017.

Shipping and handling costs totaled approximately $59 million in 2019, $56 million in 2018 and $53 million in 2017.

Research and Development Expenses

Research and development (R&D) costs are expensed as incurred. Research is the effort associated with the discovery of new knowledge that will be useful in developing a new product or in significantly improving an existing product. Development is the implementation of the research findings. Before a compound receives regulatory approval, we record upfront and milestone payments made by us to third parties under licensing arrangements as expense. Upfront payments are recorded when incurred, and milestone payments are recorded when the specific milestone has been achieved. Once a compound receives regulatory approval in a major market, we record any milestone payments in Identifiable intangible assets, less accumulated amortization and, unless the assets are determined to have an indefinite life, we amortize them on a straight-line basis over the remaining agreement term or the expected product life cycle, whichever is shorter.

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Amortization of Intangible Assets, Depreciation and Certain Long-Lived Assets

Long-lived assets include:

•Goodwill—goodwill represents the excess of the consideration transferred for an acquired business over the assigned values of its net assets. Goodwill is not amortized.
•Identifiable intangible assets, less accumulated amortization—these acquired assets are recorded at our cost. Identifiable intangible assets with finite lives are amortized on a straight-line basis over their estimated useful lives. Identifiable intangible assets with indefinite lives that are associated with marketed products are not amortized until a useful life can be determined. Identifiable intangible assets associated with IPR&D projects are not amortized until regulatory approval is obtained. The useful life of an amortizing asset generally is determined by identifying the period in which substantially all of the cash flows are expected to be generated.
•Property, plant and equipment, less accumulated depreciation––these assets are recorded at our cost and are increased by the cost of any significant improvements after purchase. Property, plant and equipment assets, other than land and construction-in-progress, are depreciated on a straight-line basis over the estimated useful life of the individual assets. Depreciation begins when the asset is ready for its intended use. For tax purposes, accelerated depreciation methods are used as allowed by tax laws.

Amortization expense related to finite-lived identifiable intangible assets that contribute to our ability to sell, manufacture, research, market and distribute products, compounds and intellectual property are included in Amortization of intangible assets as they benefit multiple business functions. Amortization expense related to intangible assets that are associated with a single function and depreciation of property, plant and equipment are included in Cost of sales, Selling, general and administrative expenses and Research and development expenses, as appropriate.

We review all of our long-lived assets for impairment indicators throughout the year and we perform detailed testing whenever impairment indicators are present. In addition, we perform impairment testing for goodwill and indefinite-lived assets at least annually. When necessary, we record charges for impairments. Specifically:

•For finite-lived identifiable intangible assets, such as developed technology rights, and for other long-lived assets, such as property, plant and equipment, whenever impairment indicators are present, we calculate the undiscounted value of the projected cash flows associated with the asset, or asset group, and compare this estimated amount to the carrying amount. If the carrying amount is found to be greater, we record an impairment loss for the excess of book value over fair value. In addition, in all cases of an impairment review, we re-evaluate the remaining useful lives of the assets and modify them, as appropriate.
•For indefinite-lived identifiable intangible assets, such as brands and IPR&D assets, we test for impairment at least annually, or more frequently if impairment indicators exist, by first assessing qualitative factors to determine whether it is more likely than not that the fair value of the indefinite-lived intangible asset is less than its carrying amount. If we conclude it is more likely than not that the fair value is less than the carrying amount, a quantitative test that compares the fair value of the indefinite-lived intangible asset with its carrying value is performed. If the fair value is less than the carrying amount, an impairment loss is recognized. We record an impairment loss, if any, for the excess of book value over fair value. In addition, in all cases of an impairment review other than for IPR&D assets, we re-evaluate whether continuing to characterize the asset as indefinite-lived is appropriate.
•For goodwill, we test for impairment on at least an annual basis, or more frequently if impairment indicators exist, either by assessing qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, or by performing a quantitative assessment. If we choose to perform a qualitative analysis and conclude it is more likely than not that the fair value of a reporting unit is less than its carrying amount, a quantitative fair value test is performed. We determine the implied fair value of goodwill by subtracting the fair value of all the identifiable net assets other than goodwill from the fair value of the reporting unit and record an impairment loss for the excess, if any, of book value of goodwill over the implied fair value. In 2019, we performed a qualitative impairment assessment as of September 30, 2019, which did not result in the impairment of goodwill associated with any of our reporting units. In 2018, we performed a quantitative impairment assessment as of September 30, 2018, which did not result in the impairment of goodwill associated with any of our reporting units.

Impairment reviews can involve a complex series of judgments about future events and uncertainties and can rely on estimates and assumptions. For information about the risks associated with estimates and assumptions, see Estimates and Assumptions.

Software Capitalization and Depreciation

We capitalize certain costs incurred in connection with obtaining or developing internal-use software, including payroll and payroll-related costs for employees who are directly associated with the internal-use software project, external direct costs of materials and services and interest costs while developing the software. Capitalized software costs are included in Property, plant and equipment and are amortized using the straight-line method over the estimated useful life of five to ten years. Capitalization of such costs ceases when the project is substantially complete and ready for its intended purpose. Costs incurred during the preliminary project and post-implementation stages, as well as software maintenance and training costs, are expensed in the period in which they are incurred. The company capitalized $74 million and $18 million of internal-use software for the years ended December 31, 2019, and 2018, respectively. Depreciation expense for capitalized software was $27 million in 2019, $23 million in 2018 and $21 million in 2017.

Restructuring Charges and Certain Acquisition-Related Costs

We may incur restructuring charges in connection with acquisitions when we implement plans to restructure and integrate the acquired operations or in connection with cost-reduction and productivity initiatives. Included in Restructuring charges and certain acquisition-related costs are all restructuring charges and certain costs associated with acquiring and integrating an acquired business. Transaction costs and integration costs are expensed as incurred. Termination costs are a significant component of restructuring charges and are generally recorded when the actions are probable and estimable.

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Amounts recorded for restructuring charges and other associated costs can result from a complex series of judgments about future events and uncertainties and can rely on estimates and assumptions. For information about the risks associated with estimates and assumptions, see Estimates and Assumptions.

Earnings per Share

Basic earnings per share is computed by dividing net income attributable to Zoetis by the weighted-average number of common shares outstanding during the period. Diluted earnings per share adjusts the weighted-average number of common shares outstanding for the potential dilution that could occur if common stock equivalents (stock options, restricted stock units, and performance-vesting restricted stock units) were exercised or converted into common stock, calculated using the treasury stock method.

Cash Equivalents

Cash equivalents include items almost as liquid as cash, such as certificates of deposit and time deposits with maturity periods of three months or less when purchased.

Fair Value

Certain assets and liabilities are required to be measured at fair value, either upon initial recognition or for subsequent accounting or reporting. For example, we use fair value extensively in the initial recognition of net assets acquired in a business combination. Fair value is estimated using an exit price approach, which requires, among other things, that we determine the price that would be received to sell an asset or paid to transfer a liability in an orderly market. The determination of an exit price is considered from the perspective of market participants, considering the highest and best use of assets and, for liabilities, assuming that the risk of non-performance will be the same before and after the transfer.

When estimating fair value, depending on the nature and complexity of the asset or liability, we may use one or all of the following approaches:

•Income approach, which is based on the present value of a future stream of net cash flows.
•Market approach, which is based on market prices and other information from market transactions involving identical or comparable assets or liabilities.
•Cost approach, which is based on the cost to acquire or construct comparable assets less an allowance for functional and/or economic obsolescence.

These fair value methodologies depend on the following types of inputs:

•Quoted prices for identical assets or liabilities in active markets (Level 1 inputs).
•Quoted prices for similar assets or liabilities in active markets or quoted prices for identical or similar assets or liabilities in markets that are not active or are directly or indirectly observable (Level 2 inputs).
•Unobservable inputs that reflect estimates and assumptions (Level 3 inputs).

A single estimate of fair value can result from a complex series of judgments about future events and uncertainties and can rely on estimates and assumptions. For information about the risks associated with estimates and assumptions, see Estimates and Assumptions.

Accounts Receivable

The recorded amounts of accounts receivable approximate fair value because of their relatively short-term nature. As of December 31, 2019, and 2018, Accounts receivable, less allowance for doubtful accounts, of $1,086 million and $1,036 million, respectively, includes approximately $37 million and $41 million, respectively, of other receivables, such as trade notes receivable and royalty receivables, among others.

Deferred Tax Assets and Liabilities and Income Tax Contingencies

Deferred tax assets and liabilities are recognized for the expected future tax consequences of differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates and laws. We provide a valuation allowance when we believe that our deferred tax assets are not recoverable based on an assessment of estimated future taxable income that incorporates ongoing, prudent and feasible tax planning strategies.

We account for income tax contingencies using a benefit recognition model. If we consider that a tax position is more likely than not to be sustained upon audit, based solely on the technical merits of the position, we recognize the benefit. We measure the benefit by determining the amount that is greater than 50% likely of being realized upon settlement, presuming that the tax position is examined by the appropriate taxing authority that has full knowledge of all relevant information. Under the benefit recognition model, if the initial assessment fails to result in the recognition of a tax benefit, we regularly monitor our position and subsequently recognize the tax benefit: (i) if there are changes in tax law, analogous case law or there is new information that sufficiently raise the likelihood of prevailing on the technical merits of the position to more likely than not; (ii) if the statute of limitations expires; or (iii) if there is a completion of an audit resulting in a favorable settlement of that tax year with the appropriate agency. We regularly re-evaluate our tax positions based on the results of audits of federal, state and foreign income tax filings, statute of limitations expirations, changes in tax law or receipt of new information that would either increase or decrease the technical merits of a position relative to the “more-likely-than-not” standard. Liabilities associated with uncertain tax positions are classified as current only when we expect to pay cash within the next 12 months. Interest and penalties, if any, are recorded in Provision for taxes on income and are classified on our Consolidated Balance Sheets with the related tax liability.

Amounts recorded for valuation allowances and income tax contingencies can result from a complex series of judgments about future events and uncertainties and can rely on estimates and assumptions. For information about the risks associated with estimates and assumptions, see Estimates and Assumptions.

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Benefit Plans

All dedicated benefit plans are pension plans. For our dedicated benefit plans, we recognize the overfunded or underfunded status of defined benefit plans as an asset or liability on the Consolidated Balance Sheets and the obligations generally are measured at the actuarial present value of all benefits attributable to employee service rendered, as provided by the applicable benefit formula. Pension obligations may include assumptions such as long-term rate of return on plan assets, expected employee turnover, participant mortality, and future compensation levels. Plan assets are measured at fair value. Net periodic benefit costs are recognized, as required, into Cost of sales, Selling, general and administrative expenses and Research and development expenses, as appropriate.

Amounts recorded for benefit plans can result from a complex series of judgments about future events and uncertainties and can rely on estimates and assumptions. For information about the risks associated with estimates and assumptions, see Estimates and Assumptions.

Asset Retirement Obligations

We record accruals for the legal obligations associated with the retirement of tangible long-lived assets, including obligations under the doctrine of promissory estoppel and those that are conditioned upon the occurrence of future events. These obligations generally result from the acquisition, construction, development and/or normal operation of long-lived assets. We recognize the fair value of these obligations in the period in which they are incurred by increasing the carrying amount of the related asset. Over time, we recognize expense for the accretion of the liability and for the amortization of the asset.

As of December 31, 2019 and 2018, accruals for asset retirement obligations are $23 million and $22 million, respectively, and are primarily included in Other noncurrent liabilities.

Amounts recorded for asset retirement obligations can result from a complex series of judgments about future events and uncertainties and can rely on estimates and assumptions. For information about the risks associated with estimates and assumptions, see Estimates and Assumptions.

Legal and Environmental Contingencies

We are subject to numerous contingencies arising in the ordinary course of business, such as product liability and other product-related litigation, commercial litigation, patent litigation, environmental claims and proceedings, government investigations and guarantees and indemnifications. We record accruals for these contingencies to the extent that we conclude that a loss is both probable and reasonably estimable. If some amount within a range of loss appears to be a better estimate than any other amount within the range, we accrue that amount. Alternatively, when no amount within a range of loss appears to be a better estimate than any other amount, we accrue the lowest amount in the range. We record anticipated recoveries under existing insurance contracts when recovery is assured.

Amounts recorded for contingencies can result from a complex series of judgments about future events and uncertainties and can rely on estimates and assumptions. For information about the risks associated with estimates and assumptions, see Estimates and Assumptions.

Share-Based Payments

Our compensation programs can include share-based payment plans. All grants under share-based payment programs are accounted for at fair value and such amounts generally are amortized on a straight-line basis over the vesting term to Cost of sales, Selling, general and administrative expenses, and Research and development expenses, as appropriate. We include the impact of estimated forfeitures when determining share-based compensation expense.

Amounts recorded for share-based compensation can result from a complex series of judgments about future events and uncertainties and can rely on estimates and assumptions. For information about the risks associated with estimates and assumptions, see Estimates and Assumptions.

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 a single product in all brands, or its dosage forms for all species, as a product line. We have approximately 300 comprehensive product lines, including products for both livestock and companion animals across each of our major product categories.

In the fourth quarter of 2019, the company modified the list of major product categories to include a category for dermatology products, which was previously included within other pharmaceutical products. The prior period presentation has been revised to reflect the new product categories.

Our major product categories are:

•vaccines: biological preparations that help prevent diseases of the respiratory, gastrointestinal and reproductive tracts or induce a specific immune response;
•anti-infectives: products that prevent, kill or slow the growth of bacteria, fungi or protozoa;
•parasiticides: products that prevent or eliminate external and internal parasites such as fleas, ticks and worms;
•other pharmaceutical products: pain and sedation, antiemetic, reproductive, and oncology products;

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•dermatology products: products that relieve itch associated with allergic conditions and atopic dermatitis;
•medicated feed additives: products added to animal feed that provide medicines to livestock; and
•animal health diagnostics: portable blood and urine analysis systems and point-of-care diagnostic products, including instruments and reagents, rapid immunoassay tests, reference laboratory kits and blood glucose monitors.

Our remaining revenue is derived from other non-pharmaceutical product categories, such as nutritionals and agribusiness, as well as products and services in smaller but fast growing areas, including biodevices, genetic tests and precision livestock farming.

Our livestock products primarily help prevent or treat diseases and conditions to enable the cost-effective production of safe, high-quality animal protein. Human population growth and increasing standards of living are important long-term growth drivers for our livestock products in three major ways. First, population growth and increasing standards of living drive increased demand for improved nutrition, particularly animal protein. Second, population growth leads to increased natural resource constraints driving a need for enhanced productivity. Finally, as standards of living improve, there is increased focus on food quality and safety.

Our companion animal products help extend and improve the quality of life for pets; increase convenience and compliance for pet owners; and help veterinarians improve the quality of their care and the efficiency of their businesses. 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. Companion animals are also living longer, receiving increased medical treatment and benefiting from advances in animal health medicines and vaccines.

The following tables present our revenue disaggregated by geographic area, species, and major product category:

Revenue by geographic area

Year Ended December 31,
(MILLIONS OF DOLLARS)201920182017
United States$3,203$2,877$2,620
Australia196189176
Brazil293295300
Canada206203184
China200211174
France117130121
Germany153147137
Italy11210489
Japan158149138
Mexico11710086
Spain11411093
United Kingdom198181149
Other developed markets370361339
Other emerging markets738710657
6,1755,7675,263
Contract manufacturing & human health855844
Total Revenue$6,260$5,825$5,307

Revenue exceeded $100 million in eleven countries outside the U.S. in 2019, ten countries outside the U.S. in 2018 and eight countries outside the U.S. in 2017. The U.S. was the only country to contribute more than 10% of total revenue in each year.

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Revenue by major species

Year Ended December 31,
(MILLIONS OF DOLLARS)201920182017
U.S.
Livestock$1,219$1,269$1,244
Companion animal1,9841,6081,376
3,2032,8772,620
International
Livestock1,8111,8851,793
Companion animal1,1611,005850
2,9722,8902,643
Total
Livestock3,0303,1543,037
Companion animal3,1452,6132,226
Contract manufacturing & human health855844
Total Revenue$6,260$5,825$5,307

Revenue by species

Year Ended December 31,
(MILLIONS OF DOLLARS)201920182017
Livestock:
Cattle$1,654$1,754$1,735
Swine611663621
Poultry559522479
Fish134132118
Other728384
3,0303,1543,037
Companion Animal:
Horses195168151
Dogs and Cats2,9502,4452,075
3,1452,6132,226
Contract manufacturing & human health855844
Total Revenue$6,260$5,825$5,307

Revenue by product category

Year Ended December 31,
(MILLIONS OF DOLLARS)201920182017
Vaccines$1,483$1,488$1,373
Anti-infectives1,2541,2801,253
Parasiticides966836763
Other pharmaceuticals780765753
Dermatology770607428
Medicated feed additives470485475
Animal health diagnostics26813644
Other non-pharmaceuticals184170174
6,1755,7675,263
Contract manufacturing & human health855844
Total Revenue$6,260$5,825$5,307

B. Other Revenue Information

Significant Customers

We sell our livestock products primarily to veterinarians and livestock producers as well as third-party veterinary distributors, and retail outlets who generally sell the products to livestock producers. We sell our companion animal products primarily to veterinarians who then sell the products to pet

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owners. Sales to our largest customer, a U.S. veterinary distributor, represented approximately 15%, 13% and 14% of total revenue for 2019, 2018, and 2017, respectively.

5. Acquisitions and Divestitures

A. Acquisitions

Acquisition of Abaxis, Inc.

On July 31, 2018, we completed the acquisition of Abaxis, Inc. (Abaxis), a California corporation and a leader in the development, manufacture and marketing of diagnostic instruments for veterinary point-of-care services. We acquired all of the outstanding common shares of Abaxis for $83.00 per share in cash resulting in Abaxis becoming our wholly owned subsidiary. The acquisition enhances our presence in animal health diagnostics.

The acquisition date fair value of the consideration transferred was approximately $1,962 million, which consisted of the following:

(MILLIONS OF DOLLARS)Amounts
Cash paid to Abaxis' shareholders(a)$1,898
Cash paid for equity awards attributable to pre-merger services(b)54
Fair value of Zoetis equity awards issued in exchange for outstanding Abaxis equity awards pertaining to pre-merger service(c)10
Total consideration$1,962
(a)Represents cash paid for cancellation and conversion of each outstanding share of Abaxis' common stock at the acquisition date.
(b)Represents cash paid for cancellation and settlement of restricted stock awards that fully vested in July 2018 as a result of service or pre-existing change-in-control provisions and termination provisions. Includes certain awards that will be settled in cash during 2019, reflected in Other current liabilities within the Consolidated Balance Sheets.
(c)Represents the fair value of replacement awards issued for Abaxis equity awards outstanding immediately before the acquisition and attributable to the service period prior to the acquisition. The previous Abaxis equity awards were converted into the Zoetis equity awards at an exchange ratio based on the closing prices of shares of Zoetis Common Stock and Abaxis Common Stock for ten full trading days before the closing of the acquisition.

The acquisition has been accounted for as a business combination with the assets acquired and liabilities assumed measured at estimated fair values as of the acquisition date, primarily using Level 3 inputs, except for investments in debt securities which were valued using Level 2 inputs.

During the three months ended December 31, 2018, the company recorded measurement period adjustments to reflect the facts and circumstances in existence as of the acquisition date. These adjustments primarily include an increase to Property, plant and equipment of $5 million, a reduction to Identifiable intangible assets of $3 million, an increase to Other current liabilities of $4 million, and a corresponding decrease to Goodwill of $6 million. These measurement period adjustments primarily related to changes in valuation assumptions, including market participant estimates of cash flows, as well as other initial estimates.

During the first half of 2019, the company recorded additional measurement period adjustments which were made to reflect the facts and circumstances in existence as of the acquisition date. These adjustments include a reduction to Identifiable intangible assets and Noncurrent deferred tax liabilities of $1 million each with a corresponding offset to goodwill. These measurement period adjustments were primarily attributable to changes in valuation assumptions, including market participant estimates of cash flows as well as other initial estimates and the finalization of legal entity fair values. The valuation was finalized during the second quarter of 2019. The final fair values allocated to Abaxis' assets and liabilities as of the acquisition date, are reflected in the table below.

(MILLIONS OF DOLLARS)Amounts
Cash and cash equivalents$64
Short term investments(a)107
Accounts receivable(b)30
Inventories(c)79
Other current assets6
Property, plant and equipment(d)54
Identifiable intangible assets(e)894
Other noncurrent assets29
Accounts payable(21)
Accrued compensation and related items(10)
Other current liabilities(22)
Other noncurrent liabilities(11)
Noncurrent deferred tax liabilities(f)(214)
Total net assets acquired985
Goodwill(g)977
Total consideration$1,962
(a)Short term investments include investments in debt securities that are classified as available-for-sale and measured at fair value.

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(b)The fair value approximates the gross contractual amount of accounts receivable. The contractual amount not expected to be collected is immaterial.
(c)Acquired inventory is comprised of finished goods, work in process and raw materials. The fair value of finished goods was determined based on net realizable value adjusted for the costs of the selling effort, a reasonable profit allowance for the selling effort, and estimated holding costs. The fair value of work in process was determined based on net realizable value adjusted for costs to complete the manufacturing process, costs of the selling effort, a reasonable profit allowance for the remaining manufacturing and selling effort, and an estimate of holding costs. The fair value of raw materials was determined to approximate book value.
(d)Property, plant and equipment is comprised of machinery and equipment, furniture and fixtures, computer equipment, leasehold improvements and construction in progress. The fair value was primarily determined using a reproduction/replacement cost approach which measures the value of an asset by estimating the cost to acquire or construct comparable assets adjusted for age and condition of the asset.
(e)Identifiable intangible assets primarily consist of developed technology rights, customer relationships, and trademarks and tradenames. The fair value of identifiable intangible assets was determined using the income approach, which includes a forecast of expected future cash flows. For additional information regarding identifiable intangible assets, see Note 13. Goodwill and Other Intangible Assets.
(f)The acquisition was structured as a stock purchase and therefore we assumed the historical tax basis of Abaxis' assets and liabilities. The estimate of deferred tax effects resulting from the acquisition include the expected federal, state, and foreign tax consequences associated with temporary differences between the fair values of the assets acquired and liabilities assumed and the respective tax basis. The components of the Abaxis net deferred tax liability are included within amounts reported in Note 8. Tax Matters.
(g)Goodwill represents the excess of consideration transferred over the fair values of the assets acquired and liabilities assumed. It is allocated to our existing reportable segments and is primarily attributable to the future potential of the technology platforms, as well as cost and revenue synergies including market share capture, elimination of cost redundancies and gain of cost efficiencies, and intangible assets such as assembled workforce which are not separately recognizable. The primary strategic purpose of the acquisition was to enhance the company’s existing product portfolio by strengthening Zoetis’ presence in veterinary diagnostics. The goodwill recorded is not deductible for tax purposes.

The Company incurred acquisition-related costs of approximately $43 million for the year ended December 31, 2019, which are included within Restructuring charges and certain acquisition-related costs on our Consolidated Statements of Income.

Supplemental Pro Forma Information (Unaudited):

The following table provides unaudited supplemental pro forma financial information as if the acquisition of Abaxis had occurred on January 1, 2017.

Year Ended December 31,
(MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA)20182017
Revenue$5,980$5,542
Net income attributable to Zoetis Inc.1,402706

The supplemental pro forma financial information has been prepared using the acquisition method of accounting and is based on the historical financial information of Zoetis and Abaxis. The supplemental pro forma financial information does not necessarily represent what the combined company’s revenue or results of operations would have been had the acquisition been completed on January 1, 2017, nor do they intend to be a projection of future operating results of the combined company. It also does not reflect any operating efficiencies or potential cost savings that might be achieved from synergies of combining Zoetis and Abaxis.

The unaudited supplemental pro forma financial information reflects primarily the following pro forma adjustments:

•Acquisition-related costs incurred by Zoetis and Abaxis of $82 million have been removed for the year ended December 31, 2018. Acquisition-related costs of $60 million are assumed to be have been incurred during the year ended December 31, 2017.
•Additional amortization expense of $77 million for the year ended December 31, 2018, and $130 million for the year ended December 31, 2017, related to the fair value of identified intangible assets acquired.
•Additional depreciation expense of $2 million for the year ended December 31, 2018, and $3 million for the year ended December 31, 2017, related to the fair value adjustments to property, plant and equipment acquired.
•Adjustment related to the the non-recurring fair value adjustment to acquisition date inventory estimated to have been sold, resulting in $18 million removed for the year ended December 31, 2018, and $33 million added for the year ended December 31, 2017.
•Additional interest expense and amortization of debt issuance costs for the debt issuance to finance the acquisition, resulting in $36 million added for the year ended December 31, 2018, and $57 million added for the year ended December 31, 2017.
•Adjustments related to the post merger share-based compensation expense of the replacement awards are $4 million for the year ended December 31, 2018, and $13 million for the year ended December 31, 2017.
•Applicable tax impact of the above adjustments based on the statutory tax rates in the various jurisdictions where the adjustments are expected to be incurred.

Other Acquisitions

During 2019, we completed the acquisitions of Platinum Performance, a nutrition-focused animal health business for companion animals and Phoenix Lab and ZNLabs, both full service veterinary reference laboratory companies with networks of labs across the U.S. These transactions did not have a significant impact on our consolidated financial statements.

During 2018, we completed the acquisition of a manufacturing business in Ireland and the noncontrolling interest of a European livestock monitoring company. These transactions did not have a significant impact on our consolidated financial statements.

During 2017, we completed the acquisitions of the remaining 55 percent noncontrolling interest in Jilin Zoetis Guoyuan Animal Health Co., Ltd. (a variable interest entity previously consolidated by Zoetis as the primary beneficiary), an Irish biologic therapeutics company, and a Norwegian fish

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vaccination company. In addition, we also consolidated a European livestock monitoring company, a variable interest entity of which Zoetis is the primary beneficiary. These transactions did not have a significant impact on our consolidated financial statements.

B. Divestitures

In 2019, we received cash proceeds of $20 million resulting from a payment received pursuant to an agreement related to the 2016 sale of certain U.S. manufacturing sites.

In September 2018, we received total cash proceeds of approximately $47 million related to the divestiture of certain agribusiness products within our international segment. During the fourth quarter of 2018, we recorded a net pre-tax gain of approximately $42 million within Other (income)/deductions— net, related to this divestiture.

On November 14, 2017, as part of our supply network strategy, we completed the sale of our manufacturing site in Guarulhos, Brazil to Uniao Quimica (UQ), a Brazilian-based pharmaceutical company. In conjunction with the sale, we also entered into a five-year manufacturing and supply agreement with UQ, commencing upon completion of the sale. We received $41 million in cash at closing, and an additional $8 million subsequent to the closing in December 2017. Additionally, we recorded a net pre-tax loss of approximately $9 million, inclusive of charges of $5 million recorded during the third quarter of 2017, within Other (income)/deductions—net.

On May 11, 2017, we completed the sale of our manufacturing site in Shenzhou, China. We had previously exited operations at this site during the second quarter of 2015 as part of our operational efficiency program. We received total cash proceeds of approximately $3 million and recorded a net pre-tax gain of approximately $2 million within Other (income)/deductions—net.

Additionally, in the second quarter of 2017, we recorded a $4 million expense within Other (income)/deductions—net related to the February 12, 2016 sale of two of our manufacturing sites in the U.S., Laurinburg, North Carolina, and Longmont, Colorado, to Huvepharma NV, a European animal health company.

6. Restructuring Charges and Other Costs Associated with Acquisitions, Cost-Reduction and Productivity Initiatives

In connection with our cost-reduction/productivity initiatives, we typically incur costs and charges associated with site closings and other facility rationalization actions, workforce reductions and the expansion of shared services, including the development of global systems. In connection with our acquisition activity, we typically incur costs and charges associated with executing the transactions, integrating the acquired operations, which may include expenditures for consulting and the integration of systems and processes, product transfers and restructuring the consolidated company, which may include charges related to employees, assets and activities that will not continue in the consolidated company. All operating functions can be impacted by these actions, including sales and marketing, manufacturing and R&D, as well as functions such as business technology, shared services and corporate operations.

The components of costs incurred in connection with restructuring initiatives, acquisitions and cost-reduction/productivity initiatives are as follows:

Year Ended December 31,
(MILLIONS OF DOLLARS)201920182017
Restructuring charges and certain acquisition-related costs:
Integration costs(a)$18$21$6
Transaction costs(b)—21—
Restructuring charges(c)(d):
Employee termination costs/(reversals)332510
Exit costs—13
Total Restructuring charges and certain acquisition-related costs$51$68$19
(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, as well as product transfer costs.
(b)Transaction costs represent external costs directly related to acquiring businesses and primarily include expenditures for banking, legal, accounting and other similar services.
(c)The restructuring charges for the year ended December 31, 2019, are primarily related to the acquisition of Abaxis and CEO transition-related costs.

The restructuring charges for the year ended December 31, 2018, are primarily related to:

•employee termination costs of $7 million in Europe as a result of initiatives to better align our organizational structure;
•employee termination costs of $21 million related to the acquisition of Abaxis; and
•a net reversal of employee termination costs of $3 million, and exit costs of $1 million as a result of our operational efficiency initiative and supply network strategy initiative launched in 2015.
The restructuring charges for the year ended December 31, 2017, are primarily related to:
•a net increase in employee termination costs of $2 million related to the operational efficiency initiative and supply network strategy initiative launched in 2015;
•employee termination costs of $4 million related to the acquisition of an Irish biologic therapeutics company in the third quarter of 2017, and
•employee termination costs of $4 million in Europe, as a result of initiatives to better align our organizational structure.
(d)The restructuring charges are associated with the following:
•For the year ended December 31, 2019, International of $2 million and Manufacturing/research/corporate of $31 million.
•For the year ended December 31, 2018, International of $7 million, and Manufacturing/research/corporate of a $19 million.

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•For the year ended December 31, 2017 International of $2 million, and Manufacturing/research/corporate of a $11 million.

The components of, and changes in, our restructuring accruals are as follows:

Employee
TerminationExit
(MILLIONS OF DOLLARS)CostsCostsAccrual
Balance, December 31, 2016$90$—$90
Provision10313
Utilization and other(a)(59)(3)(62)
Balance, December 31, 2017$41$—$41
Provision25126
Utilization and other(a)(21)(1)(22)
Balance, December 31, 2018(b)$45$—$45
Provision33—33
Utilization and other**(a)**(33)—(33)
Balance, December 31, 2019**(b)**$45$—$45
(a)Includes adjustments for foreign currency translation.
(b)At December 31, 2019 and 2018, included in Accrued Expenses ($23 million and $27 million, respectively) and Other noncurrent liabilities ($22 million and $18 million, respectively).

7. Other (Income)/Deductions—Net

The components of Other (income)/deductions—net follow:

Year Ended December 31,
(MILLIONS OF DOLLARS)201920182017
Royalty-related income(a)$(16)$(28)$(12)
Interest income(37)(31)(13)
Net (gain)/loss on sale of assets(b)(20)(40)11
Certain legal and other matters, net(c)——(8)
Foreign currency loss(d)163129
Other, net(e)—(15)(1)
Other (income)/deductions—net$(57)$(83)$6
(a)For 2017, includes an adjustment to our royalty income.
(b)For 2019, represents income resulting from a payment received pursuant to an agreement related to the 2016 sale of certain U.S. manufacturing sites.

For 2018, represents a gain on the divestiture of certain agribusiness products within our International segment, and a net loss related to sales of certain manufacturing sites and products as part of our supply network strategy initiative.

For 2017, primarily represents a net loss related to sales of certain manufacturing sites and products, including our manufacturing site in Guarulhos, Brazil, as part of our operational efficiency initiative and supply network strategy.

(c)For 2017, includes income associated with an insurance recovery related to commercial settlements, as well as a favorable outcome on a patent infringement settlement.
(d)Primarily driven by costs related to hedging and exposures to certain emerging market currencies.
(e)For 2018, primarily includes a net gain related to the relocation of a manufacturing site in China.

8. Tax Matters

A. Taxes on Income

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)201920182017
United States$965$937$897
International836753628
Income before provision for taxes on income$1,801$1,690$1,525

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The components of Provision for taxes on income based on the location of the taxing authorities follow:

Year Ended December 31,
(MILLIONS OF DOLLARS)201920182017
United States:
Current income taxes:
Federal$192$199$384
State and local283225
Deferred income taxes:
Federal(5)(107)113
State and local(15)32
Total U.S. tax provision200127524
International:
Current income taxes161148126
Deferred income taxes(60)(9)13
Total international tax provision101139139
Provision for taxes on income*(a)(b)(c)*$301$266$663
(a)In 2019, the Provision for taxes on income reflects the following:
•the change in the jurisdictional mix of earnings, which includes the impact of the location of earnings from operations and repatriation costs. The jurisdictional mix of earnings can vary as a result of repatriation decisions, operating fluctuations in the normal course of business, the impact of non-deductible items, and the extent and location of other income and expense items, such as gains and losses on asset divestitures;
•the impact of the GILTI tax, a new provision of the Tax Act, which became effective for the company in the first quarter of 2019;
•a $20 million discrete tax benefit recorded in 2019 related to the excess tax benefits for share-based compensation payments;
•an $18 million discrete tax benefit related to the changes in valuation allowances;
•a $14 million net discrete tax benefit recorded in the third quarter of 2019, due to a change in tax basis related to purchase accounting;
•a $12 million net discrete tax benefit recorded in 2019, related to changes in various other tax items;
•an $8 million discrete tax benefit recorded in 2019 related to a remeasurement of deferred tax assets and liabilities as a result of a change in U.S. and non-U.S. statutory tax rates;
•U.S. tax benefit related to U.S. Research and Development Tax Credit; and
•tax expense related to changes in uncertain tax positions (see D. Tax Contingencies).
(b)In 2018, the Provision for taxes on income reflects the following:
•the change in the jurisdictional mix of earnings, which includes the impact of the location of earnings from operations and repatriation costs. The jurisdictional mix of earnings can vary as a result of repatriation decisions, operating fluctuations in the normal course of business, the impact of non-deductible items, and the extent and location of other income and expense items, such as gains and losses on asset divestitures;
•the reduction of the U.S. federal corporate income tax rate, from 35% to 21%, effective January 1, 2018, pursuant to the Tax Act;
•a $45 million net tax benefit recorded in 2018, associated with a measurement-period adjustment to the one-time mandatory deemed repatriation tax on the company’s undistributed non-U.S. earnings pursuant to the Tax Act;
•a $23 million discrete tax benefit recorded in 2018 related to the favorable impact of certain tax accounting method changes;
•a $15 million discrete tax benefit recorded in 2018 related to the excess tax benefits for share-based compensation payments;
•a $5 million discrete tax benefit recorded in 2018 related to a remeasurement of deferred tax assets and liabilities as a result of a change in non-U.S. statutory tax rates;
•U.S. tax benefit related to U.S. Research and Development Tax Credit;
•tax expense related to the changes in valuation allowances and the resolution of other tax items; and
•tax expense related to changes in uncertain tax positions (see D. Tax Contingencies).
(c)In 2017, the Provision for taxes on income reflects the following:
•the change in the jurisdictional mix of earnings, which includes the impact of the location of earnings from (i) operations and (ii) restructuring charges related to the operational efficiency initiative and supply network strategy, as well as repatriation costs. The jurisdictional mix of earnings can vary as a result of repatriation decisions and as a result of operating fluctuations in the normal course of business, the impact of non-deductible items and the extent and location of other income and expense items, such as restructuring charges/(benefits), asset impairments and gains and losses on asset divestitures;
•a $212 million net discrete provisional tax expense recorded in the fourth quarter of 2017, related to the impact of the Tax Act enacted on December 22, 2017, including a one-time mandatory deemed repatriation tax, partially offset by a net tax benefit related to the remeasurement of the deferred tax assets and liabilities, as of the date of enactment, due to the reduction in the U.S. federal corporate tax rate;
•U.S. tax benefit related to U.S. Research and Development Tax Credit and the U.S. Domestic Production Activities deduction;
•a $15 million discrete tax benefit recorded in the fourth quarter of 2017 related to the effective settlement of certain issues with U.S. and non-U.S. tax authorities;
•a $9 million discrete tax benefit recorded in 2017 related to the excess tax benefits for share-based compensation payments;
•a $3 million discrete tax benefit recorded in the first quarter of 2017 related to a remeasurement of the company’s deferred tax assets and liabilities using the tax rates expected to be in place going forward;
•tax expense related to the changes in valuation allowances and the resolution of other tax items; and
•tax expense related to changes in uncertain tax positions (see D. Tax Contingencies).

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Tax Rate Reconciliation

The reconciliation of the U.S. statutory income tax rate to our effective tax rate follows:

Year Ended December 31,
201920182017
U.S. statutory income tax rate21%21%35%
State and local taxes, net of federal benefits0.61.80.7
Unrecognized tax benefits and tax settlements and resolution of certain tax positions(a)0.51.26.0
Impact of the Tax Act(b)—(3.9)7.7
Impact of Tax Accounting Method Changes—(1.3)—
U.S. Research and Development Tax Credit and U.S. Domestic Production Activities deduction(c)(0.7)(0.5)(1.3)
Share-based compensation(1.0)(0.8)(0.5)
Non-deductible / non-taxable items(0.2)(1.6)0.5
Taxation of non-U.S. operations(d)(e)(3.1)(0.3)(3.9)
All other—net(0.4)0.1(0.7)
Effective tax rate16.7%15.7%43.5%
(a)For a discussion about unrecognized tax benefits and tax settlements and resolution of certain tax positions, see A. Taxes on Income and D. Tax Contingencies.
(b)In 2018, the rate impact related to the Tax Act was a decrease to our effective tax rate. This tax benefit represents the measurement-period adjustment related to the one-time mandatory deemed repatriation tax on the company’s undistributed non-U.S. earnings. In 2017, the rate impact related to the Tax Act was an increase to our effective tax rate. The provisional net tax charge represented the amount related to the one-time mandatory deemed repatriation tax on the company’s undistributed non-U.S. earnings, partially offset by a net tax benefit related to the remeasurement of the company’s deferred tax assets and liabilities due to the reduction in the U.S. federal corporate tax rate.
(c)In all years, the benefit associated with the U.S. Research and Development Tax Credit was a decrease to our effective tax rate. Included in 2017, is also the benefit associated with the U.S. Domestic Production Activities deduction which was also a decrease to our effective tax rate.
(d)The rate impact of taxation of non-U.S. operations was a decrease to our effective tax rate in 2017 through 2019 due to the jurisdictional mix of earnings.
(e)In 2019, the rate impact of non-U.S. operations also includes (i) an $18 million discrete tax benefit related to the changes in valuation allowances, (ii) a $14 million net discrete tax benefit recorded in the third quarter of 2019, due to a change in tax basis related to purchase accounting, and (iii) a $10 million discrete tax benefit recorded in 2019 related to the effective settlement of certain issues with non-U.S. tax authorities.

B. Tax Matters Agreement

In connection with the separation from Pfizer in 2013, we entered into a tax matters agreement with Pfizer that governs the parties' respective rights, responsibilities and obligations with respect to tax liabilities and benefits, tax attributes, the preparation and filing of tax returns, the control of audits and other tax proceedings and other matters regarding taxes.

In general, under the agreement:

•Pfizer will be responsible for any U.S. federal, state, local or foreign income taxes and any U.S. state or local non-income taxes (and any related interest, penalties or audit adjustments and including those taxes attributable to our business) reportable on a consolidated, combined or unitary return that includes Pfizer or any of its subsidiaries (and us and/or any of our subsidiaries) for any periods or portions thereof ending on or prior to December 31, 2012. We will be responsible for the portion of any such taxes for periods or portions thereof beginning on or after January 1, 2013, as would be applicable to us if we filed the relevant tax returns on a standalone basis.
•We will be responsible for any U.S. federal, state, local or foreign income taxes and any U.S. state or local non-income taxes (and any related interest, penalties or audit adjustments) that are reportable on returns that include only us and/or any of our subsidiaries, for all tax periods whether before or after the completion of the separation from Pfizer.
•Pfizer will be responsible for certain specified foreign taxes directly resulting from certain aspects of the separation from Pfizer.

We will not generally be entitled to receive payment from Pfizer in respect of any of our tax attributes or tax benefits or any reduction of taxes of Pfizer. Neither party's obligations under the agreement will be limited in amount or subject to any cap. The agreement also assigns responsibilities for administrative matters, such as the filing of returns, payment of taxes due, retention of records and conduct of audits, examinations or similar proceedings. In addition, the agreement provides for cooperation and information sharing with respect to tax matters.

Pfizer is primarily responsible for preparing and filing any tax return with respect to the Pfizer affiliated group for U.S. federal income tax purposes and with respect to any consolidated, combined, unitary or similar group for U.S. state or local or foreign income tax purposes or U.S. state or local non-income tax purposes that includes Pfizer or any of its subsidiaries, including those that also include us and/or any of our subsidiaries. We are generally responsible for preparing and filing any tax returns that include only us and/or any of our subsidiaries.

The party responsible for preparing and filing a given tax return will generally have exclusive authority to control tax contests related to any such tax return.

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C. Deferred Taxes

Deferred taxes arise as a result of basis differentials between financial statement accounting and tax amounts.

The components of our deferred tax assets and liabilities follow:

As of December 31,
20192018
(MILLIONS OF DOLLARS)Assets (Liabilities)
Prepaid/deferred items$42$34
Inventories(1)(2)
Intangibles(296)(370)
Property, plant and equipment(149)(114)
Employee benefits6154
Restructuring and other charges45
Legal and product liability reserves1412
Net operating loss/credit carryforwards118128
Unremitted earnings(2)(5)
All other(1)—
Subtotal(210)(258)
Valuation allowance(136)(155)
Net deferred tax liability(a)(b)$(346)$(413)
(a)The decrease in the total net deferred tax liability from December 31, 2018 to December 31, 2019 is primarily attributable to a decrease in deferred tax liabilities related to intangibles and valuation allowances representing the amounts determined to be unrecoverable, partially offset by an increase in deferred tax liabilities related to property, plant and equipment. In addition, the decrease in the total net deferred tax liability was also attributable to an increase in deferred tax assets related to prepaid/deferred items, employee benefits, partially offset by a decrease in net operating loss/credit carryforwards.
(b)In 2019, included in Noncurrent deferred tax assets ($88 million) and Noncurrent deferred tax liabilities ($434 million). In 2018, included in Noncurrent deferred tax assets ($61 million) and Noncurrent deferred tax liabilities ($474 million).

We have carryforwards, primarily related to net operating losses, which are available to reduce future foreign, U.S. federal, and U.S. state income taxes payable with either an indefinite life or expiring at various times from 2020 to 2039.

Valuation allowances are provided when we believe that our deferred tax assets are not recoverable based on an assessment of estimated future taxable income that incorporates ongoing, prudent and feasible tax planning strategies. On the basis of this evaluation, as of December 31, 2019 and December 31, 2018, a valuation allowance of $136 million and $155 million, respectively, has been recorded to record only the portion of the deferred tax asset that is more likely than not to be realized. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence such as projections for growth.

In general, it is our practice and intention to permanently reinvest the majority of the earnings of the company’s non-U.S. subsidiaries. As of December 31, 2019, the cumulative amount of such undistributed earnings was approximately $5.9 billion, for which we have not provided U.S. and local income taxes, such as U.S. state income taxes, local withholding taxes, and taxes on currency gains and losses. Since these earnings are intended to be indefinitely reinvested overseas as of December 31, 2019, we cannot predict the time or manner of a potential repatriation. As such, other than the deferred tax liability associated with the one-time mandatory deemed repatriation tax on such undistributed earnings imposed by the Tax Act, it is not practicable to estimate the additional deferred tax liability associated with the potential repatriation of the unremitted earnings due to the complexity of the hypothetical calculation.

D. Tax Contingencies

We are subject to income tax in many jurisdictions, and a certain degree of estimation is required in recording the assets and liabilities related to income taxes. All of our tax positions are subject to audit by the local taxing authorities in each tax jurisdiction. These tax audits can involve complex issues, interpretations and judgments and the resolution of matters may span multiple years, particularly if subject to negotiation or litigation. Our assessments are based on estimates and assumptions that have been deemed reasonable by management, but our estimates of unrecognized tax benefits and potential tax benefits may not be representative of actual outcomes, and variation from such estimates could materially affect our financial statements in the period of settlement or when the statute of limitations expire. We treat these events as discrete items in the period of resolution.

For a description of our accounting policies associated with accounting for income tax contingencies, see Note 3. Significant Accounting Policies*: Deferred Tax Assets and Liabilities* and Income Tax Contingencies. For a description of the risks associated with estimates and assumptions, see Note 3. Significant Accounting Policies*: Estimates and Assumptions.*

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Uncertain Tax Positions

As tax law is complex and often subject to varied interpretations, it is uncertain whether some of our tax positions will be sustained upon audit. As of December 31, 2019, 2018 and 2017, we had approximately $180 million, $182 million and $161 million, respectively, in net liabilities associated with uncertain tax positions, excluding associated interest:

•Tax assets associated with uncertain tax positions primarily represent our estimate of the potential tax benefits in one tax jurisdiction that could result from the payment of income taxes in another tax jurisdiction. These potential benefits generally result from cooperative efforts among taxing authorities, as required by tax treaties to minimize double taxation, commonly referred to as the competent authority process. The recoverability of these assets, which we believe to be more likely than not, is dependent upon the actual payment of taxes in one tax jurisdiction and, in some cases, the successful petition for recovery in another tax jurisdiction. As of December 31, 2019, 2018 and 2017, we had approximately $3 million, $3 million and $3 million, respectively, in assets associated with uncertain tax positions recorded in Noncurrent deferred tax assets and Other noncurrent assets.
•Tax liabilities associated with uncertain tax positions represent unrecognized tax benefits, which arise when the estimated benefit recorded in our financial statements differs from the amounts taken or expected to be taken in a tax return because of the uncertainties described above. These unrecognized tax benefits relate primarily to issues common among multinational corporations. Substantially all of these unrecognized tax benefits, if recognized, would impact our effective income tax rate.

The reconciliation of the beginning and ending amounts of gross unrecognized tax benefits follows:

(MILLIONS OF DOLLARS)201920182017
Balance, January 1$(185)$(164)$(68)
Increases based on tax positions taken during a prior period(a)(b)(3)(24)(4)
Decreases based on tax positions taken during a prior period(a)(c)12612
Increases based on tax positions taken during the current period(a)(d)(8)(11)(107)
Settlements(e)—6—
Lapse in statute of limitations223
Balance, December 31(f)$(182)$(185)$(164)
(a)Primarily included in Provision for taxes on income.
(b)In 2019, the increases are primarily related to movements on prior year positions. In 2018, the increases are primarily related to the impact of the Tax Act and movements on prior year positions. In 2017, the increases are primarily related to movements on prior year positions, including movements in foreign translation adjustments on prior year positions. See A. Taxes on Income.
(c)In 2019, the decreases are primarily related to movements on prior year positions and effective settlement of certain issues with non-U.S. tax authorities, including movements in foreign translation adjustments on prior year positions. In 2018, the decreases are primarily related to movements on prior year positions and closure of audits with U.S. and non-U.S. tax authorities, including movements in foreign translation adjustments on prior year positions. In 2017, the decreases are primarily related to movements on prior year positions and effective settlement of certain issues with U.S. and non-U.S. tax authorities. See A. Taxes on Income.
(d)In 2019 and 2018, the increases are primarily related to movements on current year positions. In 2017, the increases are primarily related to the impact of the Tax Act. See A. Taxes on Income.
(e)In 2018, the decreases are due to settlements with U.S. and non-U.S. tax authorities. See A. Taxes on Income.
(f)In 2019, included in Noncurrent deferred tax assets and Other noncurrent assets ($2 million) and Other taxes payable ($180 million). In 2018, included in Noncurrent deferred tax assets and Other noncurrent assets ($3 million) and Other taxes payable ($182 million). In 2017, included in Noncurrent deferred tax assets and Other noncurrent assets ($3 million) and Other taxes payable ($161 million).
•Interest related to our unrecognized tax benefits is recorded in accordance with the laws of each jurisdiction and is recorded in Provision for taxes on income in our Consolidated Statements of Income. In 2019, we recorded a net interest expense of $2 million; in 2018, we recorded a net interest expense of $1 million; and in 2017, we recorded a net interest expense of $1 million. Gross accrued interest totaled $9 million, $8 million and $7 million as of December 31, 2019, 2018 and 2017, respectively, and were included in Other taxes payable. Gross accrued penalties totaled $3 million, $3 million and $4 million as of December 31, 2019, 2018 and 2017, respectively, and were included in Other taxes payable.

Status of Tax Audits and Potential Impact on Accruals for Uncertain Tax Positions

We are subject to taxation in the U.S. including various states, and foreign jurisdictions. The U.S. is one of our major tax jurisdictions, and we are currently under audit for tax years 2015 through 2017. For U.S. Federal and state tax purposes, the tax years 2013 through 2019 are open for examination (see B. Tax Matters Agreement for years prior to 2013).

In addition to the open audit years in the U.S., we have open audit years in other major foreign tax jurisdictions, such as Canada (2016-2019), Asia-Pacific (2011-2019, primarily reflecting Australia, China and Japan), Europe (2012-2019, primarily reflecting France, Germany, Italy, Spain and the United Kingdom) and Latin America (2006-2019, primarily reflecting Brazil and Mexico).

Any settlements or statute of limitations expirations could result in a significant decrease in our uncertain tax positions. We do not expect that within the next twelve months any of our gross unrecognized tax benefits, exclusive of interest, could significantly decrease as a result of settlements with taxing authorities or the expiration of the statutes of limitations. Our assessments are based on estimates and assumptions that have been deemed reasonable by management, but our estimates of unrecognized tax benefits and potential tax benefits may not be representative of actual outcomes, and any variation from such estimates could materially affect our financial statements in the period of settlement or when the statutes of limitations expire, as we treat these events as discrete items in the period of resolution. Finalizing audits with the relevant taxing authorities can include formal

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administrative and legal proceedings, and, as a result, it is difficult to estimate the timing and range of possible change related to our uncertain tax positions, and such changes could be significant.

9. Financial Instruments

A. Debt

Credit Facilities

In December 2016, we entered into an amended and restated revolving credit agreement with a syndicate of banks providing for a multi-year $1.0 billion senior unsecured revolving credit facility (the credit facility). In December 2018, the maturity for the amended and restated credit facility was extended through December 2023. Subject to certain conditions, we have the right to increase the credit facility to up to $1.5 billion. The credit facility contains a financial covenant requiring us to not exceed a maximum total leverage ratio (the ratio of consolidated net debt as of the end of the period to consolidated Earnings Before Interest, Income Taxes, Depreciation and Amortization (EBITDA) for such period) of 3.50:1. Upon entering into a material acquisition, the maximum total leverage ratio increases to 4.00:1, and extends until the fourth full consecutive fiscal quarter ended immediately following the consummation of a material acquisition. The credit facility also contains a clause which adds back to Adjusted Consolidated EBITDA, any operational efficiency restructuring charge (defined as charges recorded by the company during the period commencing on October 1, 2016 and ending December 31, 2019, related to operational efficiency initiatives), provided that for any twelve-month period such charges added back to Adjusted Consolidated EBITDA shall not exceed $100 million in the aggregate.

The credit facility also contains a financial covenant requiring that we maintain a minimum interest coverage ratio (the ratio of EBITDA at the end of the period to interest expense for such period) of 3.50:1. In addition, the credit facility contains other customary covenants.

We were in compliance with all financial covenants as of December 31, 2019 and December 31, 2018. There were no amounts drawn under the credit facility as of December 31, 2019 or December 31, 2018.

We have additional lines of credit and other credit arrangements with a group of banks and other financial intermediaries for general corporate purposes. We maintain cash and cash equivalent balances in excess of our outstanding short-term borrowings. As of December 31, 2019, we had access to $76 million of lines of credit which expire at various times through 2020, and are generally renewed annually. We did not have any borrowings outstanding related to these facilities as of December 31, 2019 and $9 million of borrowings outstanding related to these facilities as of December 31, 2018.

Commercial Paper Program

In February 2013, we entered into a commercial paper program with a capacity of up to $1.0 billion. As of December 31, 2019, and 2018, there was no commercial paper outstanding under this program.

Senior Notes and Other Long-Term Debt

On August 20, 2018, we issued $1.5 billion aggregate principal amount of our senior notes (2018 senior notes), with an original issue discount of $4 million. These notes are comprised of $300 million aggregate principal amount of floating rate senior notes due 2021 (the "2018 floating rate senior notes"), and $300 million aggregate principal amount of 3.250% senior notes due 2021, $500 million aggregate principal amount of 3.900% senior notes due 2028 and $400 million aggregate principal amount of 4.450% senior notes due 2048 (collectively, the "2018 fixed rate senior notes"). Net proceeds from this offering were partially used to pay down and terminate a revolving credit agreement and repay outstanding commercial paper, which were borrowed to finance a portion of the cash consideration for the acquisition of Abaxis (see Note 5. Acquisitions and Divestitures). The remainder of the net proceeds will be used for general corporate purposes.

On September 12, 2017, we issued $1.25 billion aggregate principal amount of our senior notes (2017 senior notes), with an original issue discount of $7 million. These notes are comprised of $750 million aggregate principal amount of 3.000% senior notes due 2027 and $500 million aggregate principal amount of 3.950% senior notes due 2047. Net proceeds from this offering were partially used in October 2017 to repay, prior to maturity, the aggregate principal amount of $750 million, and a make-whole amount and accrued interest of $4 million, of our 1.875% senior notes due 2018. The remainder of the net proceeds were used for general corporate purposes.

On November 13, 2015, we issued $1.25 billion aggregate principal amount of our senior notes (2015 senior notes), with an original issue discount of $2 million. On January 28, 2013, we issued $3.65 billion aggregate principal amount of our senior notes (the 2013 senior notes offering) in a private placement, with an original issue discount of $10 million.

The 2013, 2015, 2017 and 2018 senior notes are governed by an indenture and supplemental indenture (collectively, the indenture) between us and Deutsche Bank Trust Company Americas, as trustee. The indenture contains certain covenants, including limitations on our and certain of our subsidiaries' ability to incur liens or engage in sale-leaseback transactions. The indenture also contains restrictions on our ability to consolidate, merge or sell substantially all of our assets. In addition, the indenture contains other customary terms, including certain events of default, upon the occurrence of which the 2013, 2015, 2017 and 2018 senior notes may be declared immediately due and payable.

Pursuant to the indenture, we are able to redeem the 2013, 2015 and 2017 senior notes and the 2018 fixed rate senior notes of any series, in whole or in part, at any time by paying a “make whole” premium, plus accrued and unpaid interest to, but excluding, the date of redemption. The 2018 floating rate senior notes are not redeemable at our option prior to their maturity date. Pursuant to our tax matters agreement with Pfizer, we will not be permitted to redeem the 2013 senior notes due 2023 pursuant to this optional redemption provision, except under limited circumstances. Upon the occurrence of a change of control of us and a downgrade of the 2013, 2015, 2017 and 2018 senior notes below an investment grade rating by each of Moody's Investors Service, Inc. and Standard & Poor's Ratings Services, we are, in certain circumstances, required to make an offer to repurchase all of the outstanding 2013, 2015, 2017 and 2018 senior notes at a price equal to 101% of the aggregate principal amount of the 2013, 2015, 2017 and 2018 senior notes together with accrued and unpaid interest to, but excluding, the date of repurchase.

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The components of our long-term debt are as follows:

As of December 31,
(MILLIONS OF DOLLARS)20192018
3.450% 2015 senior notes due 2020$500$500
2018 floating rate (three-month USD LIBOR plus 0.44%) senior notes due 2021300300
3.250% 2018 senior notes due 2021300300
3.250% 2013 senior notes due 20231,3501,350
4.500% 2015 senior notes due 2025750750
3.000% 2017 senior notes due 2027750750
3.900% 2018 senior notes due 2028500500
4.700% 2013 senior notes due 20431,1501,150
3.950% 2017 senior notes due 2047500500
4.450% 2018 senior notes due 2048400400
6,5006,500
Unamortized debt discount / debt issuance costs(51)(57)
Less current portion of long-term debt500—
Cumulative fair value adjustment for interest rate swap contracts(2)—
Long-term debt, net of discount and issuance costs$5,947$6,443

The fair value of our long-term debt was $6,587 million and $6,474 million as of December 31, 2019, and December 31, 2018, respectively, and has been determined using a third-party matrix-pricing model that uses significant inputs derived from, or corroborated by, observable market data and Zoetis’ credit rating (Level 2 inputs). See Note 3. Significant Accounting Policies*— Fair Value.*

The principal amount of debt outstanding as of December 31, 2019, matures in the following years:

After
(MILLIONS OF DOLLARS)202020212022202320242024Total
Maturities$500$600$—$1,350$—$4,050$6,500

Interest Expense

Interest expense, net of capitalized interest, was $223 million for 2019, $206 million for 2018 and $175 million for 2017. Capitalized interest expense was $13 million for 2019, $9 million for 2018, and $4 million for 2017.

B. Investments

As part of the acquisition of Abaxis, we acquired short and long-term investments in debt securities (see Note 5. Acquisitions and Divestitures). These investments are classified as available-for-sale securities and, therefore, are measured at fair value at each reporting date. The changes in fair value are recognized in Accumulated other comprehensive income/(loss). We utilized Level 2 inputs such as observable quoted prices for similar assets and liabilities in active markets and observable quoted prices for identical or similar assets in markets that are not very active. See Note 3. Significant Accounting Policies*— Fair Value.*

At December 31, 2019 all of the available-for-sale securities had been sold or matured. The net gains/(losses) were immaterial to our financial results for 2019. At December 31, 2018, the investment securities portfolio consisted of debt securities that were virtually all investment-grade. Information on investments in the debt securities at December 31, 2018, including the contractual maturities, or as necessary, the estimated maturities, of the available-for-sale securities is as follows:

Gross UnrealizedMaturities by Period(a)
(MILLIONS OF DOLLARS)Amortized CostGainsLossesFair ValueWithin 1 yearOver 1 to 5 yearsOver 5 yearsTotal
Available-for-sale debt securities
Municipal Bonds$1$—$—$1$1$—$—$1
Corporate Bonds100——100982—100
Total debt securities$101$—$—$101$99$2$—$101

(a) Long term investments are included in Other noncurrent assets.

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C. Derivative Financial Instruments

Foreign Exchange Risk

A significant portion of our revenue, earnings and net investment in foreign affiliates is exposed to changes in foreign exchange rates. We seek to manage our foreign exchange risk, in part, through operational means, including managing same-currency revenue in relation to same-currency costs and same-currency assets in relation to same-currency liabilities. Depending on market conditions, foreign exchange risk is also managed through the use of various derivative financial instruments. These derivative financial instruments serve to manage the exposure of our net investment in certain foreign operations to changes in foreign exchange rates and protect net income against the impact of translation into U.S. dollars of certain foreign exchange-denominated transactions.

All derivative financial instruments used to manage foreign currency risk are measured at fair value and are reported as assets or liabilities on the Consolidated Balance Sheets. The derivative financial instruments primarily offset exposures in the Australian dollar, British pound, Canadian dollar, Chinese yuan, euro, and Japanese yen. Changes in fair value are reported in earnings or in Accumulated other comprehensive income/(loss), depending on the nature and purpose of the financial instrument, as follows:

•For foreign exchange contracts not designated as hedging instruments, we recognize the gains and losses on forward-exchange contracts that are used to offset the same foreign currency assets or liabilities immediately into earnings along with the earnings impact of the items they generally offset. These contracts essentially take the opposite currency position of that reflected in the month-end balance sheet to counterbalance the effect of any currency movement. The vast majority of the foreign exchange derivative financial instruments mature within 60 days and all mature within three years.
•For cross-currency interest rate swaps, which are designated as a hedge against our net investment in foreign operations, changes in the fair value are deferred as a component of cumulative translation adjustment within Accumulated other comprehensive loss and reclassified into earnings when the foreign investment is sold or substantially liquidated. Gains and losses excluded from the assessment of hedge effectiveness are recognized in earnings (Interest expense—net of capitalized interest). The cash flows from these contracts are reflected within the investing section of our Consolidated Statements of Cash Flows. The cross-currency interest rate swap contracts have varying maturities of up to six years.

Interest Rate Risk

The company may use interest rate swap contracts on certain investing and borrowing transactions to manage its net exposure to interest rates and to reduce its overall cost of borrowing.

•In anticipation of issuing fixed-rate debt, we may use forward-starting interest rate swaps that are designated as cash flow hedges to hedge against changes in interest rates that could impact expected future issuances of debt. Unrealized gains or losses on the forward-starting interest rate swaps are reported in Accumulated other comprehensive loss and are recognized in earnings over the life of the future fixed-rate notes. When the company discontinues hedge accounting because it is no longer probable that an anticipated transaction will occur within the originally expected period of execution, or within an additional two-month period thereafter, changes to fair value accumulated in other comprehensive income are recognized immediately in earnings. For the twelve months ended December 31, 2019, we entered into interest rate swaps having an effective date and mandatory termination date in March 2023. We designated these swaps as cash flow hedges against interest rate exposure related principally to the anticipated future issuance of fixed-rate debt to be used primarily to refinance our 3.250% 2013 senior notes due 2023.
•We may use fixed-to-floating interest rate swaps that are designated as fair value hedges to hedge against changes in the fair value of certain fixed-rate debt attributable to changes in the benchmark LIBOR rate. These derivative instruments effectively convert a portion of the company’s long-term debt from fixed rate to floating rate debt based on three-month LIBOR plus a spread. Gains or losses on the fixed to floating interest rate swaps due to changes in LIBOR are recorded in Interest expense, net of capitalized interest. Changes in the fair value of the fixed-to-floating interest rate swaps are offset by changes in the fair value of the underlying fixed rate debt. As of December 31, 2019, we had an outstanding fixed-to-floating interest rate swap which corresponds to a portion of the 3.9% Senior Notes due 2028.

During 2018 and 2017, we entered into forward starting interest rate swaps with an aggregate notional value of $350 million and $500 million, respectively. In addition, we entered into treasury lock trades with an aggregate notional value of $350 million and $500 million, respectively. We designated these swaps and treasury locks (contracts) as cash flow hedges against interest rate exposure related principally to the issuance of fixed-rate debt to be used primarily to fund the acquisition of Abaxis in 2018 and to refinance our 1.875% 2013 senior notes due 2018. Upon issuance of our 2018 senior notes, we terminated the contracts we entered into in 2018 and paid $2 million in cash to the counterparties for settlement. Upon issuance of our 2017 senior notes, we terminated the contracts entered into in 2017 and paid $3 million in cash to the counterparties for settlement. See A. Debt: Senior Notes and Other Long-Term Debt. There was $0.1 million of ineffectiveness related to the forward interest rate swaps entered into in 2017 through the date of settlement which was immediately recognized as a loss within Interest expense—net of capitalized interest. In addition, in previous years we had entered into various forward-starting interest rate swap contracts that were designated as cash flow hedges and that were terminated upon issuance of fixed-rate notes. The settlement amounts, which represent the fair value of the contracts at the time of termination, were recorded in Accumulated other comprehensive loss, and will be amortized into income over the life of the 2018 and 2017 senior notes.

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Outstanding Positions

The aggregate notional amount of derivative instruments are as follows:

Notional
As of December 31,
(MILLIONS)20192018
Foreign currency forward-exchange contracts$1,364$1,330
Cross-currency interest rate swap contracts (in foreign currency):
Euro650400
Danish krone600—
Swiss franc25—
Forward-starting interest rate swaps$250$—
Fixed-to-floating interest rate swap contracts$150$—

Fair Value of Derivative Instruments

The classification and fair values of derivative instruments are as follows:

Fair Value of Derivatives
As of December 31,
(MILLIONS OF DOLLARS)Balance Sheet Location20192018
Derivatives Not Designated as Hedging Instruments:
Foreign currency forward-exchange contractsOther current assets$7$6
Foreign currency forward-exchange contractsOther current liabilities(5)(7)
Total derivatives not designated as hedging instruments2(1)
Derivatives Designated as Hedging Instruments:
Forward starting interest rate swap contractsOther non-current assets$5$—
Forward starting interest rate swap contractsOther non-current liabilities(1)—
Cross-currency interest rate swap contractsOther current assets43
Cross-currency interest rate swap contractsOther non-current assets208
Cross-currency interest rate swap contractsOther current liabilities(3)—
Fixed to floating interest rate swap contractsOther non-current liabilities(2)—
Total derivatives designated as hedging instruments2311
Total derivatives$25$10

The company’s cross-currency interest rate swaps are subject to master netting arrangements to mitigate credit risk by permitting net settlement of transactions with the same counterparty. We may also enter into collateral security arrangements with certain of our counterparties to exchange cash collateral when the net fair value of certain derivative instruments fluctuates from contractually established thresholds. At December 31, 2019, there was $12 million of collateral received related to the long-term cross-currency interest rate swaps.

We use a market approach in valuing financial instruments on a recurring basis. Our derivative financial instruments are measured at fair value on a recurring basis using Level 2 inputs in the calculation of fair value. See Note 3. Significant Accounting Policies*— Fair Value.*

The amounts of net gains/(losses) on derivative instruments not designated as hedging instruments, recorded in Other (income)/deductions - net, are as follows:

Year Ended December 31,
(MILLIONS OF DOLLARS)20192018
Foreign currency forward-exchange contracts$—$6

These amounts were substantially offset in Other (income)/deductions—net by the effect of changing exchange rates on the underlying foreign currency exposures.

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The amounts of unrecognized net gains/(losses) on interest rate swap contracts, recorded, net of tax, in Accumulated other comprehensive income/(loss), are as follows:

Year Ended December 31,
(MILLIONS OF DOLLARS)20192018
Forward starting interest rate swap contracts$3$—
Cross-currency interest rate swap contracts$12$9

Gains/(losses) on interest rate swap contracts, recognized within Interest expense, net of capitalized interest, are as follows:

Year Ended December 31,
(MILLIONS OF DOLLARS)20192018
Cross-currency interest rate swap contracts$19$6

The net amount of deferred gains/(losses) related to derivative instruments designated as cash flow hedges that is expected to be reclassified from Accumulated other comprehensive loss into earnings over the next 12 months is insignificant.

10. Leases

We have facilities, vehicles and equipment under various non-cancellable operating leases with third parties. These leases generally have remaining terms ranging from 1 to 15 years, inclusive of renewal options that are reasonably certain of exercise.

Supplemental information for operating leases is as follows:

(MILLIONS OF DOLLARS, EXCEPT LEASE TERM AND DISCOUNT RATE AMOUNTS)As of December 31, 2019
Supplemental Balance Sheet information for operating leases
Operating lease right of use assets$189
Operating lease liabilities
Operating lease liabilities - current (in Other current liabilities)$35
Operating lease liabilities - noncurrent164
Total operating lease liabilities$199
Weighted-average remaining lease term—operating leases (years)7.12
Weighted-average discount rate—operating leases3.67%
(MILLIONS OF DOLLARS)Year Ended December 31, 2019
Supplemental Income Statement information for operating leases
Operating lease expense$40
Variable lease payments not included in the measurement of lease liabilities21
Short-term lease payments not included in the measurement of lease liabilities9
Supplemental Cash Flow information for operating leases
Cash paid for amounts included in the measurement of lease liabilities$42
Lease obligations obtained in exchange for right-of-use assets (non-cash)241

Future minimum lease payments under non-cancellable operating lease contracts as of December 31, 2019 are as follows:

TotalLess:
AfterLeaseImputed
(MILLIONS OF DOLLARS)202020212022202320242024PaymentsInterestTotal
Maturities$42$36$32$26$22$67$225$(26)$199

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Future minimum lease payments under non-cancellable operating lease contracts as of December 31, 2018, in accordance with the superceded leasing standard, are as follows:

After
(MILLIONS OF DOLLARS)201920202021202220232023Total
Maturities$38$30$24$21$15$45$173

Total rent expense, net of sublease rental income, in accordance with the superceded leasing standard, was approximately $45 million in 2018 and $27 million in 2017.

11. Inventories

The components of inventory follow:

As of December 31,
(MILLIONS OF DOLLARS)20192018
Finished goods$701$744
Work-in-process511481
Raw materials and supplies198166
Inventories$1,410$1,391

12. Property, Plant and Equipment

The components of property, plant and equipment follow:

Useful LivesAs of December 31,
(MILLIONS OF DOLLARS)(Years)20192018
Land—$22$22
Buildings33 1/3 - 50983929
Machinery, equipment and fixtures3 - 202,1191,852
Construction-in-progress—553454
3,6773,257
Less: Accumulated depreciation1,7371,599
Property, plant and equipment$1,940$1,658

Depreciation expense was $175 million in 2019, $152 million in 2018 and $142 million in 2017.

13. Goodwill and Other Intangible Assets

A. Goodwill

The components of, and changes in, the carrying amount of goodwill follow:

(MILLIONS OF DOLLARS)U.S.InternationalTotal
Balance, December 31, 2017$671$839$1,510
Additions / Adjustments(a)5944311,025
Other(b)—(16)(16)
Balance, December 31, 2018$1,265$1,254$2,519
Additions / Adjustments**(a)**102—102
Other**(b)**—(29)(29)
Balance, December 31, 2019$1,367$1,225$2,592
(a)For 2019, primarily relates to the acquisitions of Platinum Performance, Phoenix Lab and ZNLabs. See Note 5. Acquisitions and Divestitures

For 2018, primarily includes a $977 million purchase price allocation associated with the acquisition of Abaxis and $48 million related to the acquisition of a manufacturing business in Ireland. See Note 5. Acquisitions and Divestitures.

(b)Includes adjustments for foreign currency translation. For 2018, also includes $2 million related to the divestiture of certain agribusiness products within our International segment.

The gross goodwill balance was $3,128 million as of December 31, 2019, and $3,055 million as of December 31, 2018. Accumulated goodwill impairment losses (generated entirely in fiscal 2002) was $536 million as of December 31, 2019 and December 31, 2018.

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B. Other Intangible Assets

The components of identifiable intangible assets follow:

As of December 31, 2019As of December 31, 2018
IdentifiableIdentifiable
GrossIntangible Assets,GrossIntangible Assets,
CarryingAccumulatedLess AccumulatedCarryingAccumulatedLess Accumulated
(MILLIONS OF DOLLARS)AmountAmortizationAmortizationAmountAmortizationAmortization
Finite-lived intangible assets:
Developed technology rights(a)(b)$1,938$(657)$1,281$1,854$(523)$1,331
Brands and tradenames(a)(b)424(223)201378(205)173
Other(a)(b)441(249)192412(178)234
Total finite-lived intangible assets2,803(1,129)1,6742,644(906)1,738
Indefinite-lived intangible assets:
Brands and tradenames104—104104—104
In-process research and development105—105197—197
Product rights7—77—7
Total indefinite-lived intangible assets216—216308—308
Identifiable intangible assets$3,019$(1,129)$1,890$2,952$(906)$2,046
(a)Includes intangible assets associated with the acquisitions of Platinum Performance, Phoenix Lab and ZNLabs in 2019.
(b)In connection with the acquisition of Abaxis, the company recorded $894 million of intangible assets, as shown in the table below, representing the fair value at the acquisition date. See Note 5. Acquisitions and Divestitures for additional information.
Gross CarryingWeighted-average
(MILLIONS OF DOLLARS)AmountLife (years)
Finite-lived intangible assets:
Developed technology rights$61010
Brands and tradenames10420
Other1804
Total$894

Developed Technology Rights

Developed technology rights represent the amortized cost associated with developed technology, which has been acquired from third parties and which can include the right to develop, use, market, sell and/or offer for sale the product, compounds and intellectual property that we have acquired with respect to products, compounds and/or processes that have been completed. These assets include technologies related to the care and treatment of cattle, swine, poultry, sheep, fish, dogs, cats and horses.

Brands and Tradenames

Brands and tradenames represent the amortized or unamortized cost associated with product name recognition, as the products themselves do not receive patent protection and legal trademark and tradenames. The more significant finite-lived brands are Platinum Performance, Excenel, and Lutalyse and the more significant indefinite-lived brands are the Linco family products and Mastitis. The more significant components of indefinite-lived trademarks and tradenames are indefinite-lived trademarks and tradenames acquired from SmithKlineBeecham. The more significant finite-lived trademarks and tradenames are finite-lived trademarks and tradenames acquired from Abaxis.

In-Process Research and Development

IPR&D assets represent R&D assets that have not yet received regulatory approval in a major market. The majority of these IPR&D assets were acquired in connection with our acquisition of Pharmaq.

IPR&D assets are required to be classified as indefinite-lived assets until the successful completion or abandonment of the associated R&D effort. Accordingly, during the development period after the date of acquisition, these assets will not be amortized until approval is obtained in a major market, typically either the U.S. or the EU, or in a series of other countries, subject to certain specified conditions and management judgment. At that time, we will determine the useful life of the asset, reclassify the asset out of IPR&D and begin amortization. If the associated R&D effort is abandoned, the related IPR&D assets will be written-off, and we will record an impairment charge.

There can be no certainty that IPR&D assets ultimately will yield a successful product.

Product Rights

Product rights represent product registration and application rights that were acquired from Pfizer in 2014.

C. Amortization

The weighted average life of our total finite-lived intangible assets is approximately 10.0 years. Total amortization expense for finite-lived intangible assets was $237 million in 2019, $157 million in 2018, and $100 million in 2017.

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The annual amortization expense expected for the years 2020 through 2024 is as follows:

(MILLIONS OF DOLLARS)20202021202220232024
Amortization expense$224$199$188$177$158

14. Benefit Plans

Our employees ceased to participate in the Pfizer U.S. qualified defined benefit and U.S. retiree medical plans effective December 31, 2012, and liabilities associated with our employees under these plans were retained by Pfizer. Pfizer continued to credit certain employees' service with Zoetis generally through December 31, 2017 (or termination of employment from Zoetis, if earlier) for certain early retirement benefits with respect to Pfizer's U.S. defined benefit pension and retiree medical plans. In connection with an employee matters agreement between Pfizer and Zoetis, Zoetis is responsible for payment of three-fifths of the total cost of the service credit continuation (approximately $38 million) for these plans and Pfizer is responsible for the remaining two-fifths of the total cost (approximately $25 million). The $25 million capital contribution from Pfizer and corresponding contra-equity account (which is being reduced as the service credit continuation is incurred) is included in Employee benefit plan contribution from Pfizer Inc. in the Consolidated Statements of Equity. The balance in the contra-equity account was approximately $8 million and $10 million as of December 31, 2019 and 2018, respectively. The amount of the service cost continuation payment to be paid by Zoetis to Pfizer was determined and fixed based on an actuarial assessment of the value of the grow-in benefits and is being paid in equal installments over a period of 10 years. Pension and postretirement benefit expense associated with the extended service for certain employees in the U.S. plans totaled approximately $6 million per year in 2019 and 2018.

Pension expense associated with the U.S. and certain significant international locations (inclusive of service cost grow-in benefits discussed above) totaled approximately $13 million in 2019, $14 million in 2018, and $15 million in 2017.

A.International Pension Plans

Information about the dedicated pension plans, including the plans transferred to us as part of the separation from Pfizer, is provided in the tables below.

Obligations and Funded Status––Dedicated Plans

The following table provides an analysis of the changes in the benefit obligations, plan assets and funded status of our dedicated pension plans (including those transferred to us):

As of and for the
Year Ended December 31,
(MILLIONS OF DOLLARS)20192018
Change in benefit obligation:
Projected benefit obligation, beginning$123$129
Service cost67
Interest cost33
Changes in actuarial assumptions and other19(4)
Settlements and curtailments(1)(6)
Benefits paid(2)—
Adjustments for foreign currency translation(3)(5)
Other––net(1)(1)
Benefit obligation, ending144123
Change in plan assets:
Fair value of plan assets, beginning6569
Actual return on plan assets7(1)
Company contributions55
Settlements and curtailments(1)(5)
Benefits paid(2)—
Adjustments for foreign currency translation(2)(2)
Other––net—(1)
Fair value of plan assets, ending7265
Funded status—Projected benefit obligation in excess of plan assets at end of year(a)$(72)$(58)
(a)Included in Other noncurrent liabilities.

Actuarial losses were approximately $32 million ($22 million net of tax) at December 31, 2019, and $21 million ($13 million net of tax) at December 31, 2018. The actuarial gains and losses primarily represent the cumulative difference between the actuarial assumptions and actual return on plan assets, changes in discount rates and changes in other assumptions used in measuring the benefit obligations. These actuarial gains and losses are recognized in Accumulated other comprehensive income/(loss). The actuarial losses will be amortized into net periodic benefit costs over an average period of 11.9 years.

The estimated net actuarial loss that will be amortized from Accumulated other comprehensive loss into 2020 net periodic benefit cost is $1 million.

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Information related to the funded status of selected plans follows:

As of December 31,
(MILLIONS OF DOLLARS)20192018
Pension plans with an accumulated benefit obligation in excess of plan assets:
Fair value of plan assets$65$56
Accumulated benefit obligation11395
Pension plans with a projected benefit obligation in excess of plan assets:
Fair value of plan assets6660
Projected benefit obligation138118

Net Periodic Benefit Costs––Dedicated Plans

The following table provides the net periodic benefit cost associated with dedicated pension plans (including those transferred to us):

Year Ended December 31,
(MILLIONS OF DOLLARS)201920182017
Service cost$6$7$7
Interest cost333
Expected return on plan assets(3)(3)(3)
Amortization of net (gains) / losses111
Settlement and curtailments (gains) / losses—(1)1
Net periodic benefit cost$7$7$9

Actuarial Assumptions––Dedicated Plans

The following table provides the weighted average actuarial assumptions for the dedicated pension plans (including those transferred to us):

As of December 31,
(PERCENTAGES)201920182017
Weighted average assumptions used to determine benefit obligations:
Discount rate1.3%2.3%2.2%
Rate of compensation increase3.1%3.0%3.0%
Weighted average assumptions used to determine net benefit cost for the year ended December 31:
Discount rate2.3%2.2%2.1%
Expected return on plan assets4.1%4.4%3.9%
Rate of compensation increase3.0%3.0%3.2%

The assumptions above are used to develop the benefit obligations at the end of the year and to develop the net periodic benefit cost for the following year. Therefore, the assumptions used to determine the net periodic benefit cost for each year are established at the end of each previous year, while the assumptions used to determine the benefit obligations are established at each year-end. The net periodic benefit cost and the benefit obligations are based on actuarial assumptions that are reviewed on an annual basis. The assumptions are revised based on an annual evaluation of long-term trends, as well as market conditions that may have an impact on the cost of providing retirement benefits.

Actuarial and other assumptions for pension plans can result from a complex series of judgments about future events and uncertainties and can rely on estimates and assumptions. For a description of the risks associated with estimates and assumptions, see Note 3. Significant Accounting Policies—Estimates and Assumptions.

Plan Assets—Dedicated Plans

The components of plan assets follow:

As of December 31,
(MILLIONS OF DOLLARS)20192018
Cash and cash equivalents$1$1
Equity securities: Equity commingled funds2725
Debt securities: Government bonds3631
Other investments88
Total(a)$72$65
(a)Fair values are determined based on valuation inputs categorized as Level 1, 2 or 3 (see Note 3. Significant Accounting Policies—Fair Value). Investment plan assets are valued using Level 1 or Level 2 inputs.

A single estimate of fair value can result from a complex series of judgments about future events and uncertainties and can rely on estimates and assumptions. For information about the risks associated with estimates and assumptions, see Note 3. Significant Accounting Policies—Estimates and Assumptions.

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Specifically, the following methods and assumptions were used to estimate the fair value of our pension assets:

•Equity commingled funds––observable market prices.
•Government bonds and other investments––principally observable market prices.

The long-term target asset allocations and the percentage of the fair value of plans assets for dedicated benefit plans follow:

As of December 31,
Target allocation
percentagePercentage of Plan Assets
(PERCENTAGES)201920192018
Cash and cash equivalents0-10%1.7%0.9%
Equity securities0-60%36.9%43.0%
Debt securities15-100%49.7%46.5%
Other investments0-100%11.7%9.6%
Total100%100%100%

Zoetis utilizes long-term asset allocation ranges in the management of our plans’ invested assets. Long-term return expectations are developed with input from outside investment consultants based on the company’s investment strategy, which takes into account historical experience, as well as the impact of portfolio diversification, active portfolio management, and the investment consultant’s view of current and future economic and financial market conditions. As market conditions and other factors change, the targets may be adjusted accordingly and actual asset allocations may vary from the target allocations.

The long-term asset allocation ranges reflect the asset class return expectations and tolerance for investment risk within the context of the respective plans’ long-term benefit obligations. These ranges are supported by an analysis that incorporates historical and expected returns by asset class, as well as volatilities and correlations across asset classes and our liability profile. This analysis, referred to as an asset-liability analysis, also provides an estimate of expected returns on plan assets, as well as a forecast of potential future asset and liability balances.

The investment consultants review investment performance with Zoetis on a quarterly basis in total, as well as by asset class, relative to one or more benchmarks.

Cash Flows—Dedicated Plans

Our plans are generally funded in amounts that are at least sufficient to meet the minimum requirements set forth in applicable employee benefit laws and local tax and other laws.

We expect to contribute approximately $6 million to our dedicated pension plans in 2020. Benefit payments are expected to be approximately $3 million for 2020, $3 million for 2021, $5 million for 2022, and $4 million for 2023 and $5 million for 2024. Benefit payments are expected to be approximately $39 million in the aggregate for the five years thereafter. These expected benefit payments reflect the future plan benefits subsequent to 2020 projected to be paid from the plans or from the general assets of Zoetis entities under the current actuarial assumptions used for the calculation of the projected benefit obligation and, therefore, actual benefit payments may differ from projected benefit payments.

B.Postretirement Plans

As discussed above, Pfizer continued to credit certain U.S. employees' service with Zoetis generally through December 31, 2017 (or termination of employment from Zoetis, if earlier), for certain early retirement benefits with respect to Pfizer's U.S. retiree medical plans. Postretirement benefit expense associated with these U.S. retiree medical plans totaled approximately $4 million per year in 2019, 2018 and 2017 (inclusive of service cost grow-in benefits discussed above). The expected benefit payments for each of the next three years is approximately $4 million per year.

C.Defined Contribution Plans

Zoetis has a voluntary defined contribution plan (Zoetis Savings Plan) that allows participation by substantially all U. S. employees. Zoetis matches 100% of employee contributions, up to a maximum of 5% of each employee’s eligible compensation. The Zoetis Savings Plan also includes a profit-sharing feature that provides for an additional contribution ranging between 0 and 8 percent of each employee’s eligible compensation. All eligible employees receive the profit-sharing contribution regardless of the amount they choose to contribute to the Zoetis Savings Plan. The profit-sharing contribution is a discretionary amount provided by Zoetis and is determined on an annual basis. Employees can direct their contributions and the company's matching and profit-sharing contributions into any of the funds offered. These funds provide participants with a cross section of investing options, including the Zoetis stock fund. The matching and profit-sharing contributions are cash funded.

When the Abaxis acquisition closed on July 31, 2018, we assumed Abaxis’ legacy defined contribution plan, the Abaxis 401(k) Plan. On June 24, 2019, the Abaxis 401(k) Plan was merged into the Zoetis Savings Plan.

Employees are permitted to diversify all or any portion of their company matching or profit-sharing contribution. Once the contributions have been paid, Zoetis has no further payment obligations. Contribution expense, associated with the Zoetis Savings Plan, totaled approximately $46 million in 2019, $43 million in 2018 and $38 million in 2017.

Employees in the U.S. who meet certain eligibility requirements participate in a supplemental (non-qualified) savings plan sponsored by Zoetis. The cost of the supplemental savings plan was $12 million and $2 million in 2019 and 2018, respectively.

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15. Share-based Payments

The Zoetis 2013 Equity and Incentive Plan (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.

Twenty-five 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, 2019, the aggregate number of remaining shares available for future grant under the Equity Plan was approximately 11 million shares.

A. Share-Based Compensation Expense

In connection with the acquisition of Abaxis, in August 2018, the company issued 502,766 restricted stock units (replacement awards) with a weighted average grant date fair value of $85.26 per RSU, per the terms of the merger agreement between Zoetis and Abaxis, in connection with unvested Abaxis employee equity awards. The Abaxis unvested equity awards were canceled and exchanged for the replacement awards using a conversion ratio stated in the merger agreement. The grant date fair value of the replacement awards that is attributable to pre merger service is $10 million and is part of the consideration transferred in exchange for the acquisition of Abaxis. The fair value of the replacement awards attributable to post merger service is $33 million and will be recorded over future vesting periods. The replacements awards vest over varying terms of continuous service up to four years from the grant date and the values are amortized on a straight-line basis over the vesting term. For additional information see Note 5. Acquisitions and Divestitures*.*

The components of share-based compensation expense follow:

Year Ended December 31,
(MILLIONS OF DOLLARS)201920182017
Stock options / stock appreciation rights$10$10$10
RSUs / DSUs(a)433426
PSUs1498
Share-based compensation expense—total(b)$67$53$44
Tax benefit for share-based compensation expense(10)(7)(13)
Share-based compensation expense, net of tax$57$46$31
(a)For the year ended December 31, 2018, includes share-based compensation expense of $7 million related to the acquisition of Abaxis, for the post-merger service period. For additional details see Note 5. Acquisitions and Divestitures*.*
(b)For each of the years ended December 31, 2019, 2018 and 2017, we capitalized approximately $1 million of share-based compensation expense to inventory.

B. Stock Options

Stock 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 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. Zoetis stock option awards generally vest after three years of continuous service from the date of grant and have a contractual term of 10 years.

The fair-value-based method for valuing each Zoetis stock option grant on the grant date uses the Black-Scholes-Merton option-pricing model, which incorporates a number of valuation assumptions noted in the following table, shown at their weighted-average values:

Year Ended December 31,
201920182017
Expected dividend yield(a)0.75%0.69%0.76%
Risk-free interest rate(b)2.56%2.74%2.29%
Expected stock price volatility(c)23.08%23.61%23.26%
Expected term(d) (years)5.76.56.5
(a)Determined using a constant dividend yield during the expected term of the Zoetis stock option.
(b)Determined using the interpolated yield on U.S. Treasury zero-coupon issues.
(c)Determined using an equal weighting between historical volatility of the Zoetis stock price and implied volatility. The selection of the blended historical and implied volatility approach was based on our assessment that this calculation of expected volatility is more representative of future stock price trends.
(d)Determined using expected exercise and post-vesting termination patterns.

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The following table provides an analysis of stock option activity for the year ended December 31, 2019:

Weighted-Average
RemainingAggregate
Weighted-AverageContractual TermIntrinsic Value(a)
SharesExercise Price(Years)(MILLIONS)
Outstanding, December 31, 20184,157,129$43.41
Granted446,15887.87
Exercised(1,115,451)35.32
Forfeited(24,212)58.17
Outstanding, December 31, 20193,463,624$51.646.2$280
Exercisable, December 31, 20191,846,236$35.544.6$179
(a)Market price of underlying Zoetis common stock less exercise price.

As of December 31, 2019, there was approximately $7 million of unrecognized compensation costs related to nonvested stock options, which will be recognized over an expected remaining weighted-average period of 1.0 years.

The following table summarizes data related to stock option activity:

Year Ended/As of December 31,
(MILLIONS OF DOLLARS, EXCEPT PER STOCK OPTION AMOUNTS)201920182017
Weighted-average grant date fair value per stock option$21.84$20.30$14.31
Aggregate intrinsic value on exercise766632
Cash received upon exercise393635
Tax benefits realized related to exercise312316

C. Restricted Stock Units (RSUs)

Restricted stock units represent the right to receive a share of our common stock that is subject to a risk of forfeiture until the restrictions lapse at the end of the vesting period subject to the recipient's continued employment. RSUs accrue dividend equivalent units and are paid in shares of our common stock upon vesting (or cash determined by reference to the value of our common stock).

RSUs are accounted for using a fair-value-based method that utilizes the closing price of Zoetis common stock on the date of grant. Zoetis RSUs generally vest after three years of continuous service from the grant date and the values are amortized on a straight-line basis over the vesting term.

The following table provides an analysis of RSU activity for the year ended December 31, 2019:

Weighted-Average
RSUsGrant Date Fair Value
Nonvested, December 31, 20181,975,659$62.28
Granted363,44788.09
Vested(829,067)54.11
Reinvested dividend equivalents9,09163.98
Forfeited(58,595)72.73
Nonvested, December 31, 20191,460,535$72.93

As of December 31, 2019, there was approximately $43 million of unrecognized compensation costs related to nonvested RSUs, which will be recognized over an expected remaining weighted-average period of 1.12 years years.

D. Deferred Stock Units (DSUs)

Deferred stock units, which were granted to non-employee compensated Directors in 2013 and 2014, represent the right to receive shares of our common stock at a future date. The DSU awards will be automatically settled and paid in shares within 60 days following the Director’s separation from service on the Board of Directors.

DSUs are accounted for using a fair-value-based method that utilizes the closing price of Zoetis common stock on the date of grant. DSUs vested immediately as of the grant date and the values were expensed at the time of grant into Selling, general and administrative expenses.

For the years ended December 31, 2019 and 2018, there were no DSUs granted. As of December 31, 2019 and 2018, there were 74,273 and 73,802 DSUs outstanding, respectively, including dividend equivalents.

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E. Performance-Vesting Restricted Stock Units (PSUs)

Performance-vesting restricted stock units, which are granted to eligible senior management, represent the right to receive a share of our common stock that is subject to a risk of forfeiture until the restrictions lapse, which include continued employment through the end of the vesting period and the attainment of performance goals. PSUs represent the right to receive shares of our common stock in the future (or cash determined by reference to the value of our common stock).

PSUs are accounted for using a Monte Carlo simulation model. The units underlying the PSUs will be earned and vested over a three-year performance period, based upon the total shareholder return of the company in comparison to the total shareholder return of the companies comprising the S&P 500 index at the start of the performance period, excluding companies that during the performance period are acquired or are no longer publicly traded (Relative TSR). The weighted-average fair value was estimated based on volatility assumptions of Zoetis common stock and an average of peer companies, which were 20.3% and 25.3%, respectively, in 2019, and 21.9% and 25.1%, respectively, in 2018. Depending on the company’s Relative TSR performance at the end of the performance period, the recipient may earn between 0% and 200% of the target number of units. Vested units, including dividend equivalent units, are paid in shares of the company’s common stock. PSU values are amortized on a straight-line basis over the vesting term.

On October 3, 2019, the Company announced the retirement of Juan Ramón Alaix as Chief Executive Officer (“CEO”) effective December 31, 2019. As a result of Mr. Alaix’s retirement as CEO, a transition services letter agreement was entered into between the Company and Mr. Alaix. The letter agreement stipulates that any nonvested equity awards as of his retirement date would continue to vest according to their original vesting schedule. As a result of this change, 37,265 of nonvested PSUs granted as part of his 2018 and 2019 equity grants were modified resulting in $8 million to be recognized through December 31, 2020. During the year ended December 31, 2019, the company recognized $2 million of expense related to share-based compensation in connection with Mr. Alaix's retirement.

The following table provides an analysis of PSU activity for the year ended December 31, 2019:

Weighted-Average
PSUsGrant Date Fair Value
Nonvested, December 31, 2018390,841$71.93
Granted190,170101.51
Vested(159,216)50.78
Reinvested dividend equivalents3,02983.04
Forfeited(5,428)92.32
Nonvested, December 31, 2019419,396$93.19
Shares issued, December 31, 2019360,546$50.27

As of December 31, 2019, there was approximately $21 million of unrecognized compensation costs related to nonvested PSUs, which will be recognized over an expected remaining weighted-average period of 1.3 years.

F. Other Equity-Based or Cash-Based Awards

Our Compensation Committee is authorized to grant awards in the form of other equity-based awards or other cash-based awards, as deemed to be consistent with the purposes of the Equity Plan.

16. Stockholders' Equity

Zoetis is authorized to issue 6 billion shares of common stock and 1 billion shares of preferred stock.

In December 2016, the company's Board of Directors authorized a $1.5 billion share repurchase program. This program was completed as of December 31, 2019. In December 2018, the company's Board of Directors authorized an additional $2.0 billion share repurchase program. As of December 31, 2019, there was approximately $1.7 billion remaining under this authorization. Purchases of Zoetis shares may be made at the discretion of management, depending on market conditions and business needs.

Accumulated other comprehensive loss

Changes, net of tax, in accumulated other comprehensive loss, excluding noncontrolling interest, follow:

Currency Translation AdjustmentsBenefit PlansAccumulated Other
Cash FlowNet InvestmentOther CurrencyActuarialComprehensive
(MILLIONS OF DOLLARS)HedgesHedgesTranslation Adj(Losses)/Gains(Loss)/Income
Balance, December 31, 2016$8$—$(583)$(23)$(598)
Other comprehensive (loss)/gain, net of tax(11)—96893
Balance, December 31, 2017(3)—(487)(15)(505)
Other comprehensive (loss)/gain, net of tax(1)9(133)1(124)
Balance, December 31, 2018(4)9(620)(14)(629)
Other comprehensive gain/(loss), net of tax412(104)(9)(97)
Balance, December 31, 2019$—$21$(724)$(23)$(726)

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17. Earnings per Share

The following table presents the calculation of basic and diluted earnings per share:

Year Ended December 31,
(MILLIONS OF DOLLARS AND SHARES, EXCEPT PER SHARE DATA)201920182017
Numerator
Net income before allocation to noncontrolling interests$1,500$1,424$862
Less: net loss attributable to noncontrolling interests—(4)(2)
Net income attributable to Zoetis Inc.$1,500$1,428$864
Denominator
Weighted-average common shares outstanding478.128483.063489.918
Common stock equivalents: stock options, RSUs, DSUs and PSUs3.6593.8353.243
Weighted-average common and potential dilutive shares outstanding481.787486.898493.161
Earnings per share attributable to Zoetis Inc. stockholders—basic$3.14$2.96$1.76
Earnings per share attributable to Zoetis Inc. stockholders—diluted$3.11$2.93$1.75

The number of stock options outstanding under the company's Equity Plan that were excluded from the computation of diluted earnings per share, as the effect would have been antidilutive, were de minimis for December 31, 2019, and December 31, 2018 and approximately 1 million shares as of December 31, 2017.

18. Commitments and Contingencies

We 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 Proceedings

Our 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.

The principal matters to which we are a party are discussed below. In determining whether a pending matter is significant for financial reporting and disclosure purposes, we consider both quantitative and qualitative factors in order to assess materiality, such as, among other things, the amount of damages and the nature of any other relief sought in the proceeding, if such damages and other relief are specified; our view of the merits of the claims and of the strength of our defenses; whether the action purports to be a class action and our view of the likelihood that a class will be certified by the court; the jurisdiction in which the proceeding is pending; any experience that we or, to our knowledge, other companies have had in similar proceedings; whether disclosure of the action would be important to a reader of our financial statements, including whether disclosure might change a reader’s judgment about our financial statements in light of all of the information about the company that is available to the reader; the potential impact of the proceeding on our reputation; and the extent of public interest in the matter. In addition, with respect to patent matters, we consider, among other things, the financial significance of the product protected by the patent.

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Ulianopolis, Brazil

In February 2012, the Municipality of Ulianopolis (State of Para, Brazil) filed a complaint against Fort Dodge Saúde Animal Ltda. (FDSAL), a Zoetis entity, and five other large companies alleging that waste sent to a local waste incineration facility for destruction, but that was not ultimately destroyed as the facility lost its operating permit, caused environmental impacts requiring cleanup.

The Municipality is seeking recovery of cleanup costs purportedly related to FDSAL's share of all waste accumulated at the incineration facility awaiting destruction, and compensatory damages to be allocated among the six defendants. We believe we have strong arguments against the claim, including defense strategies against any claim of joint and several liability.

At the request of the Municipal prosecutor, in April 2012, the lawsuit was suspended for one year. Since that time, the prosecutor has initiated investigations into the Municipality's actions in the matter as well as the efforts undertaken by the six defendants to remove and dispose of their individual waste from the incineration facility. On October 3, 2014, the Municipal prosecutor announced that the investigation remained ongoing and outlined the terms of a proposed Term of Reference (a document that establishes the minimum elements to be addressed in the preparation of an Environmental Impact Assessment), under which the companies would be liable to withdraw the waste and remediate the area. On March 5, 2015, we presented our response to the prosecutor’s proposed Term of Reference, arguing that the proposed terms were overly general in nature and expressing our interest in discussing alternatives to address the matter. The prosecutor agreed to consider our request to engage a technical consultant to conduct an environmental diagnostic of the contaminated area. On May 29, 2015, we, in conjunction with the other defendant companies, submitted a draft cooperation agreement to the prosecutor, which outlined the proposed terms and conditions for the engagement of a technical consultant to conduct the environmental diagnostic. On August 19, 2016, the parties and the prosecutor agreed to engage the services of a third-party consultant to conduct a limited environmental assessment of the site. The site assessment was conducted during June 2017, and a written report summarizing the results of the assessment was provided to the parties and the prosecutor in November 2017. The report noted that waste is still present on the site and that further environmental assessments are needed before a plan to manage that remaining waste can be prepared. On April 1, 2019, the defendants met with the Prosecutor to discuss the conclusions set forth in the written report. Following that discussion, on April 10, 2019, the Prosecutor issued a procedural order requesting that the defendants prepare and submit a technical proposal outlining the steps needed to conduct the additional Phase II environmental assessments. The defendants presented the technical proposal to the Prosecutor on October 21, 2019. The technical proposal remains under consideration by the Prosecutor.

Lascadoil Contamination in Animal Feed

An investigation by the U.S. Food and Drug Administration (FDA) and the Michigan Department of Agriculture into the alleged contamination of the feed supply of certain turkey and hog feed mills in Michigan led to the recall of certain batches of soy oil (intended for use as an animal feed additive) that had originted with Shur-Green Farms LLC, a producer of soy oil, and that had been contaminated with lascadoil, an industrial by-product of certain Zoetis manufacturing processes. The contaminated feed is believed to have caused the deaths of approximately 50,000 turkeys and the contamination (but not death) of at least 20,000 hogs in August 2014. The investigation posited that Shur-Green inadvertently contaminted soy oil with lascadoil which it purchased from Zoetis for use as a bio-fuel ingredient, and then sold the contaminated soy oil to fat recycling vendors, who in turn unknowingly sold to feed mills for use in animal feed.

During the course of its investigation, the FDA identified the process used to manufacture Zoetis’ Avatec® (lasalocid sodium) and Bovatec® (lasalocid sodium) products as the possible source of the lascadoil, since lascadoil contains small amounts of lasalocid, the active ingredient found in both products. Zoetis sold the industrial lascadoil by-product to Shur-Green, through its broker, Heritage Intreractive Services, LLC. Under the terms of the sale agreement, the lascadoil could only be incinerated or resold for use in biofuel, and the agreement expressly prohibited the reselling of lascadoil for use as a component in food. The FDA inspected the Zoetis site where Avatec and Bovatec are manufactured, and found no evidence that Zoetis was involved in the contamination of the animal feed.

On March 10, 2015, plaintiffs Restaurant Recycling, LLC (Restaurant Recycling) and Superior Feed Ingredients, LLC (Superior), both of whom are in the fat recycling business, filed a complaint in the Seventeenth Circuit Court for the State of Michigan against Shur-Green Farms alleging negligence and breach of warranty claims arising from their purchase of soy oil allegedly contaminated with lascadoil. Plaintiffs resold the allegedly contaminated soy oil to turkey feed mills for use in feed ingredient. Plaintiffs also named Zoetis as a defendant in the complaint alleging that Zoetis failed to properly manufacture its products and breached an implied warranty that the soy oil was fit for use at turkey and hog mills. Zoetis was served with the complaint on June 3, 2015, and we filed our answer, denying all allegations, on July 15, 2015. On August 10, 2015, several of the turkey feed mills filed a joint complaint against Restaurant Recycling, Superior, Shur-Green Farms and others, alleging claims for negligence, misrepresentation, and breach of warranty, arising out of their alleged purchase and use of the contaminated soy oil. The complaint raises only one count against Zoetis for negligence. We filed an answer to the complaint on November 2, 2015, denying the allegation. On May 16, 2016, two additional turkey producers filed a complaint in the Seventeenth Circuit Court for the State of Michigan against the company, Restaurant Recycling, Superior, Shur-Green Farms and others, alleging claims for negligence and breach of warranties. We filed an answer to the complaint on June 20, 2016, denying the allegations. The Court has consolidated all three cases in Michigan for purposes of discovery and disposition. On July 28, 2017, we filed a motion for summary disposition on the grounds that no genuine issues of material fact exist and that Zoetis is entitled to judgment as a matter of law. On October 19, 2017, the Court granted our motion and dismissed all claims against Zoetis. On October 31, 2017, the plaintiffs filed motions for reconsideration of the Court’s decision granting summary disposition. The Court denied all such motions on December 6, 2017, for the same reasons cited in the Court’s original decision. On December 27, 2017, the plaintiffs filed a request with the Michigan Court of Appeals seeking an interlocutory (or interim) appeal of the lower Court’s decision, which we opposed on January 17, 2018. On July 5, 2018, the Court of Appeals denied the plaintiffs’ request for an interlocutory appeal. The case has been remanded back to the lower Court, where it will proceed to trial (unless settled) without Zoetis. The trial began on November 4, 2019. We have been advised that the remaining parties may have reached an agreement in principle to settle the dispute, but we have not yet received any formal notification from the Court that the case has concluded. Depending on the exact nature of the settlement, the plaintiffs may still have the option to seek an appeal of the lower Court’s decision granting Zoetis’ motion for summary disposition after the final adjudication of the case.

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Other Matters

On February 14, 2019, the General Court of the European Union (General Court) annulled the January 11, 2016 decision of the European Commission (EC) that selective tax advantages granted by Belgium under its "excess profit" tax scheme constitute illegal state aid. On May 8, 2019, the EC filed an appeal to the decision of the General Court. On September 16, 2019, the EC opened separate in-depth investigations to assess whether Belgium excess profit rulings granted to 39 multinational companies, including Zoetis, constituted state aid for those companies. Due to the uncertainty with respect to the outcome of the appeal to be filed by the EC, the company has not reflected any potential benefits associated with the decision of the General Court in its consolidated financial statements as of December 31, 2019. We will continue to monitor the developments of the appeal and its ultimate resolution.

The EC published a decision on alleged competition law infringements by several human health pharmaceutical companies on June 19, 2013. One of the involved legal entities is Alpharma LLC (previously having the name Zoetis Products LLC). Alpharma LLC’s involvement is solely related to its human health activities prior to Pfizer's acquisition of King/Alpharma. Zoetis paid a fine in the amount of euro 11 million (approximately $14 million) and was reimbursed in full by Pfizer in accordance with the Global Separation Agreement between Pfizer and Zoetis, which provides that Pfizer is obligated to indemnify Zoetis for any liabilities arising out of claims not related to its animal health assets. We filed an appeal of the decision on September 6, 2013 to the General Court of the European Union. On September 8, 2016, the General Court upheld the decision of the European Commission. On November 25, 2016, we filed an appeal to the Court of Justice of the European Union. On January 24, 2019, the Court heard oral argument on the merits of the appeal, and we now await the Court’s decision.

B. Guarantees and Indemnifications

In the ordinary course of business and in connection with the sale of assets and businesses, we indemnify our counterparties against certain liabilities that may arise in connection with the transaction or related to activities prior to the transaction. These indemnifications typically pertain to environmental, tax, employee and/or product-related matters and patent-infringement claims. If the indemnified party were to make a successful claim pursuant to the terms of the indemnification, we would be required to reimburse the loss. These indemnifications are generally subject to threshold amounts, specified claim periods and other restrictions and limitations. Historically, we have not paid significant amounts under these provisions and, as of December 31, 2019, recorded amounts for the estimated fair value of these indemnifications were not significant.

C. Purchase Commitments

As of December 31, 2019, we have agreements totaling $440 million to purchase goods and services that are enforceable and legally binding and include amounts relating to contract manufacturing, information technology services and potential milestone payments deemed reasonably likely to occur.

19. Segment Information

A. Segment Information

We 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 vaccines, parasiticides, anti-infectives, medicated feed additives, animal health diagnostics and other pharmaceuticals, for both livestock and companion animal customers.

Operating Segments

Our operating segments are the U.S. and International. Our chief operating decision maker uses the revenue and earnings of the two operating segments, among other factors, for performance evaluation and resource allocation.

Other Costs and Business Activities

Certain 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 platform functions such as business technology, facilities, legal, finance, human resources, business development, and communications, among others. These costs also include compensation costs and other miscellaneous operating expenses not charged to our operating segments, as well as interest income and expense.
•Certain transactions and events such as (i) Purchase accounting adjustments, where we incur expenses associated with the amortization of fair value adjustments to inventory, intangible assets and property, plant and equipment; (ii) Acquisition-related activities, where we incur costs associated with acquiring and integrating newly acquired businesses, such as transaction costs and integration costs; and (iii) Certain significant items, which comprise 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 as certain costs related to becoming an independent public company, restructuring charges and implementation costs associated with our cost-reduction/productivity initiatives that are not associated with an acquisition, certain asset impairment charges, certain legal and commercial settlements and the impact of divestiture-related gains and losses.
•Other unallocated includes (i) certain overhead expenses associated with our global manufacturing operations not charged to our operating segments; (ii) certain costs associated with business technology and finance that specifically support our global manufacturing operations; (iii) certain supply chain and global logistics costs; and (iv) procurement costs.

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Segment Assets

We manage our assets on a total company basis, not by operating segment. Therefore, our chief operating decision maker does not regularly review any asset information by operating segment and, accordingly, we do not report asset information by operating segment. Total assets were approximately $11.5 billion and $10.8 billion at December 31, 2019 and 2018, respectively.

Selected Statement of Income Information

EarningsDepreciation and Amortization(a)
Year Ended December 31,Year Ended December 31,
(MILLIONS OF DOLLARS)201920182017201920182017
U.S.
Revenue$3,203$2,877$2,620
Cost of Sales655606565
Gross Profit2,5482,2712,055
Gross Margin79.6%78.9%78.4%
Operating Expenses543456421
Other (income)/deductions——(3)
U.S. Earnings2,0051,8151,637$44$34$29
International
Revenue(b)2,9722,8902,643
Cost of Sales925929889
Gross Profit2,0471,9611,754
Gross Margin68.9%67.9%66.4%
Operating Expenses560559515
Other (income)/deductions—3(1)
International Earnings1,4871,3991,240534844
Total operating segments3,4923,2142,877978273
Other business activities(348)(337)(313)242323
Reconciling Items:
Corporate(707)(666)(625)695952
Purchase accounting adjustments(234)(162)(88)21914388
Acquisition-related costs(43)(63)(10)———
Certain significant items(c)(67)43(25)———
Other unallocated(292)(339)(291)316
Total Earnings(d)$1,801$1,690$1,525$412$308$242
(a)Certain production facilities are shared. Depreciation and amortization is allocated to the reportable operating segments based on estimates of where the benefits of the related assets are realized.
(b)Revenue denominated in euros was $742 million in 2019, $745 million in 2018, and $660 million in 2017.
(c)For 2019, certain significant items primarily includes: (i) a change in estimate related to inventory costing of $69 million, (ii) CEO transition-related costs of $10 million, (iii) consulting fees, product transfer costs, employee termination costs and exit costs related to cost-reduction and productivity initiatives of $7 million, and (iv) income of $20 million resulting from a payment received pursuant to an agreement related to the 2016 sale of certain U.S. manufacturing sites.

For 2018, certain significant items primarily includes: (i) a net gain of $42 million related to the divestiture of certain agribusiness products within our International segment, (ii) a net gain of $18 million related to the relocation of a manufacturing site in China, (iii) charges related to our operational efficiency initiative and supply network strategy initiative of $9 million; and (iv) employee termination costs in Europe of $7 million.

For 2017, certain significant items primarily includes: (i) charges related to our operational efficiency initiative and supply network strategy initiative of $20 million; (ii) Zoetis stand-up costs of $3 million; (iii) employee termination costs in Europe of $4 million, (iv) income related to a commercial settlement in Mexico recorded in 2014 and 2016 of $5 million; and (iv) charges of $3 million associated with changes to our operating model.
(d)Defined as income before provision for taxes on income.

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B. Geographic Information

Property, plant and equipment, less accumulated depreciation, by geographic region follow:

As of December 31,
(MILLIONS OF DOLLARS)20192018
U.S.$1,342$1,188
International598470
Property, plant and equipment, less accumulated depreciation$1,940$1,658

20. Selected Quarterly Financial Data (Unaudited)

(MILLIONS OF DOLLARS, EXCEPT PER COMMON SHARE DATA)FIRSTSECONDTHIRDFOURTH
2019
Revenue$1,455$1,547$1,584$1,674
Costs and expenses1,0691,0701,0501,219
Restructuring charges and certain acquisition-related costs522618
Income before provision for taxes on income381455528437
Provision for taxes on income69849553
Net income before allocation to noncontrolling interests312371433384
Net loss attributable to noncontrolling interests————
Net income attributable to Zoetis$312$371$433$384
Earnings per common share--basic$0.65$0.77$0.91$0.81
Earnings per common share--diluted$0.65$0.77$0.90$0.80
2018
Revenue$1,366$1,415$1,480$1,564
Costs and expenses9479731,0151,132
Restructuring (reversals)/charges and certain acquisition-related costs254714
Income before provision for taxes on income417437418418
Provision for taxes on income67557173
Net income before allocation to noncontrolling interests350382347345
Net loss attributable to noncontrolling interests(2)(2)——
Net income attributable to Zoetis$352$384$347$345
Earnings per common share--basic$0.72$0.79$0.72$0.72
Earnings per common share--diluted$0.72$0.79$0.71$0.71

Basic and diluted EPS are computed independently for each of the periods presented. Accordingly, the sum of the quarterly EPS amounts may not agree to the total for the year.

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Zoetis Inc. and Subsidiaries

Schedule II—Valuation and Qualifying Accounts

Balance,Balance,
Beginning ofEnd of
(MILLIONS OF DOLLARS)PeriodAdditionsDeductionsPeriod
Year Ended December 31, 2019
Allowance for doubtful accounts$24$3$(6)$21
Year Ended December 31, 2018
Allowance for doubtful accounts$25$2$(3)$24
Year Ended December 31, 2017
Allowance for doubtful accounts$30$3$(8)$25

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