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 Firm			61
Consolidated Statements of Income for the Years Ended December 31, 2021, 2020 and 2019			64
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2021, 2020 and 2019			65
Consolidated Balance Sheets as of December 31, 2021 and 2020			66
Consolidated Statements of Equity for the Years Ended December 31, 2021, 2020 and 2019			67
Consolidated Statements of Cash Flows for the Years Ended December 31, 2021, 2020 and 2019			68
Notes to Consolidated Financial Statements			69
Schedule II—Valuation and Qualifying Accounts			99

60 |

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, 2021 and 2020, 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, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021, 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, 2021, 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 15, 2022 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, 2021, the Company has recorded gross unrecognized tax benefits of $189 million.

We identified the evaluation of gross unrecognized tax benefits as a critical audit matter. Complex auditor judgment, including the involvement of tax professionals with specialized skills and knowledge was required to assess the valuation of a tax position, which included 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 following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s unrecognized tax benefit process. This included controls related to (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 as well as 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.

61 |

Deductions from revenue related to the rebates accrual for the U.S. segment

As discussed in Note 3 to the consolidated financial statements, the Company records an accrual for estimated rebates as a deduction from revenue when the related revenue is 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, 2021 are approximately $216 million and accruals for deductions from revenue included in accrued expenses are approximately $312 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 settled by the Company, challenging auditor judgment was required in assessing the estimate of the required rebates accrual. In particular, the identification of which revenue transactions were subject to a rebate and the relevance and reliability of information used to estimate an individual rebate programs’ accrual required challenging auditor judgment.

The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s rebate accrual process for the U.S. segment. This included 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 tested the estimate of 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, 2020 to the actual amount that ultimately was paid by the Company during 2021.

/s/ KPMG LLP

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

Short Hills, New Jersey

February 15, 2022

62 |

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, 2021, 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, 2021, 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, 2021 and 2020, 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, 2021, and the related notes and financial statement Schedule II - Valuation and Qualifying Accounts (collectively, the consolidated financial statements), and our report dated February 15, 2022 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 15, 2022

63 |

ZOETIS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME


	Year Ended December 31,
(MILLIONS OF DOLLARS AND SHARES, EXCEPT PER SHARE DATA)	2021		2020		2019
Revenue	$	7,776	$	6,675	$	6,260
Costs and expenses:
Cost of sales(a)	2,303		2,057		1,992
Selling, general and administrative expenses(a)	2,001		1,726		1,638
Research and development expenses(a)	508		463		457
Amortization of intangible assets	161		160		155
Restructuring charges and certain acquisition-related costs	43		25		51
Interest expense, net of capitalized interest	224		231		223
Other (income)/deductions––net	48		17		(57)
Income before provision for taxes on income	2,488		1,996		1,801
Provision for taxes on income	454		360		301
Net income before allocation to noncontrolling interests	2,034		1,636		1,500
Less: Net loss attributable to noncontrolling interests	(3)		(2)		—
Net income attributable to Zoetis Inc.	$	2,037	$	1,638	$	1,500
Earnings per share attributable to Zoetis Inc. stockholders:
Basic	$	4.29	$	3.44	$	3.14
Diluted	$	4.27	$	3.42	$	3.11
Weighted-average common shares outstanding:
Basic	474.348		475.502		478.128
Diluted	476.717		478.569		481.787
Dividends declared per common share	$	1.075	$	0.850	$	0.692

(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)	2021		2020		2019
Net income before allocation to noncontrolling interests	$	2,034	$	1,636	$	1,500
Other comprehensive loss, net of tax and reclassification adjustments:
Unrealized gains/(losses) on derivatives for cash flow hedges, net(a)	19		(15)		4
Unrealized gains/(losses) on derivatives for net investment hedges, net(a)	42		(58)		12
Foreign currency translation adjustments, net	(101)		69		(104)
Benefit plans: Actuarial gain/(loss), net(a)	6		—		(9)

Total other comprehensive loss, net of tax	(34)		(4)		(97)
Comprehensive income before allocation to noncontrolling interests	2,000		1,632		1,403
Comprehensive loss attributable to noncontrolling interests	(3)		(2)		—
Comprehensive income attributable to Zoetis Inc.	$	2,003	$	1,634	$	1,403

(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)	2021		2020
Assets
Cash and cash equivalents(a)	$	3,485	$	3,604

Accounts receivable, less allowance for doubtful accounts of $17 in 2021 and $20 in 2020	1,133		1,013
Inventories	1,923		1,628
Other current assets	389		366
Total current assets	6,930		6,611
Property, plant and equipment, less accumulated depreciation of $2,072 in 2021 and $1,952 in 2020	2,422		2,202
Operating lease right of use assets	181		192
Goodwill	2,682		2,694
Identifiable intangible assets, less accumulated amortization	1,474		1,710
Noncurrent deferred tax assets	100		94
Other noncurrent assets	111		106
Total assets	$	13,900	$	13,609

Liabilities and Equity
Short-term borrowings	$	—	$	4
Current portion of long-term debt	—		600
Accounts payable	436		457
Dividends payable	154		119
Accrued expenses	710		556
Accrued compensation and related items	392		295
Income taxes payable	38		46
Other current liabilities	67		93
Total current liabilities	1,797		2,170
Long-term debt, net of discount and issuance costs	6,592		6,595
Noncurrent deferred tax liabilities	320		378
Operating lease liabilities	151		163
Other taxes payable	257		260
Other noncurrent liabilities	239		270
Total liabilities	9,356		9,836
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; 472,574,090 and 475,317,751 shares outstanding at December 31, 2021 and 2020, respectively	5		5
Treasury stock, at cost, 29,317,153 and 26,573,492 shares of common stock at December 31, 2021 and 2020, respectively	(2,952)		(2,230)
Additional paid-in capital	1,068		1,065
Retained earnings	7,186		5,659
Accumulated other comprehensive loss	(764)		(730)
Total Zoetis Inc. equity	4,543		3,769
Equity attributable to noncontrolling interests	1		4
Total equity	4,544		3,773
Total liabilities and equity	$	13,900	$	13,609

(a) As of December 31, 2021 and 2020, includes $3 million and $2 million, respectively, of restricted cash.

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ZOETIS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY


				Zoetis
																		Accumulated			Equity
												Additional						Other			Attributable to
(MILLIONS OF DOLLARS, EXCEPT SHARE DATA)		Common Stock					Treasury Stock					Paid-in			Retained			Comprehensive			Noncontrolling			Total
	Shares		Amount			Shares		Amount			Capital			Earnings			Loss			Interests			Equity
Balance, December 31, 2018		501.9		$	5		22.3		$	(1,487)		$	1,026		$	3,270		$	(629)		$	—		$	2,185
Net income		—		—			—		—			—			1,500			—			—			1,500
Other comprehensive loss		—		—			—		—			—			—			(97)			—			(97)


Share-based compensation awards(a)		—		—			(1.8)		71			15			(13)			—			—			73
Treasury stock acquired(b)		—		—			5.8		(626)			—			—			—			—			(626)
Employee benefit plan contribution from Pfizer Inc.(c)		—		—			—		—			3			—			—			—			3
Dividends declared		—		—			—		—			—			(330)			—			—			(330)
Balance, December 31, 2019		501.9		$	5		26.4		$	(2,042)		$	1,044		$	4,427		$	(726)		$	—		$	2,708
Net income/(loss)		—		—			—		—			—			1,638			—			(2)			1,636
Other comprehensive loss		—		—			—		—			—			—			(4)			—			(4)
Consolidation of a noncontrolling interest(d)		—		—			—		—			—			—			—			6			6

Share-based compensation awards(a)		—		—			(1.6)		62			18			(2)			—			—			78
Treasury stock acquired(b)		—		—			1.8		(250)			—			—			—			—			(250)
Employee benefit plan contribution from Pfizer Inc.(c)		—		—			—					3			—			—			—			3
Dividends declared		—		—			—					—			(404)			—			—			(404)
Balance, December 31, 2020		501.9		$	5		26.6		$	(2,230)		$	1,065		$	5,659		$	(730)		$	4		$	3,773
Net income/(loss)		—		—			—		—			—			2,037			—			(3)			2,034
Other comprehensive loss		—		—			—		—			—			—			(34)			—			(34)

Share-based compensation awards(a)		—		—			(1.3)		21			—			(1)			—			—			20
Treasury stock acquired(b)		—		—			4.0		(743)			—			—			—			—			(743)
Employee benefit plan contribution from Pfizer Inc.(c)		—		—			—		—			3			—			—			—			3
Dividends declared		—		—			—		—			—			(509)			—			—			(509)
Balance, December 31, 2021		501.9		$	5		29.3		$	(2,952)		$	1,068		$	7,186		$	(764)		$	1		$	4,544

Shares may not add due to rounding.

(a) 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.

(b) Reflects the acquisition of treasury shares in connection with the share repurchase program. For additional information, see Note 16. Stockholders' Equity.

(c) 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.

(d) Represents the consolidation of a research and development arrangement with a Belgian company, a variable interest entity of which Zoetis is the primary beneficiary.

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ZOETIS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Year Ended December 31,
(MILLIONS OF DOLLARS)	2021		2020		2019
Operating Activities
Net income before allocation to noncontrolling interests	$	2,034	$	1,636	$	1,500
Adjustments to reconcile net income before noncontrolling interests to net cash provided by operating activities:
Depreciation and amortization expense	448		441		412
Share-based compensation expense	58		59		67
Asset write-offs and asset impairments	47		43		7
Net loss/(gain) on sales of assets	2		(19)		(20)
Provision for losses on inventory	46		105		68
Deferred taxes	(80)		(62)		(79)
Loss on treasury locks	—		(6)		—
Employee benefit plan contribution from Pfizer Inc.	3		3		3
Other non-cash adjustments	(2)		11		(12)
Other changes in assets and liabilities, net of acquisitions and divestitures:
Accounts receivable	(155)		74		(69)
Inventories	(366)		(346)		(104)
Other assets	(7)		(68)		(51)
Accounts payable	(17)		147		(10)
Other liabilities	227		91		91
Other tax accounts, net	(25)		17		(8)
Net cash provided by operating activities	2,213		2,126		1,795
Investing Activities
Capital expenditures	(477)		(453)		(460)

Acquisitions, net of cash acquired	(14)		(113)		(195)
Purchase of investments	(12)		—		—
Proceeds from maturities and redemptions of investments	—		—		101
Settlements on swaps designated as net investment hedges	44		(27)		37
Net proceeds from sale of assets	2		21		21
Other investing activities	(1)		—		(8)
Net cash used in investing activities	(458)		(572)		(504)
Financing Activities
(Decrease)/increase in short-term borrowings, net	(4)		4		(9)
Principal payments on long-term debt	(600)		(500)		—
Proceeds from issuance of long-term debt—senior notes, net of discount	—		1,240		—
Payment of consideration related to previous acquisitions	(6)		(2)		(9)
Share-based compensation-related proceeds, net of taxes paid on withholding shares	(35)		20		7
Purchases of treasury stock	(743)		(250)		(626)
Cash dividends paid	(474)		(380)		(314)
Payment of debt issuance costs	—		(12)		—
Acquisition of a noncontrolling interest, net of cash acquired	—		3		—
Net cash (used in)/provided by financing activities	(1,862)		123		(951)
Effect of exchange-rate changes on cash and cash equivalents	(12)		(7)		(8)
Net (decrease)/increase in cash and cash equivalents	(119)		1,670		332
Cash and cash equivalents at beginning of period	3,604		1,934		1,602
Cash and cash equivalents at end of period	$	3,485	$	3,604	$	1,934


Supplemental cash flow information
Cash paid during the period for:
Income taxes	$	548	$	418	$	418
Interest, net of capitalized interest	253		257		247
Non-cash transactions:
Capital expenditures	$	6	$	3	$	7
Contingent purchase price consideration	—		—		23
Dividends declared, not paid	154		119		95

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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 animal health industry, focused on the discovery, development, manufacture and commercialization of medicines, vaccines, diagnostic products and services, biodevices, genetic tests and precision animal health technology. 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: dogs, cats and horses (collectively, companion animals) and cattle, swine, poultry, fish and sheep (collectively, livestock); and within seven major product categories: vaccines, parasiticides, anti-infectives, dermatology, other pharmaceutical products, 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 Issued Accounting Standards

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. In January 2021, it issued a subsequent amendment to the initial guidance: ASU No. 2021-01, Reference Rate Reform (Topic 848). The new guidance provides temporary optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions that reference the London Interbank Offered Rate (LIBOR) or another reference rate expected to be discontinued because of reference rate reform. Adoption of the guidance is optional and effective as of March 12, 2020, but only available through December 31, 2022. We currently have a revolving credit facility and various hedging transactions that reference LIBOR. We will make specific amendments to our affected contracts and hedge documentation to adopt these standards as of December 31, 2022 and we do not expect these changes to have a material impact on our consolidated financial statements or related disclosures.

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.

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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.

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, 2021 and 2020 are approximately $216 million and $185 million, respectively. As of December 31, 2021, and 2020, accruals for deductions from revenue included in Accrued expenses are approximately $312 million and $226 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 December 31, 2020 and subsequently recognized as revenue during 2021 were approximately $6 million. Contract liabilities as of December 31, 2021 were approximately $12 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, 2021 is not material.

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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 $292 million in 2021, $233 million in 2020 and $167 million in 2019.

Shipping and handling costs totaled approximately $80 million in 2021, $66 million in 2020 and $59 million in 2019.

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.

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

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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 necessary, 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 periodic 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 2021 and 2020, we performed a periodic quantitative impairment assessment as of September 30, 2021 and 2020, respectively, 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 5 to 10 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 $73 million and $59 million of internal-use software for the years ended December 31, 2021 and 2020, respectively. Depreciation expense for capitalized software was $52 million in 2021, $46 million in 2020 and $27 million in 2019.

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.

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 money market funds, 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).

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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, 2021 and 2020, Accounts receivable, less allowance for doubtful accounts, of $1,133 million and $1,013 million, respectively, includes approximately $47 million and $48 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.

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, 2021 and 2020, accruals for asset retirement obligations are $25 million 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.

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

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;
parasiticides: products that prevent or eliminate external and internal parasites such as fleas, ticks and worms;
anti-infectives**: products that prevent, kill or slow the growth of bacteria, fungi or protozoa;
dermatology products: products that relieve itch associated with allergic conditions and atopic dermatitis;
other pharmaceutical products**: pain and sedation, antiemetic, reproductive, and oncology products;
medicated feed additives**: products added to animal feed that provide medicines to livestock; and
animal health diagnostics: blood and urine analysis testing capabilities, including point-of-care diagnostic products, instruments and reagents, rapid immunoassay tests, reference laboratory kits and services 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 biodevices, genetic tests and precision animal health.

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, deepening the human-animal bond, receiving increased medical treatment and benefiting from advances in animal health medicine, vaccines and diagnostics.

Our livestock products primarily help prevent or treat diseases and conditions to allow veterinarians and producers to care for their animals and 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 demand for improved nutrition, particularly through increased consumption of animal protein. Second, population growth leads to greater natural resource constraints driving a need for enhanced productivity. Finally, as standards of living improve and the global chain faces increased scrutiny, there is more focus on food quality, safety, and reliability of supply.

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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)	2021		2020		2019
United States	$	4,042	$	3,557	$	3,203
Australia	259		207		196
Brazil	312		258		293
Canada	232		210		206
Chile	136		100		91
China	357		266		200
France	132		118		117
Germany	183		159		153
Italy	115		90		112
Japan	186		177		158
Mexico	133		116		117
Spain	128		112		114
United Kingdom	234		178		198
Other developed markets	467		388		370
Other emerging markets	778		656		647
	7,694		6,592		6,175
Contract manufacturing & human health	82		83		85
Total Revenue	$	7,776	$	6,675	$	6,260

Revenue exceeded $100 million in twelve countries outside the U.S. in 2021 and eleven countries outside the U.S. in 2020 and 2019. The U.S. was the only country to contribute more than 10% of total revenue in each year.

Revenue by major species


	Year Ended December 31,
(MILLIONS OF DOLLARS)	2021		2020		2019
U.S.
Companion animal	$	2,990	$	2,391	$	1,984
Livestock	1,052		1,166		1,219
	4,042		3,557		3,203
International
Companion animal	1,699		1,261		1,161
Livestock	1,953		1,774		1,811
	3,652		3,035		2,972
Total
Companion animal	4,689		3,652		3,145
Livestock	3,005		2,940		3,030
Contract manufacturing & human health	82		83		85
Total Revenue	$	7,776	$	6,675	$	6,260

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Revenue by species


	Year Ended December 31,
(MILLIONS OF DOLLARS)	2021		2020		2019
Companion Animal:
Dogs and Cats	$	4,426	$	3,437	$	2,950
Horses	263		215		195
	4,689		3,652		3,145
Livestock:
Cattle	1,557		1,558		1,654
Swine	659		621		611
Poultry	507		537		559
Fish	187		148		134
Sheep and other	95		76		72
	3,005		2,940		3,030
Contract manufacturing & human health	82		83		85
Total Revenue	$	7,776	$	6,675	$	6,260

Revenue by product category


	Year Ended December 31,
(MILLIONS OF DOLLARS)	2021		2020		2019
Vaccines	$	1,673	$	1,476	$	1,483
Parasiticides	1,635		1,173		966
Anti-infectives	1,215		1,206		1,254
Dermatology	1,180		941		770
Other pharmaceuticals	966		821		780
Medicated feed additives	420		460		470
Animal health diagnostics	374		305		268
Other non-pharmaceuticals	231		210		184
	7,694		6,592		6,175
Contract manufacturing & human health	82		83		85
Total Revenue	$	7,776	$	6,675	$	6,260

B. Other Revenue Information

Significant Customers

We sell our companion animal products primarily to veterinarians who then sell the products to pet owners. 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. Sales to our largest customer, a U.S. veterinary distributor, represented approximately 14%, 14% and 15% of total revenue for 2021, 2020, and 2019, respectively.

5. Acquisitions and Divestitures

A. Acquisitions

During 2021, we entered into an agreement to acquire Jurox, a privately held animal health company based in Australia, which develops, manufactures and markets a wide range of veterinary medicines for treating companion animals and livestock. The transaction is subject to customary closing conditions and the satisfaction of regulatory requirements. We expect to complete the acquisition in 2022. We also acquired certain assets to expand our portfolio of equine care products, which did not have a significant impact on our consolidated financial statements.

During 2020, we completed the acquisitions of Fish Vet Group, a diagnostics company for aquaculture, Virtual Recall, a veterinary engagement software company, Performance Livestock Analytics, a cloud-based technology company in the precision animal health business, and Ethos Diagnostic Science, a veterinary reference laboratory business with labs across the U.S. We also entered into an option purchase agreement as part of a research and development arrangement with a Belgian company, a variable interest entity of which Zoetis is the primary beneficiary and now consolidating within our results. These transactions did not have a significant impact on our consolidated financial statements.

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.

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B. Divestitures

In 2020 and 2019, we received cash proceeds of $20 million resulting from payments received pursuant to an agreement related to the 2016 sale of certain U.S. manufacturing sites.

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)	2021		2020		2019
Restructuring charges and certain acquisition-related costs:
Integration costs(a)	$	10	$	17	$	18

Restructuring charges(b)(c):
Employee termination costs	17		8		33
Asset impairment charges	13		—		—
Exit costs	3		—		—
Total Restructuring charges and certain acquisition-related costs	$	43	$	25	$	51

(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) The restructuring charges for the year ended December 31, 2021 are primarily related to the realignment of our international operations and other cost-reduction and productivity initiatives.

The restructuring charges for the year ended December 31, 2020 are primarily related to CEO transition-related costs and other cost-reduction and productivity initiatives.

The restructuring charges for the year ended December 31, 2019 are primarily related to the acquisition of Abaxis and CEO transition-related costs.

For the year ended December 31, 2021, Manufacturing/research/corporate of $21 million and International of $12 million.
For the year ended December 31, 2020, Manufacturing/research/corporate of $8 million.
For the year ended December 31, 2019, Manufacturing/research/corporate of $31 million and International of $2 million.

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


	Employee		Asset
	Termination		Impairment		Exit
(MILLIONS OF DOLLARS)	Costs		Charges		Costs		Accrual
Balance, December 31, 2018	$	45	$	—	$	—	$	45
Provision	33		—		—		33
Utilization and other(a)	(33)		—		—		(33)
Balance, December 31, 2019	$	45	$	—	$	—	$	45
Provision	8		—		—		8
Utilization and other(a)	(32)		—		—		(32)
Balance, December 31, 2020(b)	$	21	$	—	$	—	$	21
Provision	17		13		3		33
Non-cash activity	—		(13)		—		(13)
Utilization and other(a)	(15)		—		(1)		(16)
Balance, December 31, 2021(b)(c)	$	23	$	—	$	2	$	25

(a) Includes adjustments for foreign currency translation.

(b) At December 31, 2021 and 2020, included in Accrued Expenses ($14 million and $6 million, respectively) and Other noncurrent liabilities ($11 million and $15 million, respectively).

(c) Includes contractual obligations of $16 million, of which payments are expected to be approximately $14 million in 2022 and $2 million thereafter.

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7. Other (Income)/Deductions—Net

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


	Year Ended December 31,
(MILLIONS OF DOLLARS)	2021		2020		2019
Royalty-related income	$	(10)	$	(12)	$	(16)
Interest income	(6)		(12)		(37)
Identifiable intangible asset impairment charges(a)	27		26		—
Net loss/(gain) on sale of assets(b)	3		(19)		(20)
Impairment of an equity investment	—		4		—
Other asset impairment charges	3		4		—
Foreign currency loss(c)	27		21		16
Other, net	4		5		—
Other (income)/deductions—net	$	48	$	17	$	(57)

(a) For 2021, primarily represents asset impairment charges related to developed technology rights and trademarks in our dairy cattle, diagnostics and aquatic health businesses. For 2020, primarily represents asset impairment charges related to developed technology rights in our precision animal health and aquatic health businesses.

(b) For 2020 and 2019, represents income resulting from payments received pursuant to an agreement related to the 2016 sale of certain U.S. manufacturing sites.

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)	2021		2020		2019
United States	$	1,308	$	1,109	$	965
International	1,180		887		836
Income before provision for taxes on income	$	2,488	$	1,996	$	1,801

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


	Year Ended December 31,
(MILLIONS OF DOLLARS)	2021		2020		2019
United States:
Current income taxes:
Federal	$	311	$	232	$	192
State and local	35		36		28
Deferred income taxes:
Federal	(84)		(29)		(5)
State and local	(10)		(14)		(15)
Total U.S. tax provision	252		225		200
International:
Current income taxes	188		154		161
Deferred income taxes	14		(19)		(60)
Total international tax provision	202		135		101
Provision for taxes on income(a)(b)(c)	$	454	$	360	$	301

(a) In 2021, 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 and non-taxable items, and the extent and location of other income and expense items, such as gains and losses on asset divestitures;
tax benefit related to foreign-derived intangible income;
U.S. tax benefit related to U.S. Research and Development Tax Credit;
tax expense related to changes in uncertain tax positions (see D. Tax Contingencies);
a $24 million discrete tax benefit recorded in 2021 related to the excess tax benefits for share-based payments;

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an $8 million net discrete tax benefit recorded in 2021 related to the effective settlement of certain issues with tax authorities;
a $6 million net discrete tax benefit recorded in 2021 related to changes in various other tax items; and
a $1 million discrete tax expense recorded in 2021 related to a remeasurement of deferred tax assets and liabilities as a result of changes in statutory tax rates.

(b) In 2020, 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 and non-taxable items, and the extent and location of other income and expense items, such as gains and losses on asset divestitures;
U.S. tax benefit related to U.S. Research and Development Tax Credit;
tax expense related to changes in uncertain tax positions (see D. Tax Contingencies);
a $29 million discrete tax benefit recorded in 2020 related to the excess tax benefits for share-based payments;
a $19 million net discrete tax benefit recorded in 2020 related to changes in various other tax items;
a $7 million discrete tax benefit recorded in 2020 related to the remeasurement of deferred tax assets and liabilities resulting from the integration of acquired businesses;
a $5 million discrete tax expense related to the changes in valuation allowances;
a $4 million discrete tax benefit recorded in 2020 related to a remeasurement of deferred tax assets and liabilities as a result of changes in statutory tax rates; and
a $4 million net discrete tax benefit recorded in 2020 related to the effective settlement of certain issues with tax authorities.

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 and non-taxable items, and the extent and location of other income and expense items, such as gains and losses on asset divestitures;
U.S. tax benefit related to U.S. Research and Development Tax Credit;
tax expense related to changes in uncertain tax positions (see D. Tax Contingencies);
the impact of the Global Intangible Low-Tax Income 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 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;
a $10 million net discrete tax benefit recorded in 2019 related to the effective settlement of certain issues with tax authorities; and
an $8 million discrete tax benefit recorded in 2019 related to a remeasurement of deferred tax assets and liabilities as a result of changes in statutory tax rates.

Tax Rate Reconciliation

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


	Year Ended December 31,
	2021		2020		2019
U.S. statutory income tax rate	21	%	21	%	21	%
State and local taxes, net of federal benefits	0.8		0.9		0.6
Unrecognized tax benefits and tax settlements and resolution of certain tax positions(a)	0.1		0.1		0.5


Foreign Derived Intangible Income	(1.1)		—		(0.6)
U.S. Research and Development Tax Credit	(0.6)		(0.7)		(0.7)
Share-based payments	(0.9)		(1.3)		(1.0)
Non-deductible / non-taxable items	0.3		0.4		0.4
Taxation of non-U.S. operations(b)(c)	(1.3)		(1.6)		(3.1)
All other—net	(0.1)		(0.8)		(0.4)
Effective tax rate	18.2	%	18.0	%	16.7	%

(a) For a discussion about unrecognized tax benefits and tax settlements and resolution of certain tax positions, see above in this section and D. Tax Contingencies.

(b) In all years, the rate impact of taxation of non-U.S. operations was a decrease to our effective tax rate due to the jurisdictional mix of earnings.

(c) In 2020, the rate impact of non-U.S. operations also includes (i) a $5 million discrete tax expense related to the changes in valuation allowances, and (ii) an $8 million net discrete tax benefit related to changes in various other tax items. 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 due to a change in tax basis related to purchase accounting, and (iii) a $10 million discrete tax benefit 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.

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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.

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,
	2021		2020
(MILLIONS OF DOLLARS)	Assets (Liabilities)
Prepaid/deferred items	$	109	$	64
Inventories	10		15
Intangibles	(187)		(237)
Property, plant and equipment	(183)		(168)
Employee benefits	58		59
Restructuring and other charges	3		3
Legal and product liability reserves	14		15
Net operating loss/credit carryforwards	132		127
Unremitted earnings	(7)		(6)
All other	5		1
Subtotal	(46)		(127)
Valuation allowance	(174)		(157)
Net deferred tax liability(a)(b)	$	(220)	$	(284)

(a) The decrease in the total net deferred tax liability from December 31, 2020 to December 31, 2021 is primarily attributable to a decrease in deferred tax liabilities related to intangibles, partially offset by an increase in valuation allowances representing the amounts determined to be unrecoverable, and 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 and net operation loss/credit carry forwards, partially offset by a decrease in inventory and employee benefits.

(b) In 2021, included in Noncurrent deferred tax assets ($100 million) and Noncurrent deferred tax liabilities ($320 million). In 2020, included in Noncurrent deferred tax assets ($94 million) and Noncurrent deferred tax liabilities ($378 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 2022 to 2041.

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, 2021 and December 31, 2020, a valuation allowance of $174 million and $157 million, respectively, has been recorded to reflect 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, 2021, the cumulative amount of such undistributed earnings was approximately $7.0 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, 2021, we cannot predict the time or manner of a potential repatriation. As such,

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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.

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, 2021, 2020 and 2019, we had approximately $188 million, $187 million and $180 million, respectively, in net liabilities associated with uncertain tax positions, excluding associated interest and penalties:

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, 2021, 2020 and 2019, we had approximately $3 million 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)	2021		2020		2019
Balance, January 1	$	(188)	$	(182)	$	(185)
Increases based on tax positions taken during a prior period(a)(b)	(1)		(6)		(3)
Decreases based on tax positions taken during a prior period(a)(c)	7		6		12
Increases based on tax positions taken during the current period(a)(d)	(9)		(9)		(8)

Lapse in statute of limitations	2		3		2
Balance, December 31(e)	$	(189)	$	(188)	$	(182)

(a) Primarily included in Provision for taxes on income.

(b) In 2021, 2020 and 2019, the increases are primarily related to movements on prior year positions.

(c) In 2021 and 2020, the decreases are primarily related to effective settlement of certain issues with tax authorities. In 2019, the decreases are primarily related to movements on prior year positions and effective settlement of certain issues with tax authorities, including movements in foreign translation adjustments on prior year positions.

(d) In 2021, 2020 and 2019, the increases are primarily related to movements on current year positions.

(e) In 2021, included in Noncurrent deferred tax assets and Other noncurrent assets ($1 million) and Other taxes payable ($188 million). In 2020, included in Noncurrent deferred tax assets and Other noncurrent assets ($1 million) and Other taxes payable ($187 million). In 2019, included in Noncurrent deferred tax assets and Other noncurrent assets ($2 million) and Other taxes payable ($180 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 2021, we recorded a net interest expense of $1 million; in 2020, we recorded a net interest expense of $2 million; and in 2019, we recorded a net interest expense of $2 million. Gross accrued interest totaled $12 million, $11 million and $9 million as of December 31, 2021, 2020 and 2019, respectively, and were included in Other taxes payable. As of December 31, 2021, 2020 and 2019, gross accrued penalties totaled $3 million 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 2018. For U.S. Federal and state tax purposes, the tax years 2015 through 2021 are open for examination (see B. Tax Matters Agreement for years prior to 2013).

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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 (2018-2021), Asia-Pacific (2011-2021, primarily reflecting Australia, China and Japan), Europe (2012-2021, primarily reflecting France, Germany, Italy, Spain and the U.K.) and Latin America (2006-2021, 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 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 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, 2021 and December 31, 2020. There were no amounts drawn under the credit facility as of December 31, 2021 or December 31, 2020.

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, 2021, we had access to $63 million of lines of credit which expire at various times through 2022, and are generally renewed annually. As of December 31, 2021 we had no borrowings outstanding related to these facilities and $4 million of borrowings outstanding related to these facilities as of December 31, 2020.

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, 2021 and 2020, there was no commercial paper outstanding under this program.

Senior Notes and Other Long-Term Debt

On August 20, 2021, we redeemed, upon maturity, the $300 million aggregate principal amount of our 2018 floating rate senior notes due 2021 and the $300 million aggregate principal amount of our 2018 senior notes due 2021.

On May 12, 2020, we issued $1.25 billion aggregate principal amount of our senior notes (2020 senior notes), with an original issue discount of $10 million. These notes are comprised of $750 million aggregate principal amount of 2.000% senior notes due 2030 and $500 million aggregate principal amount of 3.000% senior notes due 2050. On October 13, 2020, the net proceeds were used to repay the $500 million aggregate principal amount of our 3.450% 2015 senior notes due 2020 and the remainder is being used for general corporate purposes.

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. 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. 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, 2018 and 2020 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, 2018 and 2020 senior notes may be declared immediately due and payable.

Pursuant to the indenture, we are able to redeem the 2013, 2015, 2017, 2018 and 2020 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. 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, 2018 and 2020 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, 2018 and 2020 senior notes at a price equal to 101% of the aggregate principal amount of the 2013, 2015, 2017, 2018 and 2020 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)	2021		2020


2018 floating rate (three-month USD LIBOR plus 0.44%) senior notes due 2021	$	—	$	300
3.250% 2018 senior notes due 2021	—		300
3.250% 2013 senior notes due 2023	1,350		1,350
4.500% 2015 senior notes due 2025	750		750
3.000% 2017 senior notes due 2027	750		750
3.900% 2018 senior notes due 2028	500		500
2.000% 2020 senior notes due 2030	750		750
4.700% 2013 senior notes due 2043	1,150		1,150
3.950% 2017 senior notes due 2047	500		500
4.450% 2018 senior notes due 2048	400		400
3.000% 2020 senior notes due 2050	500		500
	6,650		7,250
Unamortized debt discount / debt issuance costs	(60)		(66)
Less current portion of long-term debt	—		600
Cumulative fair value adjustment for interest rate swap contracts	2		11
Long-term debt, net of discount and issuance costs	$	6,592	$	6,595

The fair value of our long-term debt was $7,443 million and $7,835 million as of December 31, 2021 and 2020, 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 following table provides the principal amount of debt outstanding as of December 31, 2021 by scheduled maturity date. The table also provides the expected interest payments on these borrowings as of December 31, 2021.


											After
(MILLIONS OF DOLLARS)	2022		2023		2024		2025		2026		2026		Total
Maturities	$	—	$	1,350	$	—	$	750	$	—	$	4,550	$	6,650
Interest payments	$	241	$	219	$	197	$	197	$	164	$	2,165	$	3,183

Interest Expense

Interest expense, net of capitalized interest, was $224 million for 2021, $231 million for 2020 and $223 million for 2019. Capitalized interest expense was $20 million for 2021, $17 million for 2020 and $13 million for 2019.

B. 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 Canadian dollar, Chinese yuan, Danish krone, euro, Japanese yen and Norwegian krone. Changes in fair value are reported in earnings or in Accumulated other comprehensive 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 recorded 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 Condensed Consolidated Statement of Cash Flows. These cross-currency interest rate swap contracts have varying maturities of up to four years.

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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.
As of December 31, 2021, we had outstanding forward-starting interest rate swaps, having an effective date and mandatory termination date in March 2023, to hedge 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, and a forward-starting interest rate swap, having an effective date and mandatory termination date in March 2026, to hedge against interest rate exposure related principally to the anticipated future issuance of fixed-rate debt to be used primarily to refinance our 4.500% 2015 senior notes due 2025.
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 or SOFR 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 or the daily SOFR rate plus a spread. Gains or losses on the fixed to floating interest rate swaps 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, 2021, we had outstanding fixed-to-floating interest rate swaps that correspond to a portion of the 3.900% 2018 senior notes due 2028 and the 2.00% senior notes due 2030. The amounts recorded during the twelve months ended December 31, 2021 for changes in the fair value of these hedges are not material to our consolidated financial statements.

Outstanding Positions

The aggregate notional amount of derivative instruments are as follows:


	Notional
	As of December 31,
(MILLIONS)	2021		2020
Foreign currency forward-exchange contracts	$	1,749	$	1,633

Cross-currency interest rate swap contracts (in foreign currency):
Euro	650		650
Danish krone	600		600
Swiss franc	25		25

Forward-starting interest rate swaps	$	550	$	550

Fixed-to-floating interest rate swap contracts	$	200	$	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 Location	2021		2020
Derivatives Not Designated as Hedging Instruments:
Foreign currency forward-exchange contracts	Other current assets	$	16	$	10
Foreign currency forward-exchange contracts	Other current liabilities	(15)		(16)
Total derivatives not designated as hedging instruments		1		(6)
Derivatives Designated as Hedging Instruments:
Forward starting interest rate swap contracts	Other non-current assets	$	17	$	6
Forward starting interest rate swap contracts	Other non-current liabilities	(5)		(17)
Cross-currency interest rate swap contracts	Other current assets	12		2
Cross-currency interest rate swap contracts	Other non-current assets	14		5
Cross-currency interest rate swap contracts	Other current liabilities	(3)		(21)
Fixed to floating interest rate swap contracts	Other non-current assets	2		11
Total derivatives designated as hedging instruments		37		(14)
Total derivatives		$	38	$	(20)

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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, 2021, there was $23 million of collateral received related to interest rate swap contracts and cross-currency interest rate swaps recorded in Other noncurrent assets.

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 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)	2021		2020
Foreign currency forward-exchange contracts	$	(20)	$	(2)

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

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


	Year Ended December 31,
(MILLIONS OF DOLLARS)	2021		2020
Forward starting interest rate swap contracts	$	18	$	(11)
Cross-currency interest rate swap contracts	$	42	$	(58)

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


	Year Ended December 31,
(MILLIONS OF DOLLARS)	2021		2020
Cross-currency interest rate swap contracts	$	12	$	18

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.

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Supplemental information for operating leases is as follows:


			As of December 31,
(MILLIONS OF DOLLARS, EXCEPT LEASE TERM AND DISCOUNT RATE AMOUNTS)			2021			2020
Supplemental Balance Sheet information for operating leases
Operating lease right of use assets			$	181		$	192

Operating lease liabilities
Operating lease liabilities - current (in Other current liabilities)			$	41		$	40
Operating lease liabilities - noncurrent			151			163
Total operating lease liabilities			$	192		$	203

Weighted-average remaining lease term—operating leases (years)			6.55			6.59
Weighted-average discount rate—operating leases			2.81		%	3.12		%

	Year Ended December 31,
(MILLIONS OF DOLLARS)	2021		2020			2019
Supplemental Income Statement information for operating leases
Operating lease expense	$	50	$	46		$	40
Variable lease payments not included in the measurement of lease liabilities	19		20			21
Short-term lease payments not included in the measurement of lease liabilities	9		7			9

Supplemental Cash Flow information for operating leases
Cash paid for amounts included in the measurement of lease liabilities	$	47	$	42		$	42
Lease obligations obtained in exchange for right-of-use assets (non-cash)	39		47			241

Future minimum lease payments under non-cancellable operating lease contracts as of December 31, 2021 are as follows:


													Total		Less:
											After		Lease		Imputed
(MILLIONS OF DOLLARS)	2022		2023		2024		2025		2026		2026		Payments		Interest		Total
Maturities	$	46	$	39	$	31	$	23	$	19	$	54	$	212	$	(20)	$	192

11. Inventories

The components of inventory follow:


	As of December 31,
(MILLIONS OF DOLLARS)	2021		2020
Finished goods	$	888	$	805
Work-in-process	696		594
Raw materials and supplies	339		229
Inventories	$	1,923	$	1,628

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12. Property, Plant and Equipment

The components of property, plant and equipment follow:


	Useful Lives	As of December 31,
(MILLIONS OF DOLLARS)	(Years)	2021		2020
Land	—	$	22	$	22
Buildings	33.3 - 50	1,103		1,019
Machinery, equipment and fixtures	3 - 20	2,627		2,440
Construction-in-progress	—	742		673
		4,494		4,154
Less: Accumulated depreciation		2,072		1,952
Property, plant and equipment		$	2,422	$	2,202

Depreciation expense was $244 million in 2021, $211 million in 2020 and $175 million in 2019.

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.		International		Total
Balance, December 31, 2019	$	1,367	$	1,225	$	2,592
Additions / Adjustments(a)	58		17		75
Other(b)	—		27		27
Balance, December 31, 2020	$	1,425	$	1,269	$	2,694
Adjustments	(1)		4		3
Other(b)	—		(15)		(15)
Balance, December 31, 2021	$	1,424	$	1,258	$	2,682

(a) For 2020, primarily relates to the acquisitions of Performance Livestock Analytics, Fish Vet Group and Virtual Recall. See Note 5. Acquisitions and Divestitures.

(b) Includes adjustments for foreign currency translation.

The gross goodwill balance was $3,218 million as of December 31, 2021 and $3,230 million as of December 31, 2020. Accumulated goodwill impairment losses (generated entirely in fiscal 2002) was $536 million as of December 31, 2021 and 2020.

B. Other Intangible Assets

The components of identifiable intangible assets follow:


	As of December 31, 2021						As of December 31, 2020
					Identifiable						Identifiable
	Gross				Intangible Assets,		Gross				Intangible Assets,
	Carrying		Accumulated		Less Accumulated		Carrying		Accumulated		Less Accumulated
(MILLIONS OF DOLLARS)	Amount		Amortization		Amortization		Amount		Amortization		Amortization
Finite-lived intangible assets:
Developed technology rights	$	1,933	$	(949)	$	984	$	1,968	$	(809)	$	1,159
Brands and tradenames	426		(260)		166		427		(243)		184
Other	473		(335)		138		474		(306)		168
Total finite-lived intangible assets	2,832		(1,544)		1,288		2,869		(1,358)		1,511
Indefinite-lived intangible assets:
Brands and tradenames	91		—		91		104		—		104
In-process research and development	88		—		88		88		—		88
Product rights	7		—		7		7		—		7
Total indefinite-lived intangible assets	186		—		186		199		—		199
Identifiable intangible assets	$	3,018	$	(1,544)	$	1,474	$	3,068	$	(1,358)	$	1,710

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 dogs, cats, horses, cattle, swine, poultry, fish and sheep.

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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 most significant indefinite-lived brand is the Linco family of products. The more significant finite-lived trademarks and tradenames are finite-lived trademarks and tradenames acquired from Abaxis. The more significant components of indefinite-lived trademarks and tradenames are indefinite-lived trademarks and tradenames acquired from SmithKlineBeecham.

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 an Irish biologic therapeutics company.

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 9 years. Total amortization expense for finite-lived intangible assets was $204 million in 2021, $230 million in 2020 and $237 million in 2019.

The annual amortization expense expected for the years 2022 through 2026 is as follows:


(MILLIONS OF DOLLARS)						2022						2023						2024						2025						2026
Amortization expense						$	190					$	181					$	162					$	148					$	139

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 $3 million and $5 million as of December 31, 2021 and 2020, 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 2021 and 2020.

Pension expense associated with the U.S. and certain significant international locations (inclusive of service cost grow-in benefits discussed above) totaled approximately $14 million in 2021, $14 million in 2020 and $13 million in 2019.

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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)	2021		2020
Change in benefit obligation:
Projected benefit obligation, beginning	$	164	$	144
Service cost	8		8
Interest cost	2		2

Changes in actuarial assumptions and other	(1)		1
Settlements and curtailments	(2)		—
Benefits paid	(2)		(2)
Adjustments for foreign currency translation	(9)		12
Other––net	(1)		(1)
Benefit obligation, ending	159		164
Change in plan assets:
Fair value of plan assets, beginning	85		72

Actual return on plan assets	11		4
Company contributions	5		5
Settlements and curtailments	(1)		—
Benefits paid	(2)		(2)
Adjustments for foreign currency translation	(5)		6
Other––net	(1)		—
Fair value of plan assets, ending	92		85
Funded status—Projected benefit obligation in excess of plan assets at end of year(a)	$	(67)	$	(79)

(a) Included in Other noncurrent liabilities.

Changes in the benefit obligation resulted in a net gain of $1 million in 2021 and a net loss of $1 million in 2020.

Actuarial losses were approximately $21 million ($16 million, net of tax) at December 31, 2021 and $32 million ($22 million, net of tax) at December 31, 2020. 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 loss. The actuarial losses will be amortized into net periodic benefit costs over an average period of 10.5 years.

Information related to the funded status of selected plans follows:


	As of December 31,
(MILLIONS OF DOLLARS)	2021		2020
Pension plans with an accumulated benefit obligation in excess of plan assets:
Fair value of plan assets	$	24	$	77
Accumulated benefit obligation	72		131
Pension plans with a projected benefit obligation in excess of plan assets:
Fair value of plan assets	84		83
Projected benefit obligation	152		162

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)	2021		2020		2019
Service cost	$	8	$	8	$	6
Interest cost	2		2		3
Expected return on plan assets	(3)		(3)		(3)
Amortization of net losses	1		2		1


Net periodic benefit cost	$	8	$	9	$	7

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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)	2021		2020		2019
Weighted average assumptions used to determine benefit obligations:
Discount rate	1.4	%	1.2	%	1.3	%
Rate of compensation increase	3.4	%	3.1	%	3.1	%
Cash balance credit interest rate	1.5	%	1.5	%	1.5	%
Weighted average assumptions used to determine net benefit cost for the year ended December 31:
Discount rate	1.2	%	1.3	%	2.3	%
Expected return on plan assets	3.8	%	3.8	%	4.1	%
Rate of compensation increase	3.1	%	3.1	%	3.0	%
Cash balance credit interest rate	1.5	%	1.5	%	1.7	%

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)	2021		2020
Cash and cash equivalents	$	1	$	1
Equity securities: Equity commingled funds	36		31
Debt securities: Government bonds	45		43
Other investments	10		10
Total(a)	$	92	$	85

(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.

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

Equity commingled funds––observable market prices (Level 1).
Government bonds and other investments––principally observable market prices (Level 2).

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
	percentage	Percentage of Plan Assets
(PERCENTAGES)	2021	2021		2020
Cash and cash equivalents	0-10%	1.5	%	1.2	%
Equity securities	0-60%	39.3	%	37.0	%
Debt securities	15-100%	48.7	%	50.2	%
Other investments	0-100%	10.5	%	11.6	%
Total	100%	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

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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 $5 million to our dedicated pension plans in 2022. Benefit payments are expected to be approximately $5 million for 2022, $3 million for 2023, $6 million for 2024, $6 million for 2025 and $11 million for 2026. Benefit payments are expected to be approximately $50 million in the aggregate for the five years thereafter. These expected benefit payments reflect the future plan benefits subsequent to 2022 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

Postretirement benefit expense associated with these U.S. retiree medical plans totaled approximately $4 million per year in 2021, 2020 and 2019 (inclusive of service cost grow-in benefits discussed above). The expected benefit payments for next year is approximately $4 million.

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.

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 $54 million in 2021, $48 million in 2020 and $46 million in 2019.

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 in 2021, $11 million in 2020 and $12 million in 2019. Benefit payments for this plan are expected to be approximately $5 million in 2022 and $46 million thereafter.

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, 2021, the aggregate number of remaining shares available for future grant under the Equity Plan was approximately 10 million shares.

A. Share-Based Compensation Expense

The components of share-based compensation expense follow:


	Year Ended December 31,
(MILLIONS OF DOLLARS)	2021		2020		2019
Stock options / stock appreciation rights	$	9	$	9	$	10
RSUs / DSUs	33		31		43
PSUs	16		19		14
Share-based compensation expense—total(a)	$	58	$	59	$	67
Tax benefit for share-based compensation expense	(7)		(7)		(10)
Share-based compensation expense, net of tax	$	51	$	52	$	57

(a) For each of the years ended December 31, 2021, 2020 and 2019, we capitalized less than $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.

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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,
	2021		2020		2019
Expected dividend yield(a)	0.62	%	0.55	%	0.75	%
Risk-free interest rate(b)	0.53	%	1.41	%	2.56	%
Expected stock price volatility(c)	27.94	%	24.33	%	23.08	%
Expected term(d) (years)	5.0		5.5		5.7

(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.

The following table provides an analysis of stock option activity for the year ended December 31, 2021:


				Weighted-Average
				Remaining	Aggregate
		Weighted-Average		Contractual Term	Intrinsic Value(a)
	Shares	Exercise Price		(Years)	(MILLIONS)
Outstanding, December 31, 2020	2,554,451	$	64.43
Granted	284,198	160.73
Exercised	(680,970)	52.88
Forfeited	(25,112)	80.72
Outstanding, December 31, 2021	2,132,567	$	80.19	5.4	$	349

Exercisable, December 31, 2021	1,176,959	$	42.78	3.3	$	237

(a) Market price of underlying Zoetis common stock less exercise price.

As of December 31, 2021, there was approximately $9 million of unrecognized compensation costs related to nonvested stock options, which will be recognized over an expected remaining weighted-average period of one year.

The following table summarizes data related to stock option activity:


	Year Ended/As of December 31,
(MILLIONS OF DOLLARS, EXCEPT PER STOCK OPTION AMOUNTS)	2021		2020		2019
Weighted-average grant date fair value per stock option	$	37.81	$	34.22	$	21.84
Aggregate intrinsic value on exercise	87		114		76
Cash received upon exercise	36		57		39
Tax benefits realized related to exercise	34		39		31

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, 2021:


		Weighted-Average
	RSUs	Grant Date Fair Value
Nonvested, December 31, 2020	983,466	$	95.82
Granted	261,182	164.14

Vested	(393,575)	78.29
Reinvested dividend equivalents	4,528	116.78
Forfeited	(45,717)	115.19
Nonvested, December 31, 2021	809,884	$	125.71

As of December 31, 2021, 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 one year.

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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, 2021 and 2020, there were no DSUs granted. As of December 31, 2021 and 2020, there were 64,599 and 74,688 DSUs outstanding, respectively, including dividend equivalents.

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 28.9% and 38.1%, respectively, in 2021, and 20.2% and 24.8%, respectively, in 2020. 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 years ended December 31, 2020 and 2019, the company recognized $6 million and $2 million, respectively, 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, 2021:



		Weighted-Average
	PSUs	Grant Date Fair Value
Nonvested, December 31, 2020	344,271	$	129.38
Granted	103,759	208.81
Vested	(98,088)	101.24
Reinvested dividend equivalents	1,945	150.26
Forfeited	(9,501)	163.67
Nonvested, December 31, 2021	342,386	$	160.68
Shares issued, December 31, 2021	422,315	$	80.55

As of December 31, 2021, there was approximately $23 million of unrecognized compensation costs related to nonvested PSUs, which will be recognized over an expected remaining weighted-average period of 0.9 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, 2021, there was approximately $681 million remaining under this authorization. The company temporarily suspended share repurchases beginning in the second quarter of 2020. In January 2021, the company resumed share repurchases under its share repurchase program. In December 2021, the company's Board of Directors authorized a $3.5 billion share repurchase program. Purchases of Zoetis shares may be made at the discretion of management, depending on market conditions and business needs.

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Accumulated other comprehensive loss

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


			Currency Translation Adjustments				Benefit Plans		Accumulated Other
	Cash Flow		Net Investment		Other Currency		Actuarial		Comprehensive
(MILLIONS OF DOLLARS)	Hedges		Hedges		Translation Adj		(Losses)/Gains		Loss
Balance, December 31, 2018	$	(4)	$	9	$	(620)	$	(14)	$	(629)
Other comprehensive gain/(loss), net of tax	4		12		(104)		(9)		(97)


Balance, December 31, 2019	—		21		(724)		(23)		(726)
Other comprehensive (loss)/gain, net of tax	(15)		(58)		69		—		(4)

Balance, December 31, 2020	(15)		(37)		(655)		(23)		(730)
Other comprehensive gain/(loss), net of tax	19		42		(101)		6		(34)
Balance, December 31, 2021	$	4	$	5	$	(756)	$	(17)	$	(764)

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)	2021		2020		2019
Numerator
Net income before allocation to noncontrolling interests	$	2,034	$	1,636	$	1,500
Less: net loss attributable to noncontrolling interests	(3)		(2)		—
Net income attributable to Zoetis Inc.	$	2,037	$	1,638	$	1,500
Denominator
Weighted-average common shares outstanding	474.348		475.502		478.128
Common stock equivalents: stock options, RSUs, DSUs and PSUs	2.369		3.067		3.659
Weighted-average common and potential dilutive shares outstanding	476.717		478.569		481.787
Earnings per share attributable to Zoetis Inc. stockholders—basic	$	4.29	$	3.44	$	3.14
Earnings per share attributable to Zoetis Inc. stockholders—diluted	$	4.27	$	3.42	$	3.11

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 the years ended December 31, 2021, 2020 and 2019.

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.

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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.

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 (Phase II) 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. On March 3, 2020, the Prosecutor notified the defendants that he submitted the proposal to the Ministry of the Environment for its review and consideration by the Prosecutor. On July 15, 2020, the Prosecutor recommended certain amendments to the proposal for the Phase II testing. On September 28, 2020, the parties and the Prosecutor agreed to the final terms and conditions concerning the cooperation agreement with respect to the Phase II testing. Due to the ongoing issues presented by the COVID-19 pandemic, the parties have been unable to secure a start date for the Phase II testing and anticipate that it will begin later this year.

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 originated 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 contaminated 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 byproduct 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

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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 was remanded back to the lower Court, where it was scheduled to proceed to trial by jury. We have been advised that the remaining parties have reached an agreement to settle the dispute, and on June 24, 2020, the remaining parties jointly stipulated to the dismissal of all remaining claims. On July 13, 2020, Plaintiffs filed a claim of appeal with Michigan Court of Appeals seeking reversal of the lower Court’s decision granting Zoetis’ motion for summary disposition. Plaintiffs’ filed their appeal brief on October 29, 2020, and we filed our reply brief on December 3, 2020. The Court of Appeals heard oral argument on December 7, 2021, and we currently await its decision.

Belgium Excess Profit Tax Regime

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. As a result of the 2016 decision, the company recorded a net tax charge of approximately $35 million in the first half of 2016. 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. On September 16, 2021, the European Court of Justice upheld the EC’s decision that the Belgium excess profit ruling system is considered an aid scheme and referred the case back to the General Court to rule on open questions. The company has not reflected any potential benefits in its consolidated financial statements as of December 31, 2021 as a result of the 2019 annulment. We will continue to monitor the developments of the appeal and its ultimate resolution.

Alpharma

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. On June 4, 2020, the Advocate General issued his non-binding opinion, which largely confirmed the decision of the General Court. On March 25, 2021, the Court of Justice affirmed the decision of the General Court. Since the penalty has already been paid, no further action is needed, and the proceedings involving the EC are now concluded.

We anticipate that claims from publicly-funded healthcare systems and health insurance companies seeking compensation for losses allegedly resulting from the competition-infringement finding will be filed before the Competition Appeal Tribunal as follow-on claims. We anticipate that proceedings involving such claims will commence later this year. In accordance with the Global Separation Agreement, Pfizer would be obligated to indemnify Zoetis for any liabilities arising out of such follow-on claims.

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, 2021, recorded amounts for the estimated fair value of these indemnifications were not significant.

C. Purchase Commitments

As of December 31, 2021, we have agreements totaling $279 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. Payments for these obligations are expected to be approximately $161 million in 2022 and $118 million thereafter.

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 companion animal and livestock customers.

In 2021, certain costs associated with information technology that specifically support our global manufacturing operations, which were previously reported in Other unallocated, are now reported in Corporate. In addition, in the first quarter of 2021, the company realigned certain management responsibilities. These changes did not impact the determination of our operating segments, however they resulted in the reallocation of certain costs between segments. These changes primarily include the following: (i) certain diagnostics costs, which were previously reported in Corporate, are

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now reported in our U.S. results; and (ii) certain other miscellaneous costs, which were previously reported in our U.S. results, are now reported in Corporate.

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 information technology, facilities, legal, finance, human resources, business development, certain diagnostic costs 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 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 finance that specifically support our global manufacturing operations; (iii) certain supply chain and global logistics costs; and (iv) procurement costs.

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 $13.9 billion and $13.6 billion at December 31, 2021 and 2020, respectively.

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Selected Statement of Income Information


	Earnings									Depreciation and Amortization(a)
	Year Ended December 31,									Year Ended December 31,
(MILLIONS OF DOLLARS)	2021			2020			2019			2021		2020		2019
U.S.
Revenue	$	4,042		$	3,557		$	3,203
Cost of Sales	788			709			655
Gross Profit	3,254			2,848			2,548
Gross Margin	80.5		%	80.1		%	79.6		%
Operating Expenses	681			602			543
Other (income)/deductions-net	4			7			—
U.S. Earnings	2,569			2,239			2,005			$	54	$	55	$	44
International
Revenue(b)	3,652			3,035			2,972
Cost of Sales	1,106			971			925
Gross Profit	2,546			2,064			2,047
Gross Margin	69.7		%	68.0		%	68.9		%
Operating Expenses	602			510			560
Other (income)/deductions-net	(4)			7			—
International Earnings	1,948			1,547			1,487			74		56		53
Total operating segments	4,517			3,786			3,492			128		111		97
Other business activities	(406)			(372)			(348)			28		27		24
Reconciling Items:
Corporate	(1,052)			(879)			(755)			115		101		69
Purchase accounting adjustments	(175)			(198)			(234)			175		199		219
Acquisition-related costs	(12)			(18)			(43)			—		—		—
Certain significant items(c)	(73)			(43)			(67)			—		—		—
Other unallocated	(311)			(280)			(244)			2		3		3
Total Earnings(d)	$	2,488		$	1,996		$	1,801		$	448	$	441	$	412

(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 $814 million in 2021, $718 million in 2020 and $742 million in 2019.

(c) For 2021, certain significant items primarily included certain asset impairment charges of $46 million, as well as employee termination costs associated with our international operations and other costs associated with cost-reduction and productivity initiatives of $21 million.

For 2020, certain significant items primarily included certain asset impairment charges of $37 million and CEO transition-related costs of $16 million, partially offset by a net gain resulting from a cash payment received pursuant to an agreement related to the 2016 sale of certain U.S. manufacturing sites of $18 million.

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 cash payment received pursuant to an agreement related to the 2016 sale of certain U.S. manufacturing sites.

(d) Defined as income before provision for taxes on income.

B. Geographic Information

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


	As of December 31,
(MILLIONS OF DOLLARS)	2021		2020
U.S.	$	1,638	$	1,486
International	784		716
Property, plant and equipment, less accumulated depreciation	$	2,422	$	2,202

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Zoetis Inc. and Subsidiaries

Schedule II—Valuation and Qualifying Accounts


	Balance,						Balance,
	Beginning of						End of
(MILLIONS OF DOLLARS)	Period		Additions		Deductions		Period
Year Ended December 31, 2021
Allowance for doubtful accounts	$	20	$	1	$	(4)	$	17

Year Ended December 31, 2020
Allowance for doubtful accounts	$	21	$	3	$	(4)	$	20

Year Ended December 31, 2019
Allowance for doubtful accounts	$	24	$	3	$	(6)	$	21

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