Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

(Mark One)
x☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 1, 2017
March 31, 2020
or
☐TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
¨For the transition period from __________ to __________
Commission File Number: 001-35797

Commission File Number:001-35797

Zoetis Inc.
(Exact name of registrant as specified in its charter)
 
Delaware46-0696167
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
incorporation or organization)
10 Sylvan Way,Parsippany,New Jersey07054
(Address of principal executive offices)(Zip Code)
(973)-822-7000
(973) 822-7000
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.01 per shareZTSNew York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x☒ Yes ¨☐ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x☒ Yes ¨☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filerx
☒
Accelerated filer¨
☐
Non-accelerated filer¨
☐
Smaller reporting company¨
☐
Emerging growth company¨☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨☐
Indicate by check mark whether the registrant is a shell company (as defined in ruleRule 12b-2 of the Exchange Act). ¨☐ Yes x☒ No
At October 26, 2017,May 1, 2020, there were 487,288,245474,940,772 shares of common stock outstanding.




Table of Contents
TABLE OF CONTENTS
Page
1
Item 1.
1
Condensed Consolidated Statements of Income (Unaudited)
1
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
2
Condensed Consolidated Balance Sheets (Unaudited)
3
Condensed Consolidated Statements of Equity (Unaudited)
4
Condensed Consolidated Statements of Cash Flows (Unaudited)
5
Notes to Condensed Consolidated Financial Statements (Unaudited)
6
Review Report of Independent Registered Public Accounting Firm
2522
Item 2.
2623
Item 3.
4940
Item 4.
4940
5041
Item 1.
5041
Item 1A.
5041
Item 2.
5342
Item 3.Defaults Upon Senior Securities
5342
Item 4.Mine Safety Disclosures
5342
Item 5.Other Information
5342
Item 6.
5342
5443






Table of Contents
PART I – FINANCIAL INFORMATION
Item 1.
Item 1. Financial Statements




ZOETIS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)


Three Months Ended
March 31,
(MILLIONS OF DOLLARS AND SHARES, EXCEPT PER SHARE DATA)20202019
Revenue$1,534  $1,455  
Costs and expenses:
Cost of sales459  518  
Selling, general and administrative expenses389  369  
Research and development expenses107  102  
Amortization of intangible assets40  38  
Restructuring charges and certain acquisition-related costs9  5  
Interest expense, net of capitalized interest53  56  
Other (income)/deductions—net(20) (14) 
Income before provision for taxes on income497  381  
Provision for taxes on income74  69  
Net income$423  $312  
Earnings per share
 Basic$0.89  $0.65  
 Diluted$0.88  $0.65  
Weighted-average common shares outstanding:
 Basic475.6  479.6  
 Diluted479.0  483.1  
Dividends declared per common share$0.200  $0.164  
  Three Months Ended Nine Months Ended
  October 1,
 October 2,
 October 1,
 October 2,
(MILLIONS OF DOLLARS AND SHARES, EXCEPT PER SHARE DATA) 2017
 2016
 2017
 2016
Revenue $1,347
 $1,241
 $3,847
 $3,611
Costs and expenses:        
Cost of sales(a)
 435
 410
 1,318
 1,198
Selling, general and administrative expenses(a)
 328
 345
 973
 1,003
Research and development expenses(a)
 96
 90
 272
 268
Amortization of intangible assets(a)
 23
 21
 68
 64
Restructuring charges/(reversals) and certain acquisition-related costs 8
 4
 7
 (15)
Interest expense, net of capitalized interest 43
 41
 125
 125
Other (income)/deductions—net 1
 (3) (11) (29)
Income before provision for taxes on income 413
 333
 1,095
 997
Provision for taxes on income 117
 96
 313
 332
Net income before allocation to noncontrolling interests 296
 237
 782
 665
Less: Net loss attributable to noncontrolling interests (2) (2) (1) (2)
Net income attributable to Zoetis Inc. $298
 $239
 $783
 $667
Earnings per share attributable to Zoetis Inc. stockholders:        
 Basic $0.61
 $0.48
 $1.60
 $1.34
 Diluted $0.61
 $0.48
 $1.59
 $1.34
Weighted-average common shares outstanding:        
 Basic 489.1
 495.2
 490.8
 496.3
 Diluted 492.4
 497.9
 493.9
 498.8
Dividends declared per common share $—
 $—
 $0.210
 $0.190

(a)
Amortization expense related to finite-lived acquired intangible assets that contribute to our ability to sell, manufacture, research, market and distribute products, compounds and intellectual property is included in Amortization of intangible assets as these intangible assets benefit multiple business functions. Amortization expense related to finite-lived acquired intangible assets that are associated with a single function is included in Cost of sales, Selling, general and administrative expenses or Research and development expenses, as appropriate, in the condensed consolidated statements of income.

See notes to condensed consolidated financial statements.
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ZOETIS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)


Three Months Ended
March 31,
(MILLIONS OF DOLLARS)20202019
Net income$423  $312  
Other comprehensive (loss)/income, net of taxes:
Unrealized losses on derivatives for cash flow hedges, net(28) —  
Unrealized gains on derivatives for net investment hedges, net17  8  
Foreign currency translation adjustments, net(44) 23  
Total other comprehensive (loss)/income, net of tax(55) 31  
Comprehensive income$368  $343  
  Three Months Ended Nine Months Ended
  October 1,
 October 2,
 October 1,
 October 2,
(MILLIONS OF DOLLARS) 2017
 2016
 2017
 2016
Net income before allocation to noncontrolling interests $296
 $237
 $782
 $665
Other comprehensive income/(loss), net of taxes and reclassification adjustments:        
Unrealized (losses)/gains on derivatives, net(a)
 (10) 1
 (11) (2)
Foreign currency translation adjustments, net 98
 49
 154
 114
Benefit plans: Actuarial (losses)/gains, net(a)
 —
 (1) 1
 2
Total other comprehensive income, net of tax 88
 49
 144
 114
Comprehensive income before allocation to noncontrolling interests 384
 286
 926
 779
Less: Comprehensive (loss)/income attributable to noncontrolling interests (1) 1
 —
 —
Comprehensive income attributable to Zoetis Inc. $385
 $285
 $926
 $779
(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 condensed consolidated statements of income.






See notes to condensed consolidated financial statements.
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ZOETIS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

March 31,December 31,
20202019
(MILLIONS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)(Unaudited)
Assets
Cash and cash equivalents(a)
$1,951  $1,934  
Accounts receivable, less allowance for doubtful accounts of $21 in 2020 and $21 in 2019965  1,086  
Inventories1,481  1,410  
Other current assets375  318  
Total current assets4,772  4,748  
Property, plant and equipment, less accumulated depreciation of $1,769 in 2020 and $1,737 in 20191,977  1,940  
Operating lease right of use assets182  189  
Goodwill2,583  2,592  
Identifiable intangible assets, less accumulated amortization1,821  1,890  
Noncurrent deferred tax assets88  88  
Other noncurrent assets105  98  
Total assets$11,528  $11,545  
Liabilities and Equity
Current portion of long-term debt$500  $500  
Accounts payable265  301  
Dividends payable95  95  
Accrued expenses476  543  
Accrued compensation and related items212  276  
Income taxes payable123  36  
Other current liabilities50  55  
Total current liabilities1,721  1,806  
Long-term debt, net of discount and issuance costs5,963  5,947  
Noncurrent deferred tax liabilities421  434  
Operating lease liabilities159  164  
Other taxes payable260  257  
Other noncurrent liabilities251  229  
Total liabilities8,775  8,837  
Commitments and contingencies (Note 16)
Stockholders' equity:
Common stock, $0.01 par value: 6,000,000,000 authorized; 501,891,243 and 501,891,243 shares issued; 474,865,353 and 475,582,210 shares outstanding at March 31, 2020, and December 31, 2019, respectively5  5  
Treasury stock, at cost, 27,025,890 and 26,363,033 shares of common stock at March 31, 2020, and December 31, 2019, respectively(2,252) (2,042) 
Additional paid-in capital1,017  1,044  
Retained earnings4,764  4,427  
Accumulated other comprehensive loss(781) (726) 
Total equity2,753  2,708  
Total liabilities and equity$11,528  $11,545  
(a) As of March 31, 2020, and December 31, 2019, includes $1 million and $2 million, respectively, of restricted cash.
  October 1,
 December 31,
  2017
 2016
(MILLIONS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA) (Unaudited)
  
Assets    
Cash and cash equivalents(a)
 $1,981
 $727
Accounts receivable, less allowance for doubtful accounts of $29 in 2017 and $30 in 2016 1,009
 913
Inventories 1,490
 1,502
Assets held for sale 57
 —
Other current assets 357
 248
Total current assets 4,894
 3,390
Property, plant and equipment, less accumulated depreciation of $1,447 in 2017 and $1,358 in 2016 1,388
 1,381
Goodwill 1,530
 1,481
Identifiable intangible assets, less accumulated amortization 1,318
 1,228
Deferred tax assets 94
 96
Other noncurrent assets 64
 73
Total assets $9,288
 $7,649
     
Liabilities and Equity    
Current portion of long-term debt $750
 $—
Accounts payable 213
 265
Dividends payable —
 52
Accrued expenses 413
 464
Accrued compensation and related items 202
 224
Income taxes payable 128
 71
Liabilities associated with assets held for sale 6
 —
Other current liabilities 34
 41
Total current liabilities 1,746
 1,117
Long-term debt, net of discount and issuance costs 4,952
 4,468
Deferred tax liabilities 269
 244
Other taxes payable 89
 73
Other noncurrent liabilities 213
 248
Total liabilities 7,269
 6,150
Commitments and contingencies —
 —
Stockholders' equity:    
Preferred stock, $0.01 par value: 1,000,000,000 authorized, none issued —
 —
Common stock, $0.01 par value: 6,000,000,000 authorized; 501,891,243 and 501,891,243 shares issued; 487,832,003 and 492,855,297 shares outstanding at October 1, 2017, and December 31, 2016, respectively 5
 5
Treasury stock, at cost, 14,059,240 and 9,035,946 shares of common stock at October 1, 2017, and December 31, 2016, respectively (733) (421)
Additional paid-in capital 1,032
 1,024
Retained earnings 2,140
 1,477
Accumulated other comprehensive loss (455) (598)
Total Zoetis Inc. equity 1,989
 1,487
Equity attributable to noncontrolling interests 30
 12
Total equity 2,019
 1,499
Total liabilities and equity $9,288
 $7,649
(a)
As of October 1, 2017, includes $7 million of restricted cash.

See notes to condensed consolidated financial statements.
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ZOETIS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(UNAUDITED)


Three months ended March 31, 2020
Accumulated
AdditionalOther
Common StockTreasury StockPaid-inRetainedComprehensiveTotal
(MILLIONS OF DOLLARS AND SHARES)
Shares (a)
Amount
Shares (a)
AmountCapitalEarningsLossEquity
Balance December 31, 2019501.9  $5  26.4  $(2,042) $1,044  $4,427  $(726) $2,708  
Net income—  —  —  —  —  423  —  423  
Other comprehensive loss—  —  —  —  —  —  (55) (55) 
Share-based compensation awards (b)
—  —  (1.2) 40  (28) 9  —  21  
Treasury stock acquired (c)
—  —  1.8  (250) —  —  —  (250) 
Employee benefit plan contribution from Pfizer Inc. (d)
—  —  —  —  1  —  —  1  
Dividends declared—  —  —  —  —  (95) —  (95) 
Balance, March 31, 2020501.9  $5  27.0  $(2,252) $1,017  $4,764  $(781) $2,753  
Three months ended March 31, 2019
Accumulated
AdditionalOther
Common StockTreasury StockPaid-inRetainedComprehensiveTotal
(MILLIONS OF DOLLARS AND SHARES)
Shares (a)
Amount
Shares (a)
AmountCapitalEarningsLossEquity
Balance December 31, 2018501.9  $5  22.3  $(1,487) $1,026  $3,270  $(629) $2,185  
Net income—  —  —  —  —  312  —  312  
Other comprehensive income—  —  —  —  —  —  31  31  
Share-based compensation awards (b)—  —  (1.1) 44  (19) (8) —  17  
Treasury stock acquired (c)—  —  1.7  (150) —  —  —  (150) 
Employee benefit plan contribution from Pfizer Inc.(d)—  —  —  —  1  —  —  1  
Dividends declared—  —  —  —  —  (79) —  (79) 
Balance, March 31, 2019501.9  $5  22.9  $(1,593) $1,008  $3,495  $(598) $2,317  
 Zoetis   
          Accumulated
 Equity
  
      Additional
   Other
 Attributable to
  
  Common
 Treasury
 Paid-in
 Retained
 Comprehensive
 Noncontrolling
 Total
(MILLIONS OF DOLLARS) 
Stock(a)

 
Stock(a)

 Capital
 Earnings
 Loss
 Interests
 Equity
Balance, December 31, 2015 $5
 $(203) $1,012
 $876
 $(622) $23
 $1,091
Nine months ended October 2, 2016              
Net income —
 —
 —
 667
 —
 (2) 665
Other comprehensive income —
 —
 —
 —
 114
 —
 114
Share-based compensation awards(b)
 —
 77
 —
 (26) —
 —
 51
Treasury stock acquired(c)
 —
 (225) —
 —
 —
 —
 (225)
Employee benefit plan contribution from Pfizer Inc.(d)
 —
 —
 2
 —
 —
 —
 2
Divestitures(e)
 —
 —
 —
 —
 2
 (8) (6)
Dividends declared —
 —
 —
 (94) —
 —
 (94)
Balance, October 2, 2016 $5
 $(351) $1,014
 $1,423
 $(506) $13
 $1,598
               
Balance, December 31, 2016 $5
 $(421) $1,024
 $1,477
 $(598) $12
 $1,499
Nine months ended October 1, 2017              
Net income —
 —
 —
 783
 —
 (1) 782
Other comprehensive income —
 —
 —
 —
 143
 1
 144
Consolidation of a noncontrolling interest(f)
 —
 —
 —
 —
 —
 18
 18
Share-based compensation awards (b)
 —
 63
 6
 (17) —
 —
 52
Treasury stock acquired(c)
 —
 (375) —
 —
 —
 —
 (375)
Employee benefit plan contribution from Pfizer Inc.(d)
 —
 —
 2
 —
 —
 —
 2
Dividends declared —
 —
 —
 (103) —
 —
 (103)
Balance, October 1, 2017 $5
 $(733) $1,032
 $2,140
 $(455) $30
 $2,019
(a)
As of October 1, 2017, and October 2, 2016, there were 487,832,003 and 494,240,780 outstanding shares of common stock, respectively, and 14,059,240 and 7,650,463 shares of treasury stock, respectively. Treasury stock is recognized at the cost to reacquire the shares. For additional information, see Note 13. Stockholders' Equity.
(b)
Includes the issuance of shares of Zoetis Inc. common stock and the reissuance of treasury stock in connection with the vesting of employee share-based awards. Upon reissuance of treasury stock, differences between the proceeds from reissuance and the cost of the treasury stock that result in gains are recorded in Additional paid-in capital. Losses are recorded in Additional paid-in capital to the extent that they can offset previously recorded gains. If no such credit exists, the differences are recorded in Retained earnings. 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 12. Share-Based Payments and Note. 13. Stockholders' Equity.
(c)
Reflects the acquisition of treasury shares in connection with the share repurchase program. For additional information, see Note 13. Stockholders' Equity.
(d)
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 11. Benefit Plans.
(e)
Reflects the divestiture of our share of our Taiwan joint venture. See Note 4. Acquisitions and Divestitures: Divestitures.
(f)
Represents the consolidation of a European livestock monitoring company, a variable interest entity of which Zoetis is the primary beneficiary.

(a) Shares may not add due to rounding.

(b) 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 13. Share-based Payments and Note 14. Stockholders' Equity.

(c) Reflects the acquisition of treasury shares in connection with the share repurchase program. For additional information see Note 14. Stockholders' Equity.

(d)  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 notes to condensed consolidated financial statements.
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ZOETIS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 31,
(MILLIONS OF DOLLARS)20202019
Operating Activities
Net income$423  $312  
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense110  98  
Share-based compensation expense16  18  
Asset write-offs and asset impairments—  1  
Net gain on sale of assets(17) —  
Provision for losses on inventory13  14  
Deferred taxes(9) (16) 
Employee benefit plan contribution from Pfizer Inc.1  1  
Other changes in assets and liabilities, net of acquisitions and divestitures:
    Accounts receivable109  75  
    Inventories(97) 17  
    Other assets(65) 24  
    Accounts payable(35) (79) 
    Other liabilities(128) (103) 
    Other tax accounts, net87  27  
Net cash provided by operating activities408  389  
Investing Activities
Capital expenditures(94) (63) 
Other acquisitions(6) —  
Proceeds from maturities and redemptions of investments—  36  
Net proceeds on swaps designated as net investment hedges24  —  
Net proceeds from sale of assets20  —  
Other investing activities(1) 4  
Net cash used in investing activities(57) (23) 
Financing Activities
Decrease in short-term borrowings, net—  (9) 
Payment of contingent consideration related to previously acquired assets—  (8) 
Share-based compensation-related proceeds, net of taxes paid on withholding shares17  3  
Purchases of treasury stock(250) (150) 
Cash dividends paid(95) (79) 
Net cash used in financing activities(328) (243) 
Effect of exchange-rate changes on cash and cash equivalents(6) 3  
Net increase in cash and cash equivalents17  126  
Cash and cash equivalents at beginning of period1,934  1,602  
Cash and cash equivalents at end of period$1,951  $1,728  
Supplemental cash flow information
Cash paid during the period for:
  Income taxes$22  $29  
  Interest, net of capitalized interest95  96  
Non-cash transactions:
     Capital expenditures2  5  
  Dividends declared, not paid95  79  
  Nine Months Ended
  October 1,
 October 2,
(MILLIONS OF DOLLARS) 2017
 2016
Operating Activities    
Net income before allocation to noncontrolling interests $782
 $665
Adjustments to reconcile net income before noncontrolling interests to net cash provided by operating activities:    
Depreciation and amortization expense 179
 177
Share-based compensation expense 33
 28
Restructuring 7
 (15)
Asset write-offs and asset impairments 1
 2
Net loss/(gain) on sale of assets 2
 (27)
Provision for losses on inventory 46
 65
Deferred taxes (3) (52)
Employee benefit plan contribution from Pfizer Inc. 2
 2
Other non-cash adjustments 11
 13
Other changes in assets and liabilities, net of acquisitions and divestitures    
    Accounts receivable (58) 44
    Inventories (35) (133)
    Other assets (132) (53)
    Accounts payable (56) (56)
    Other liabilities (114) (291)
    Other tax accounts, net 73
 58
Net cash provided by operating activities 738
 427
Investing Activities    
Purchases of property, plant and equipment (141) (156)
Acquisitions (82) (88)
Net proceeds from sales of assets 1
 89
Other investing activities 6
 —
Net cash used in investing activities (216) (155)
Financing Activities    
Decrease in short-term borrowings, net —
 (5)
Proceeds from issuance of long-term debt—senior notes, net of discount and fees 1,231
 —
Principal payments on long-term debt —
 (400)
Payment of contingent consideration related to previously acquired assets (5) (28)
Share-based compensation-related proceeds, net of taxes paid on withholding shares 20
 24
Purchases of treasury stock(a) 
 (375) (225)
Cash dividends paid (155) (141)
Net cash provided by/(used in) in financing activities 716
 (775)
Effect of exchange-rate changes on cash and cash equivalents 16
 —
Net increase/(decrease) in cash and cash equivalents 1,254
 (503)
Cash and cash equivalents at beginning of period 727
 1,154
Cash and cash equivalents at end of period $1,981
 $651
     
Supplemental cash flow information    
Cash paid during the period for:    
  Income taxes $366
 $295
  Interest, net of capitalized interest 138
 140
Non-cash transactions:    
     Purchases of property, plant and equipment 6
 16
     Contingent purchase price consideration(b)
 —
 29
(a)
Reflects the acquisition of treasury shares in connection with the share repurchase programs. For additional information, see Note 13. Stockholders' Equity.
(b)
For 2016, relates primarily to the non-cash portion of the acquisition of a livestock business in South America.

See notes to condensed consolidated financial statements.
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ZOETIS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1.Organization
1. Organization
Zoetis Inc. (including its subsidiaries, collectively, Zoetis, the company, we, us or our) is a global leader in the discovery, development, manufacture and commercialization of animal health medicines, vaccines and vaccines,diagnostic products with a focus on both livestock and companion animals. We organize and operate our business in two2 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 eight8 core species: cattle, swine, poultry, sheepfish and fishsheep (collectively, livestock) and dogs, cats and horses (collectively, companion animals); and within five7 major product categories: vaccines, anti-infectives, vaccines, parasiticides, other pharmaceuticals, dermatology, medicated feed additives and other pharmaceuticals.animal health diagnostics.
2.Basis of Presentation
2. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements were prepared following the requirements of the Securities and Exchange Commission (SEC) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by accounting principles generally accepted in the United States of America (U.S. GAAP) can be condensed or omitted. Balance sheet amounts and operating results for subsidiaries operating outside the United StatesU.S. are as of and for the three and nine-monththree-month periods ended August 27, 2017,February 29, 2020 and AugustFebruary 28, 2016.2019.
Revenue, expenses, assets and liabilities can vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be representative of those for the full year.
Certain reclassifications of prior year information have been made to conform to the current year's presentation.
We are responsible for the unaudited condensed consolidated financial statements included in this Form 10-Q. The condensed consolidated financial statements include all normal and recurring adjustments that are considered necessary for the fair presentation of our financial position and operating results. The information included in this interim report should be read in conjunction with the financial statements and accompanying notes included in our 20162019 Annual Report on Form 10-K.
3.Significant Accounting Policies
3. Accounting Standards
Recently Adopted Accounting Standards
In January 2017,August 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Topic 350-40), an accounting standards update which clarifiesexpands the definitionscope of a business.costs associated with cloud computing arrangements that must be capitalized. Under the new guidance, costs associated with implementing a set of integrated activities and assetscloud computing arrangement that is a business only if it has, at a minimum, an inputservice contract must be capitalized and substantive process that together significantly contribute toexpensed over the ability to create outputs. The update also introduces the concept of an initial screening or “Step 1” which requires companies to first determine if substantially allterm of the fair value of the gross assets acquired is concentrated in a single (or group of similar) identifiable assets. Transactions that pass the Step 1 screening will be considered a business if they contain an input and substantive process and either; (1) an output or (2) an organized workforce with skills critical to the ability to create outputs and inputs that can be utilized to create the outputs. Companies will no longer be required to evaluate whether a market participant could replace any missing inputs or processes, instead focusing on the substance of what was acquired. The provisions of the new standard are effective, on a prospective basis, beginning January 1, 2018, for annual and interim reporting periods and may be adopted early for any transactions not yet reported in issued financial statements. We elected to early adopt the new standard for any new transactions occurring on or after January 1, 2017.
In July 2015, the FASB issued an accounting standards update to simplify the measurement of inventory by requiring that inventory be measured at the lower of cost or net realizable value, rather than at the lower of cost or market, with market being defined as either replacement cost, net realizable value or net realizable value less a normal profit margin.hosting arrangement. We adopted this guidance as of January 1, 2017.2020, the required effective date, on a prospective basis. The adoption did not have a significant impact on our consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (Topic 326), an accounting standards update which requires an entity to measure and recognize expected credit losses for certain financial instruments, including trade receivables, as an allowance that reflects the entity's current estimate of credit losses expected to be incurred. For available-for-sale debt securities with unrealized losses, the standard requires allowances to be recorded instead of reducing the amortized cost of the investment. We adopted this guidance as of January 1, 2020, the required effective date, on a prospective basis. The adoption did not have a significant impact on our consolidated financial statements.
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. 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 provisions of ASU 2020-04 are optional and effective as of March 12, 2020, but only available through December 31, 2022. We are currently evaluating the impact that the new guidance will have on our consolidated financial statements and related disclosures, as well as the timing of the potential adoption.
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 and 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
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across both of our operating segments, leveraging our research and development (R&D) operations and manufacturing and supply chain network.
Over the course of our history, we have focused on developing a diverse portfolio of animal health products, including medicines, vaccines and diagnostics, complemented by biodevices, genetic tests and a range of services. We refer to a single product in all brands, or its dosage forms for all species, as a product line. We have approximately 300 comprehensive product lines, including products for both livestock and companion animals across each of our major product categories.
In the fourth quarter of 2019, the company modified the list of major product categories to include a category for dermatology products, which was previously included within other pharmaceutical products. The prior period presentation has been revised to reflect the new product categories.
Our major product categories are:
•vaccines: biological preparations that help prevent diseases of the respiratory, gastrointestinal and reproductive tracts or induce a specific immune response;
•anti-infectives: products that prevent, kill or slow the growth of bacteria, fungi or protozoa;
•parasiticides: products that prevent or eliminate external and internal parasites such as fleas, ticks and worms;
•other pharmaceutical products: pain and sedation, antiemetic, reproductive, and oncology products;
•dermatology products: products that relieve itch associated with allergic conditions and atopic dermatitis;
•medicated feed additives: products added to animal feed that provide medicines to livestock; and
•animal health diagnostics: portable blood and urine analysis systems and point-of-care diagnostic products, including instruments and reagents, rapid immunoassay tests, reference laboratory kits and blood glucose monitors.
Our remaining revenue is derived from other non-pharmaceutical product categories, such as nutritionals and agribusiness, as well as products and services in smaller but fast growing areas, including biodevices, genetic tests and precision livestock farming.
Our livestock products primarily help prevent or treat diseases and conditions to enable the cost-effective production of safe, high-quality animal protein. Human population growth and increasing standards of living are important long-term growth drivers for our livestock products in three major ways. First, population growth and increasing standards of living drive increased demand for improved nutrition, particularly animal protein. Second, population growth leads to increased natural resource constraints driving a need for enhanced productivity. Finally, as standards of living improve, there is increased focus on food quality and safety.
Our companion animal products help extend and improve the quality of life for pets; increase convenience and compliance for pet owners; and help veterinarians improve the quality of their care and the efficiency of their businesses. Growth in the companion animal medicines, vaccines and diagnostics sector is driven by economic development, related increases in disposable income and increases in pet ownership and spending on pet care. Companion animals are also living longer, receiving increased medical treatment and benefiting from advances in animal health medicines and vaccines.
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The following tables present our revenue disaggregated by geographic area, species, and major product category:
Revenue by geographic area
Three Months Ended
March 31,
(MILLIONS OF DOLLARS) 20202019
United States  $786  $718  
Australia  43  48  
Brazil  63  60  
Canada  40  41  
China  66  60  
France  29  32  
Germany  34  37  
Italy  21  28  
Japan  41  37  
Mexico  32  28  
Spain  28  27  
United Kingdom  55  57  
Other developed markets  87  84  
Other emerging markets  189  179  
1,514  1,436  
Contract manufacturing & human health  20  19  
Total Revenue  $1,534  $1,455  
Revenue by major species
Three Months Ended
March 31,
(MILLIONS OF DOLLARS)20202019
U.S.
Companion animal$499  $445  
Livestock287  273  
786  718  
International
Companion animal298  284  
Livestock430  434  
728  718  
Contract manufacturing & human health20  19  
Total Revenue$1,534  $1,455  
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Revenue by species
Three Months Ended
March 31,
(MILLIONS OF DOLLARS)20202019
Companion Animal:
Dogs and Cats$746  $688  
Horses51  41  
797  729  
Livestock:
Cattle370  380  
Swine157  149  
Poultry148  139  
Fish26  23  
Sheep and other16  16  
717  707  
Contract manufacturing & human health20  19  
Total Revenue$1,534  $1,455  
Revenue by major product category
Three Months Ended
March 31,
(MILLIONS OF DOLLARS)20202019
Vaccines$349  $358  
Anti-infectives280  286  
Parasiticides255  231  
Other pharmaceuticals197  190  
Dermatology197  159  
Medicated feed additives125  112  
Animal health diagnostics60  60  
Other non-pharmaceuticals51  40  
1,514  1,436  
Contract manufacturing & human health20  19  
Total Revenue$1,534  $1,455  
B. Revenue from Contracts with Customers
Contract liabilities reflected within Other current liabilities as of December 31, 2019 and December 31, 2018, and subsequently recognized as revenue during the first three months of 2020 and 2019 were approximately $3 million and $1 million, respectively. Contract liabilities as of March 31, 2020 and December 31, 2019 were approximately $10 million and $11 million, respectively.
Estimated future revenue expected to be generated from long-term contracts with unsatisfied performance obligations as of March 31, 2020 is not material.
5. Acquisitions and Divestitures
A. Acquisitions
Other Acquisitions
In the first quarter of 2020, we acquired the net assets of Ethos Diagnostic Science, a veterinary reference laboratory business with labs across the U.S. This guidancetransaction did not have a significant impact on our consolidated financial statements.
Recently Issued Accounting Standards
In August 2017,During 2019, we completed the FASB issued an accounting standards update which amendsacquisitions 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 hedge accounting recognition and presentation requirements and allows for more hedging strategies to be eligible for hedge accounting. Recognition of periodic hedge effectiveness will no longer be required for cash flow and net investment hedges and companies may elect to perform subsequent hedge effectiveness assessments qualitatively. The update also clarifies that the change in fair value of a derivative must be recorded in the same income statement line item as the earnings effect of the hedged item and introduces additional disclosure requirements including cumulative basis adjustments for fair value hedges and the effect of hedging on individual income statement line items. The provisions of the update are effective beginning January 1, 2019 for interim and annual periods with early adoption permitted for any interim period after issuance of the update. We are currently assessing the timing of our adoption as well as the potential impact that the standard will have on our consolidated financial statements.
In March 2017, the FASB issued an accounting standards update to simplify and improve the reporting of net periodic pension benefit cost by requiring only present service cost to be presented in the same line item as other current employee compensation costs while remaining components of net periodic benefit cost would be presented within Other (income)/deductions—net outside of operations. We plan to adopt this

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guidance as of January 1, 2018, the required effective date, and doU.S. These transactions did not expect that the new standard will have a significant impact on our consolidated financial statements.
In October 2016, the FASB issued an accounting standards update that will require the recognition of the income tax consequences of an intra-entity asset transfer, other than inventory, when the transfer occurs as opposed to when the asset is sold to an outside third party. The provisions of the new standard are effective beginning January 1, 2018, for annual and interim reporting periods. Early adoption is permitted beginning on January 1, 2017. We plan to adopt this guidance as of January 1, 2018, the required effective date, and do not expect that the new standard will have a significant impact on our consolidated financial statements.
In February 2016, the FASB issued an accounting standards update which requires lessees to recognize most leases on the balance sheet with a corresponding right of use asset. Leases will be classified as financing or operating which will drive the expense recognition pattern. For lessees, the income statement presentation and expense recognition pattern for financing and operating leases is similar to the current model for capital and operating leases, respectively. Companies may elect to exclude short-term leases. The update also requires additional disclosures that will better enable users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. We plan to adopt this guidance as of January 1, 2019, the required effective date, for annual and interim reporting periods. The new standard requires a modified retrospective adoption approach, at the beginning of the earliest comparative period presented in the financial statements. We continue to assess the potential impact that adopting this new guidance will have on our consolidated financial statements.
In May 2014, the FASB issued an accounting standards update that outlines a new, single comprehensive model for companies to use in accounting for revenue arising from contracts with customers. This update supersedes most current revenue recognition guidance under U.S. GAAP. The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance includes a five-step model for determining how, when and how much revenue should be recognized. This update also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. We plan to adopt this guidance as of January 1, 2018, the required effective date, using the modified retrospective transition method. Under the modified retrospective method, the cumulative effect of applying the new standard will be recognized as of the date of initial application with disclosure of results under both the new and prior standards. We continue to assess the impact of the new standard on our current policies, procedures, and disclosures related to revenue recognition. Based on the work performed to date, we do not believe that the adoption will have a material impact on our consolidated financial statements. While implementation procedures are still ongoing, we have evaluated the impact on our primary revenue stream, product sales, in both the United States and our key international markets and no matters have currently been identified individually or in the aggregate that would have a material impact on the timing or amount of revenue recognition based on the provisions of the new standard.
4.Acquisitions andB. Divestitures
Acquisitions
During the third quarterthree months ended March 31, 2020, we received cash proceeds of 2017, we completed the acquisition of an Irish biologic therapeutics company. During the first quarter of 2017, we completed the purchase of$20 million resulting from a Norwegian fish vaccination company, as well as the consolidation of a European livestock monitoring company, a variable interest entity of which Zoetis is the primary beneficiary. These acquisitions did not have a significant impact on our condensed consolidated financial statements.
Assets and Liabilities Held for Sale
On March 30, 2017, as part of our supply network strategy, we announcedpayment received pursuant to an agreement withrelated to the Brazilian-based pharmaceutical company União Química (UQ) to sell our2016 sale of certain U.S. manufacturing site in Guarulhos, Brazil, and we met the criteria for held for sale classification. The agreement also includes entering into a five-year manufacturing and supply agreement with UQ to begin upon closing of the transaction.
As of October 1, 2017, recorded assets and liabilities held for sale are summarized below:

sites.
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  October 1,
(MILLIONS OF DOLLARS) 2017
Assets held for sale  
Accounts receivable $1
Inventories 9
Property, plant and equipment 28
Deferred tax assets 5
Goodwill 3
Other noncurrent assets 14
Other(a)
 (3)
   Total $57
   
Liabilities associated with assets held for sale  
Accounts payable $3
Accrued expenses 3
   Total $6
(a)
During the third quarter of 2017, we recorded a $3 million charge to reduce the carrying value of the disposal group to an amount equal to fair value less costs to sell.
Additionally, in the third quarter of 2017, we incurred costs of $2 million related to the anticipated disposal of the Guarulhos site.
We expect to complete this transaction during the fourth quarter of 2017.
Divestitures
On May 11, 2017, we completed the sale of our manufacturing site in Shenzhou, China. We had previously exited operations at this site during the second quarter of 2015 as part of our operational efficiency program. We received total cash proceeds of approximately $3 million6. Restructuring Charges and recorded a net pre-tax gain of approximately $2 million within Other (income)/deductions—net. Additionally, in the second quarter of 2017, we recorded a $4 million expense within Other (income)/deductions—net related to the prior year sale of the U.S. manufacturing sites noted below.
On April 28, 2016, we completed the sale of our 55 percent ownership share of a Taiwan joint venture, including a manufacturing site in Hsinchu, Taiwan to Yung Shin Pharmaceutical Industrial Co., Ltd., a pharmaceutical companyCosts Associated with an animal health businessAcquisitions, Cost-Reduction and headquarters in Taiwan. The sale also included a portfolio of products in conjunction with our comprehensive operational efficiency program. These products include medicated feed additives, anti-infective medicines and nutritional premixes for livestock, sold primarily in Taiwan and in international markets. We received $13 million in cash upon closing.Productivity Initiatives
On February 17, 2016, we completed the sale of our manufacturing site in Haridwar, India to the India-based pharmaceutical company Zydus Cadila (Cadila Healthcare Ltd.). The agreement also included the sale of a portfolio of our products in conjunction with our comprehensive operational efficiency program.
On February 12, 2016, we completed the sale of two of our manufacturing sites in the United States: Laurinburg, North Carolina, and Longmont, Colorado, to Huvepharma NV (Huvepharma), a European animal health company. Huvepharma also assumed the assets and operations and the lease of our manufacturing and distribution site in Van Buren, Arkansas. The agreement included the sale of a portfolio of products in conjunction with our comprehensive operational efficiency program.
During the first nine months of 2016, we received total cash proceeds of approximately $88 million related to the divestitures of the India and U.S. manufacturing sites noted above. During the first quarter of 2016, we recognized a net pre-tax gain of approximately $33 million, partially offset by a net pre-tax loss of approximately $6 million recognized during the second quarter of 2016. Gains and losses related to divestitures are recorded within Other (income)/deductions—net.
5.Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/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. Thisrestructuring the consolidated company, which may include charges related to employees, assets and activities that will not continue.continue in the consolidated company. All operating functions can be impacted by these actions, including sales and marketing, manufacturing and research and development (R&D),R&D, as well as functions such as businessinformation technology, shared services and corporate operations.
During 2015, we launched a comprehensive operational efficiency program, which was incremental to the previously announced supply network strategy. These initiatives have focused on reducing complexity in our product portfolios through the elimination of approximately 5,000 product stock keeping units (SKUs), changing our selling approach in certain markets, reducing our presence in certain countries, and

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planning to sell or exit 10 manufacturing sites over a long term period. As of October 1, 2017, we divested or exited three U.S. manufacturing sites, three international manufacturing sites, and our 55 percent ownership share of a Taiwan joint venture, inclusive of its related manufacturing site. We are also continuing to optimize our resource allocation and efficiency by reducing resources associated with non-customer facing activities and operating more efficiently as a result of less internal complexity and more standardization of processes. As part of these initiatives, we planned to reduce certain positions through divestitures, normal attrition and involuntary terminations by approximately 2,000 to 2,500, subject to consultations with works councils and unions in certain countries. In 2016, the operations of the Guarulhos, Brazil manufacturing site, including approximately 300 employees, were transferred to us from Pfizer, which increased our range of planned reduction in certain positions to 2,300 to 2,800. Including divestitures, as of October 1, 2017, approximately 2,200 positions have been eliminated and the comprehensive operational efficiency program is substantially complete. We expect additional reductions through divestitures related to our supply network strategy over the next several years.
The components of costs incurred in connection with restructuring initiatives, acquisitions and cost-reduction/productivity initiatives are as follows:
  Three Months Ended Nine Months Ended
  October 1,
 October 2,
 October 1,
 October 2,
(MILLIONS OF DOLLARS) 2017
 2016
 2017
 2016
Restructuring charges/(reversals) and certain acquisition-related costs:        
Integration costs(a)
 $2
 $—
 $4
 $2
Restructuring charges/(reversals)(b)(c):
        
Employee termination costs 7
 3
 3
 (20)
Exit costs (1) 1
 —
 3
Total Restructuring charges/(reversals) and certain acquisition-related costs
 $8
 $4
 $7
 $(15)
Three Months Ended
March 31,
(MILLIONS OF DOLLARS)20202019
Restructuring charges and certain acquisition-related costs:
Integration costs(a)
$6  $1  
Restructuring charges(b):
Employee termination costs3  4  
Total Restructuring charges and certain acquisition-related costs$9  $5  
(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 three months ended March 31, 2020 primarily relate to CEO transition-related costs which are associated with Manufacturing/research/corporate.
The restructuring charges for the three months ended March 31, 2019 primarily relate to the acquisition of Abaxis which are associated with Manufacturing/research/corporate.
(MILLIONS OF DOLLARS)
Accrual(a)
Balance, December 31, 2019(b)
$45 
Provision3 
Utilization and other(a)(c)
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.(7)
Balance, March 31, 2020(b)
The restructuring charges/(reversals) for the three months ended October 1, 2017, are primarily related to:$41 
(a)  Changes in our restructuring accrual represents employee termination costscosts.
(b) At March 31, 2020, and December 31, 2019, included in Accrued expenses ($19 million and $23 million, respectively) and Other noncurrent liabilities ($22 million and $22 million, respectively).
(c)  Includes adjustments for foreign currency translation.
7. Other (Income)/Deductions—Net
The components of $3 million related to the operational efficiency initiative and supply network strategy;Other (income)/deductions—net are as follows:
employee termination costs of $4 million related to the acquisition of an Irish biologic therapeutics company in the third quarter of 2017; and
Three Months Ended
March 31,
(MILLIONS OF DOLLARS)20202019
Royalty-related income$(1) $(5) 
Interest income(6) (10) 
Net gain on sale of assets(a)
(17) —  
Foreign currency loss(b)
5  —  
Other, net(1) 1  
Other (income)/deductions—net$(20) $(14) 
a reversal of exit costs of $1 million related to the operational efficiency initiative.
The restructuring charges/(reversals) for the nine months ended October 1, 2017, are primarily related to:
a net reversal of previously accrued employee termination costs of $1 million related to the operational efficiency initiative and supply network strategy; and
employee termination costs of $4 million related to the acquisition of an Irish biologic therapeutics company in the third quarter of 2017.
The restructuring charges/(reversals) for the three and nine months ended October 2, 2016, primarily relate to the operational efficiency initiative and supply network strategy.
(c)
The restructuring charges/(reversals) are associated with the following:
(a) For the three months ended October 1, 2017, International ($1 million reversal)March 31, 2020, represents a net gain resulting from net cash proceeds received pursuant to an agreement related to the 2016 sale of certain U.S. manufacturing sites. 
(b) Primarily driven by costs related to hedging and Manufacturing/research/corporate ($7 million).
For the nine months ended October 1, 2017, International ($2 million reversal)exposures to certain emerging and Manufacturing/research/corporate ($5 million).
For the three months ended October 2, 2016, International ($1 million reversal) and Manufacturing/research/corporate ($5 million).
For the nine months ended October 2, 2016, U.S. ($2 million reversal), International ($16 million reversal) and Manufacturing/research/corporate ($1 million).

developed market currencies.
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8. Income Taxes
Charges related to the operational efficiency initiative and supply network strategy are as follows:A. Taxes on Income
  Three Months Ended Nine Months Ended
  October 1,
 October 2,
 October 1,
 October 2,
(MILLIONS OF DOLLARS) 2017
 2016
 2017
 2016
Restructuring charges/(reversals) and certain acquisition-related costs:        
Operational efficiency initiative        
Employee termination costs(a)
 $1
 $3
 $2
 $(26)
Exit costs (1) 1
 —
 4
  —
 4
 2
 (22)
Supply network strategy:        
Employee termination costs 2
 —
 (3) 6
  2
 —
 (3) 6
         
Total restructuring charges/(reversals) related to the operational efficiency initiative and supply network strategy 2
 4
 (1) (16)
         
Other operational efficiency initiative charges        
    Cost of sales:        
        Inventory write-offs —
 1
 —
 1
    Selling, general and administrative expenses:        
        Accelerated depreciation —
 —
 —
 1
        Consulting fees —
 4
 1
 11
    Other (income)/deductions—net:        
        Net (gain)/loss on sale of assets(b)
 (1) —
 1
 (27)
Total other operational efficiency initiative charges (1) 5
 2
 (14)
         
Other supply network strategy charges        
    Cost of sales:        
        Accelerated depreciation —
 2
 2
 4
        Consulting fees 2
 —
 4
 3
        Other(c)
 (1) —
 (1) —
    Other (income)/deductions—net:        
        Net loss on sale of assets(d)
 5
 —
 5
 —
Total other supply network strategy charges 6
 2
 10
 7
         
Total charges associated with the operational efficiency initiative and supply network strategy $7
 $11
 $11
 $(23)
(a)
For the nine months ended October 2, 2016, includes a reduction in employee termination accruals primarily as a result of higher than expected voluntary attrition rates experienced in the first half of 2016.
(b)
For the nine months ended October 2, 2016, represents the net gain on the sale of certain manufacturing sites and products, partially offset by the loss on the sale of our share of our Taiwan joint venture, as part of our operational efficiency initiative.
(c)
For the three and nine months ended October 1, 2017, represents an adjustment related to the requirement to cease depreciation of assets, located at our manufacturing site in Guarulhos Brazil, that are currently classified as held for sale.
(d)
For the three and nine months ended October 1, 2017, represents charges related to the agreement to sell our manufacturing site in Guarulhos, Brazil, which includes a $3 million charge to reduce the carrying value of the disposal group to an amount equal to fair value, less costs to sell, as well as $2 million of costs related to the anticipated disposal.

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The components of, and changes in, our restructuring accruals are as follows:
   
   
(MILLIONS OF DOLLARS) 
Accrual(a)

Balance, December 31, 2016(b)
 $90
Provision 3
Utilization and other(c)
 (48)
Balance, October 1, 2017(b)
 $45
(a)
Changes in our restructuring accruals represent employee termination costs.
(b)
At October 1, 2017, and December 31, 2016, included in Accrued expenses ($22 million and $61 million, respectively) and Other noncurrent liabilities ($23 million and $29 million, respectively).
(c)
Includes adjustments for foreign currency translation.
6.Other (Income)/Deductions—Net
The components of Other (income)/deductions—net are as follows:
  Three Months Ended Nine Months Ended
  October 1,
 October 2,
 October 1,
 October 2,
(MILLIONS OF DOLLARS) 2017
 2016
 2017
 2016
Royalty-related income $(7) $(8) $(19) $(20)
Identifiable intangible asset impairment charges(a)
 —
 1
 —
 1
Net loss/(gain) on sale of assets(b)
 4
 —
 6
 (27)
Certain legal and other matters, net(c)
 —
 —
 (4) —
Foreign currency loss(d)
 7
 5
 17
 22
Other, net(e)
 (3) (1) (11) (5)
Other (income)/deductions—net $1
 $(3) $(11) $(29)
(a)
For the three and nine months ended October 2, 2016, represents an impairment of finite-lived trademarks related to a canine pain management product.
(b)
For the three and nine months ended October 1, 2017, represents the net loss related to sales of certain manufacturing sites and products, including the anticipated disposal of our manufacturing site in Guarulhos, Brazil, as part of our operational efficiency initiative and supply network strategy.
For the nine months ended October 2, 2016, represents the net gain on the sale of certain manufacturing sites and products, partially offset by the loss on the sale of our share of our Taiwan joint venture, as part of our operational efficiency initiative.
(c)
For the nine months ended October 1, 2017, represents income associated with an insurance recovery related to commercial settlements in Mexico recorded in 2014 and 2016.
(d)
Primarily driven by costs related to hedging and exposures to certain emerging market currencies.
(e)
Includes interest income and other miscellaneous income. The three months ended October 1, 2017, also includes income associated with certain state business employment tax incentive credits. The nine months ended October 1, 2017, also includes a settlement refund and reimbursement of legal fees related to costs incurred by Pharmaq prior to the acquisition in 2015 and income associated with certain state business employment tax incentive credits.
For the nine months ended October 2, 2016, primarily represents income associated with certain state business employment tax incentive credits.
7.Income Taxes
A.Taxes on Income
TheOur effective tax rate was 28.3%14.9% for the three months ended October 1, 2017,March 31, 2020, compared with 28.8%18.1% for the three months ended October 2, 2016.March 31, 2019. The lower effective tax rate for the three months ended October 1, 2017,March 31, 2020, was primarily attributable to:
changes in the jurisdictional mix of earnings, which includes the impact of the location of earnings from operations•a $23 million and repatriation costs. The jurisdictional mix of earnings can vary as a result of repatriation decisions and operating fluctuations in the normal course of business and the impact of non-deductible items.
The effective tax rate was 28.6% for the nine months ended October 1, 2017, compared with 33.3% for the nine months ended October 2, 2016. The lower effective tax rate for the nine months ended October 1, 2017, was primarily attributable to:
a $38$13 million net discrete tax expensebenefit recorded in the first half of 2016,three months ended March 31, 2020 and 2019, respectively, related to changes in uncertain tax positions due to the impact of the European Commission’s negative decision on the excess profits rulingstax benefits for share-based payments; and
•a $6 million discrete tax benefit recorded in Belgium, the three months ended March 31, 2020 related to a remeasurement of deferred taxes resulting from the integration of acquired businesses,
partially offset by a revaluation of the company's deferred tax assets and liabilities using the Belgium tax rates expected to be in place going forward as a result of the decision;by:
•changes 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 and operating fluctuations in the normal course of business and the impact of non-deductible items; and

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a $8 million and $7 million discrete tax benefit recorded in 2017 and 2016, respectively, related to the excess tax benefits for share-based payments recognized as a component of Provision for taxes on income; and
•a $3 million and $10$4 million discrete tax benefit recorded in the first quarter of 2017three months ended March 31, 2020 and 2016,2019, respectively, related to a revaluationremeasurement of deferred taxes as a result of a changechanges in non-U.S. statutory tax rates.
B.Deferred Taxes
B. Deferred Taxes
As of October 1, 2017,March 31, 2020, the total net deferred income tax liability of $175$333 million is included in DeferredNoncurrent deferred tax assets ($9488 million) and DeferredNoncurrent deferred tax liabilities ($269421 million).
As of December 31, 2016,2019, the total net deferred income tax liability of $148$346 million is included in DeferredNoncurrent deferred tax assets ($96 million)88 million) and DeferredNoncurrent deferred tax liabilities ($244 million)434 million).
C.Tax Contingencies
C. Tax Contingencies
As of October 1, 2017,March 31, 2020, the net tax liabilities associated with uncertain tax positions of $81$184 million (exclusive of interest and penalties related to uncertain tax positions of $13 million) are included in Noncurrent deferred tax assets and Other noncurrent assets ($2 million) and Other taxes payable ($182 million).
As of December 31, 2019, the net tax liabilities associated with uncertain tax positions of $182 million (exclusive of interest and penalties related to uncertain tax positions of $12 million) are included in DeferredNoncurrent deferred tax assets and Other noncurrent assets ($42 million) and Other taxes payable($77 ($180 million).
As of December 31, 2016, the tax liabilities associated with uncertain tax positions of $68 million (exclusive of interest and penalties related to uncertain tax positions of $10 million) are included in Deferred tax assets ($3 million) and Other taxes payable ($65 million).
Our tax liabilities for uncertain tax positions relate primarily to issues common among multinational corporations. Any settlements or statute of limitations expirations could result in a significant decrease in our uncertain tax positions. Substantially all of these unrecognized tax benefits, if recognized, would impact our effective income tax rate. We do not expect that within the next twelve months any of our uncertain tax positions 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 uncertain tax positions 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 changes related to our uncertain tax positions, and such changes could be significant.
8.Financial Instruments
A.Debt
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 five-year $1.0multi-year $1.0 billion senior unsecured revolving credit facility (the credit facility), which expires in. In December 2021.2018, the maturity for the amended and restated revolving credit agreement was extended through December 2023. Subject to certain conditions, we have the right to increase the credit facility to up to $1.5 billion.$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 3.50:1.1. Upon entering into a material acquisition, the maximum total leverage ratio increases to 4.00:1,, and extends until the fourth full consecutive fiscal quarter ended immediately following the consummation of a material acquisition. The credit facility also contains a clause which adds back to Adjusted Consolidated EBITDA, any operational efficiency restructuring charge (defined as charges recorded by the company during the period commencing on October 1, 2016 and ending December 31, 2019, related to operational efficiency initiatives), provided that for any twelve-month period such charges added back to Adjusted Consolidated EBITDA shall not to exceed $100 million in the aggregate.
The credit facility also contains a financial covenant requiring that we maintain a minimum interest coverage ratio (the ratio of EBITDA at the end of the period to interest expense for such period) of 3.50:1.1. In addition, the credit facility contains other customary covenants.
We were in compliance with all financial covenants as of October 1, 2017,March 31, 2020, and December 31, 2016.2019. There were no0 amounts drawn under the credit facility as of October 1, 2017,March 31, 2020 or December 31, 2016.2019.
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 October 1, 2017,March 31, 2020, we had access to $77$75 million of lines of credit which expire at various times throughout 2017 and 2018through 2020 and are generally renewed annually. We did not have anyThere were no borrowings outstanding related to these facilities as of October 1, 2017,March 31, 2020 and December 31, 2016.2019.
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Commercial Paper Program and Other Short-Term Borrowings
In February 2013, we entered into a commercial paper program with a capacity of up to $1.0 billion. As of October 1, 2017,March 31, 2020, and December 31, 2016,2019, there was no0 commercial paper outstanding under this program. As of October 1, 2017, and December 31, 2016, we did not have any other short-term borrowings outstanding.

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Senior Notes and Other Long-Term Debt
On August 20, 2018, we issued $1.5 billion aggregate principal amount of our senior notes (2018 senior notes), with an original issue discount of $4 million. On September 12, 2017, we issued $1.25 billion aggregate principal amount of our senior notes (2017 senior notes), with an original issue discount of $7 million. These notes are comprised of $750 million aggregate principal amount of 3.000% senior notes due 2027 and $500 million aggregate principal amount of 3.950% senior notes due 2047. Net proceeds from this offering were partially used in October 2017 to repay, prior to maturity, the principal (including a make-whole amount) of our 1.875%senior notes due 2018 in the aggregate principal amount of$750 million. The remainder of the net proceeds will be used for general corporate purposes.
On November 13, 2015, we issued $1.25 billion aggregate principal amount of our senior notes (2015 senior notes), with an original issue discount of $2 million. On January 28, 2013, we issued $3.65$3.65 billion aggregate principal amount of our senior notes (the 2013(2013 senior notes offering)notes) in a private placement, with an original issue discount of $10 million.
The current portion of long-term debt was $750 million as of October 1, 2017, with a weighted-average interest rate of 1.875%. There was no current portion of long-term debt as of December 31, 2016.$10 million.
The 2013, 2015, 2017 and 20172018 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 (if not cured or waived), the 2013, 2015, 2017 and 20172018 senior notes may be declared immediately due and payable.
Pursuant to the indenture, we are able to redeem the 2013, 2015 and 2017 senior notes and the 2018 fixed rate senior notes or any series, in whole or in part, at any time by paying a “make whole” premium, plus accrued and unpaid interest to, but excluding, the date of redemption. The 2018 floating rate senior notes are not redeemable at our option prior to their maturity date. Pursuant to our tax matters agreement with Pfizer, we will not be permitted to redeem the 2013 senior notes due 2023 pursuant to this optional redemption provision, except under limited circumstances. Upon the occurrence of a change of control of us and a downgrade of the 2013, 2015, 2017 and 20172018 senior notes below an investment grade rating by each of Moody's Investors Service, Inc. and Standard & Poor's Ratings Services, we are, in certain circumstances, required to make an offer to repurchase all of the outstanding 2013, 2015, 2017 and 20172018 senior notes at a price equal to 101% of the aggregate principal amount of the 2013, 2015, 2017 and 20172018 senior notes together with accrued and unpaid interest to, but excluding, the date of repurchase.
The components of our long-term debt are as follows:
March 31,December 31,
(MILLIONS OF DOLLARS)20202019
3.450% 2015 senior notes due 2020$500  $500  
2018 floating rate (three-month USD LIBOR plus 0.44%) senior notes due 2021300  300  
3.250% 2018 senior notes due 2021300  300  
3.250% 2013 senior notes due 20231,350  1,350  
4.500% 2015 senior notes due 2025750  750  
3.000% 2017 senior notes due 2027750  750  
3.900% 2018 senior notes due 2028500  500  
4.700% 2013 senior notes due 20431,150  1,150  
3.950% 2017 senior notes due 2047500  500  
4.450% 2018 senior notes due 2048400  400  
6,500  6,500  
Unamortized debt discount / debt issuance costs(49) (51) 
Less current portion of long-term debt500  500  
Cumulative fair value adjustment for interest rate swap contracts12  (2) 
Long-term debt, net of discount and issuance costs$5,963  $5,947  
  October 1,
 December 31,
(MILLIONS OF DOLLARS) 2017
 2016
1.875% 2013 senior notes due 2018(a)
 $750
 $750
3.450% 2015 senior notes due 2020 500
 500
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
 —
4.700% 2013 senior notes due 2043 1,150
 1,150
3.950% 2017 senior notes due 2047 500
 —
  5,750
 4,500
Unamortized debt discount / debt issuance costs (48) (32)
Less current portion of long-term debt (750) —
Long-term debt, net of discount and issuance costs $4,952
 $4,468
(a)
In October 2017, we redeemed our 1.875% senior notes due 2018, prior to maturity, for $754 million, including a make-whole premium and accrued interest.
The fair value of our long-term debt including the current portion of long-term debt, was $6,024$6,384 million and $4,565$6,587 million as of October 1, 2017,March 31, 2020, and December 31, 2016,2019, 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).
The principal amount of long-term debt outstanding, as of October 1, 2017,March 31, 2020, matures in the following years:
After
(MILLIONS OF DOLLARS)202020212022202320242024Total
Maturities$500  $600  $—  $1,350  $—  $4,050  $6,500  
          After
  
(MILLIONS OF DOLLARS) 2018
 2019
 2020
 2021
 2021
 Total
Maturities $750
(a) 
$—
 $500
 $—
 $4,500
 $5,750
(a)
In October 2017, we redeemed our 1.875% senior notes due 2018, prior to maturity, for $754 million, including a make-whole premium and accrued interest.
Interest Expense
Interest expense, net of capitalized interest, was $43$53 million and $125$56 millionfor the three and nine months ended October 1, 2017, respectively,March 31, 2020 and $41 million and $125 million for the three and nine months ended October 2, 2016,March 31, 2019, respectively. Capitalized interest expense was $1$4 million and $3 millionfor thethree and nine months ended October 1, 2017, respectively,March 31, 2020 and $1 million and $2 million for the three and nine months ended October 2, 2016,March 31, 2019, respectively.


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B. Derivative Financial Instruments
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 the translation into U.S. dollars of certain foreign exchange-denominated transactions. The aggregate notional amount of foreign exchange
All derivative financial instruments offsetting foreign currency exposures was $1.3 billion and $1.2 billion, as of October 1, 2017, and December 31, 2016, respectively. The derivative financial instruments primarily offset exposures in the Australian dollar, Brazilian real, British pound, Canadian dollar, Chinese yuan, euro, and Norwegian krone. The vast majority of the foreign exchange derivative financial instruments mature within 60 days and all mature within 180 days.
All derivative contracts used to manage foreign currency risk are measured at fair value and are reported as assets or liabilities on the condensed consolidated balance sheet. The company hasderivative financial instruments primarily offset exposures in the Australian dollar, British pound, Canadian dollar, Chinese yuan, euro, and Japanese yen. Changes in fair value are reported in earnings or in Accumulated other comprehensive income/(loss), depending on the nature and purpose of the financial instrument, as follows:
•For foreign exchange contracts not designated the foreign currency forward-exchange contracts as hedging instruments. Weinstruments, 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 income/(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. The cross-currency interest rate swap contracts have varying maturities of up to five years.
Interest Rate Risk
The company may use interest rate swap contracts on certain investing and borrowing transactions to manage its net exposure to interest rates and to reduce its overall cost of borrowing.
•In anticipation of issuing fixed-rate debt, we may use forward-starting interest rate swaps that are designated as cash flow hedges to hedge against changes in interest rates that could impact expected future issuances of debt. To the extent these hedges of cash flows related to anticipated debt are effective, any unrealizedUnrealized gains or losses on the forward-starting interest rate swaps are reported in Accumulated other comprehensive loss income/(loss) and are recognized in incomeearnings 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.
During 2016 and 2017, For the three months ended March 31, 2020, we entered into forward startingforward-starting interest rate swaps, withhaving an aggregate notional value of $500 million. During the third quarter of 2017, we also enteredeffective date and mandatory termination date in treasury lock trades with an aggregate notional value of $500 million. We designated these swaps and treasury locks (contracts) as cash flow hedgesMarch 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 1.875%3.250% 2013 senior notenotes due 2023.
•We may use fixed-to-floating interest rate swaps that are designated as fair value hedges to hedge against changes in 2018. Upon issuancethe fair value of our 2017 senior notes (see A. Debt: Senior Notes and Other Long-Term Debt), we terminated these contracts and paid $3 millioncertain fixed-rate debt attributable to changes in cashthe benchmark LIBOR rate. These derivative instruments effectively convert a portion of the company’s long-term debt from fixed rate to floating rate debt based on three-month LIBOR plus a spread. Gains or losses on the counterparties for settlement. The settlement amount, which representsfixed-to-floating interest rate swaps due to changes in LIBOR are recorded in Interest expense, net of capitalized interest. Changes in the fair value of the contracts atfixed-to-floating interest rate swaps are offset by changes in the time of termination, was recorded in Accumulated other comprehensive loss, and will be amortized into income over the lifefair value of the 2017 senior notes. There was $0.1 millionunderlying fixed rate debt. As of ineffectiveness related to the forward swaps through the date of settlement which was immediately recognized as a loss within Interest expense—net of capitalized interest. In addition, in previous yearsMarch 31, 2020, we had entered into various forward-startingan outstanding fixed-to-floating interest rate swap contracts that were designatedwhich corresponds to a portion of the 3.900% 2018 senior notes due 2028. The amounts recorded during the three months ended March 31, 2020 for changes in the fair value of this hedge are not material to our consolidated financial statements.
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Outstanding Positions
The aggregate notional amounts of derivative instruments are as cash flow hedges and that were terminated upon issuance of fixed-rate notes.follows:
Notional
March 31,December 31,
(MILLIONS)20202019
Foreign currency forward-exchange contracts$1,272  $1,364  
Cross-currency interest rate swap contracts (in foreign currency):
   Euro650  650  
   Swiss franc25  25  
   Danish krone600  600  
Forward-starting interest rate swaps$450  $250  
Fixed-to-floating interest rate swap contracts$150  $150  

Fair Value of Derivative Instruments
The classification and fair values of derivative instruments are as follows:
Fair Value of Derivatives
March 31,December 31,
(MILLIONS OF DOLLARS)Balance Sheet Location20202019
Derivatives Not Designated as Hedging Instruments
   Foreign currency forward-exchange contractsOther current assets$19  $7  
   Foreign currency forward-exchange contracts
Other current liabilities
(5) (5) 
Total derivatives not designated as hedging instruments$14  $2  
Derivatives Designated as Hedging Instruments:
   Forward-starting interest rate swap contractsOther noncurrent assets$—  $5  
   Forward-starting interest rate swap contractsOther noncurrent liabilities(32) (1) 
   Cross-currency interest rate swap contractsOther current assets7  4  
   Cross-currency interest rate swap contractsOther noncurrent assets36  20  
   Cross-currency interest rate swap contractsOther current liabilities(3) (3) 
   Fixed-to-floating interest rate swap contractsOther noncurrent assets12  (2) 
Total derivatives designated as hedging instruments20  23  
Total derivatives$34  $25  
  Fair Value of Derivatives
  October 1,
 December 31,
(MILLIONS OF DOLLARS)Balance Sheet Location2017
 2016
Derivatives Not Designated as Hedging Instruments    
   Foreign currency forward-exchange contractsOther current assets$4
 $12
   Foreign currency forward-exchange contracts
Other current liabilities 
(12) (8)
Total derivatives not designated as hedging instruments (8) 4
     
Derivatives Designated as Hedging Instruments:    
   Interest rate swap contractsOther current assets—
 17
Total derivatives designated as hedging instruments —
 17
     
Total derivatives $(8) $21
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 March 31, 2020, there was $28 million of collateral received related to the long-term cross-currency interest rate swaps.
We use a market approach in valuing financial instruments on a recurring basis. Our derivative financial instruments are measured at fair value on a recurring basis using Level 2 inputs in the calculation of fair value.
The amounts of net lossesgains on derivative instruments not designated as hedging instruments, recorded in Other (income)/deductions—net, are as follows:

Three Months Ended
March 31,
(MILLIONS OF DOLLARS)20202019
Foreign currency forward-exchange contracts$6  $(4) 
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  Three Months Ended Nine Months Ended
  October 1,
 October 2,
 October 1,
 October 2,
(MILLIONS OF DOLLARS) 2017
 2016
 2017
 2016
Foreign currency forward-exchange contracts $(17) $(25) $(39) $(29)
These amounts were substantially offset in Other (income)/deductions—net by the effect of changing exchange rates on the underlying foreign currency exposures.


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The amounts of unrecognized net gains/(losses) on derivative instruments designated as cash flow hedges,interest rate swap contracts, recorded, net of tax, in OtherAccumulated other comprehensive income/(loss), are as follows:
Three Months Ended
March 31,
(MILLIONS OF DOLLARS)20202019
Forward-starting interest rate swap contracts$(27) $—  
Cross-currency interest rate swap contracts$17  $18  
  Three Months Ended Nine Months Ended
  October 1,
 October 2,
 October 1,
 October 2,
(MILLIONS OF DOLLARS) 2017
 2016
 2017
 2016
Interest rate swaps $(10) $1
 $(11) $(2)

Gains on cross-currency interest rate swap contracts, recognized within Interest expense, net of capitalized interest, are as follows:
Three Months Ended
March 31,
(MILLIONS OF DOLLARS)20202019
Cross-currency interest rate swap contracts$6  $4  
The net amount of deferred gains/(losses)gains related to derivative instruments designated as cash flow hedges that is expected to be reclassified fromAccumulated other comprehensive lossincome/(loss) into earnings over the next 12 months is insignificant.
10. Leases
We have facilities, vehicles and equipment under various non-cancellable operating leases with third parties. These leases generally have remaining terms ranging from 1 to 15 years, inclusive of renewal options that are reasonably certain of exercise.
Supplemental information for operating leases is as follows:
(MILLIONS OF DOLLARS, EXCEPT LEASE TERM AND DISCOUNT RATE AMOUNTS)As of March 31, 2020As of December 31, 2019
Supplemental Balance Sheet information for operating leases
Operating lease right of use assets$182  $189  
Operating lease liabilities
Operating lease liabilities - current (in Other current liabilities)
$33  $35  
Operating lease liabilities - noncurrent159  164  
Total operating lease liabilities$192  $199  
Weighted-average remaining lease term—operating leases (years)7.057.12
Weighted-average discount rate—operating leases3.34 %3.76 %
Three Months Ended
(MILLIONS OF DOLLARS)March 31, 2020March 31, 2019
Supplemental Income Statement information for operating leases
Operating lease expense$11  $9  
Variable lease payments not included in the measurement of lease liabilities5  4  
Short-term lease payments not included in the measurement of lease liabilities2  3  
Supplemental Cash Flow information for operating leases
Cash paid for amounts included in the measurement of lease liabilities$11  $9  
Lease obligations obtained in exchange for right-of-use assets (non-cash)4  176  
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9.Inventories
Future minimum lease payments under non-cancellable operating lease contracts as of March 31, 2020 are as follows:
TotalLess:
AfterLeaseImputed
(MILLIONS OF DOLLARS)
2020(a)
20212022202320242024PaymentsInterestTotal
Maturities$31  $37  $33  $27  $23  $68  $219  $(27) $192  
(a) 2020 excludes the three months ended March 31, 2020.

11. Inventories
The components of inventory are as follows:
March 31,December 31,
(MILLIONS OF DOLLARS)20202019
Finished goods$731  $701  
Work-in-process543  511  
Raw materials and supplies207  198  
Inventories$1,481  $1,410  

12. Goodwill and Other Intangible Assets
  October 1,
 December 31,
(MILLIONS OF DOLLARS) 2017
 2016
Finished goods $794
 $799
Work-in-process 522
 499
Raw materials and supplies 174
 204
Inventories $1,490
 $1,502
A. Goodwill
10.Goodwill and Other Intangible Assets
A.Goodwill
The components of, and changes in, the carrying amount of goodwill are as follows:
(MILLIONS OF DOLLARS)U.S.InternationalTotal
Balance, December 31, 2019$1,367  $1,225  $2,592  
Other(a)
—  (9) (9) 
Balance, March 31, 2020$1,367  $1,216  $2,583  
(MILLIONS OF DOLLARS) U.S.
 International
 Total
Balance, December 31, 2016 $661
 $820
 $1,481
Additions(a)
 10
 7
 17
Other(b)
 —
 32
 32
Balance, October 1, 2017 $671
 $859
 $1,530
(a) Includes adjustments for foreign currency translation.
(a)
Primarily represents the acquisition of an Irish biologic therapeutics company in the third quarter of 2017, as well as the consolidation of a European livestock monitoring company, a variable interest entity of which Zoetis is the primary beneficiary, in the first quarter of 2017.
(b)
Includes adjustments for foreign currency translation, partially offset by the reclassification of $3 million to Assets Held for Sale relating to our manufacturing site in Guarulhos, Brazil. For additional information, see Note 4. Acquisitions and Divestitures: Assets Held for Sale.
The gross goodwill balance was $2,066$3,119 million and $2,017$3,128 million as of October 1, 2017,March 31, 2020 and December 31, 2016,2019, respectively. Accumulated goodwill impairment losses were $536$536 million as of October 1, 2017,March 31, 2020 and December 31, 2016.2019.

B. Other Intangible Assets
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B.
Other Intangible Assets
The components of identifiable intangible assets are as follows:
As of March 31, 2020As of December 31, 2019
IdentifiableIdentifiable
GrossIntangible AssetsGrossIntangible Assets
CarryingAccumulatedLess AccumulatedCarryingAccumulatedLess Accumulated
(MILLIONS OF DOLLARS)AmountAmortizationAmortizationAmountAmortizationAmortization
Finite-lived intangible assets:
Developed technology rights$1,946  $(691) $1,255  $1,938  $(657) $1,281  
Brands and tradenames424  (228) 196  424  (223) 201  
Other445  (267) 178  441  (249) 192  
Total finite-lived intangible assets2,815  (1,186) 1,629  2,803  (1,129) 1,674  
Indefinite-lived intangible assets:
Brands and tradenames104  —  104  104  —  104  
In-process research and development81  —  81  105  —  105  
Product rights7  —  7  7  —  7  
Total indefinite-lived intangible assets192  —  192  216  —  216  
Identifiable intangible assets$3,007  $(1,186) $1,821  $3,019  $(1,129) $1,890  
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  As of October 1, 2017 As of December 31, 2016
      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(a)(b)
 $1,212
 $(413) $799
 $1,064
 $(342) $722
Brands 213
 (141) 72
 213
 (132) 81
Trademarks and trade names 62
 (47) 15
 62
 (44) 18
Other 229
 (139) 90
 222
 (130) 92
Total finite-lived intangible assets 1,716
 (740) 976
 1,561
 (648) 913
Indefinite-lived intangible assets:            
Brands 37
 —
 37
 37
 —
 37
Trademarks and trade names 67
 —
 67
 66
 —
 66
In-process research and development(b)(c)
 230
 —
 230
 204
 —
 204
Product rights 8
 —
 8
 8
 —
 8
Total indefinite-lived intangible assets 342
 —
 342
 315
 —
 315
Identifiable intangible assets $2,058
 $(740) $1,318
 $1,876
 $(648) $1,228
C. Amortization
(a)
Includes the consolidation of a European livestock monitoring company, a variable interest entity of which Zoetis is the primary beneficiary, and intangible assets associated with the purchase of a Norwegian fish vaccination company, both during the first quarter of 2017.
(b)
In the first quarter of 2017, certain intangible assets, acquired in 2015 as part of the Pharmaq acquisition, were placed into service.
(c)
Includes the intangible assets related to the acquisition of an Irish biologic therapeutics company in the third quarter of 2017.
C.
Amortization
Amortization expense related to finite-lived acquired intangible assets that contribute to our ability to sell, manufacture, research, market and distribute products, compounds and intellectual property is included in Amortization of intangible assets as it benefits multiple business functions. Amortization expense related to finite-lived acquired intangible assets that are associated with a single function is included in Cost of sales, Selling, general and administrative expenses or Research and development expenses, as appropriate. Total amortization expense for finite-lived intangible assets was $26$62 million and $75$58 million for the three and nine months ended October 1, 2017, respectively,March 31, 2020 and $24 million and $72 million for the three and nine months ended October 2, 2016,March 31, 2019, respectively.
11.Benefit Plans
Our employees ceased to participate in the Pfizer, Inc. U.S. qualified defined benefit plans and the U.S. retiree medical plan effective December 31, 2012, and liabilities associated with our employees under these plans were retained by Pfizer. Pfizer is continuing 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. Pension and postretirement benefit expense associated with the extended service for certain employees in the U.S. plans totaled approximately $2 million in each three month period ended October 1, 2017, and October 2, 2016, and $5 million in each nine month period ended October 1, 2017, and October 2, 2016.13. Share-based Payments
The following table provides the net periodic benefit cost associated with our international defined benefit pension plans:
  Three Months Ended Nine Months Ended
  October 1,
 October 2,
 October 1,
 October 2,
(MILLIONS OF DOLLARS) 2017
 2016
 2017
 2016
Service cost $2
 $3
 $5
 $7
Interest cost 1
 —
 2
 2
Expected return on plan assets (1) (1) (2) (2)
Amortization of net actuarial loss —
 1
 1
 1
Curtailment and settlement (gain)/loss —
 —
 1
 (1)
Net periodic benefit cost $2
 $3
 $7
 $7
Total company contributions to the international pension plans were $1 million and $5 million for the three and nine months ended October 1, 2017, respectively, and $1 million and $7 million for the three and nine months ended October 2, 2016, respectively. We expect to contribute a total of approximately $7 million to these plans in 2017.

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12.Share-Based Payments
The company may grant a variety of share-based payments under the Zoetis 2013 Equity and Incentive Plan (the 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.
The components of share-based compensation expense are as follows:
Three Months Ended
March 31,
(MILLIONS OF DOLLARS)20202019
Stock options / stock appreciation rights$3  $3  
RSUs / DSUs8  12  
PSUs5  3  
Share-based compensation expense—total(a)
$16  $18  
  Three Months Ended Nine Months Ended
  October 1,
 October 2,
 October 1,
 October 2,
(MILLIONS OF DOLLARS) 2017
 2016
 2017
 2016
Stock options / stock appreciation rights $2
 $3
 $7
 $8
RSUs / DSUs 7
 5
 20
 17
PSUs 2
 1
 6
 3
Share-based compensation expense—total(a)(b)
 $11
 $9
 $33
 $28
(a) Amounts capitalized to inventory were insignificant for the three months ended March 31, 2020 and March 31, 2019.
(a)
For the three months ended October 1, 2017, and October 2, 2016, amounts capitalized to inventory were insignificant. For the nine months ended October 1, 2017, and October 2, 2016, we capitalized $1 million of share-based compensation expense to inventory.
(b)
For the three and nine months ended October 1, 2017, and three months ended October 2, 2016, the additional share-based compensation expense as a result of accelerated vesting of the outstanding stock options and the settlement, on a pro-rata basis, of other equity awards of terminated employees in connection with our operational efficiency initiative and supply network strategy, which is included in Restructuring charges/(reversals) and certain acquisition-related costs, were insignificant. For the nine months ended October 2, 2016, additional share-based compensation expense was approximately $1 million.
During the ninethree months ended October 1, 2017,March 31, 2020, the company granted 716,322279,843 stock options with a weighted-average exercise price of $55.13$144.03 per stock option and a weighted-average fair value of $14.31$33.92 per stock option. 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. The weighted-average fair value was estimated based on the following assumptions: risk-free interest rate of 2.3%1.50%; expected dividend yield of 0.76%0.55%; expected stock price volatility of 23.27%24.01%; and expected term of 6.55.5 years. In general, stock options vest after three years of continuous service and the values determined through this fair-value based method generally are amortized on a straight-line basis over the vesting term into Cost of sales, Selling, general and administrative expenses, or Research and development expenses, as appropriate.
During the ninethree months ended October 1, 2017,March 31, 2020, the company granted 537,086226,713 RSUs, with a weighted-average grant date fair value of $55.14$144.03 per RSU. RSUs are accounted for using a fair-value-based method that utilizes the closing price of Zoetis common stock on the date of grant. In general, RSUs vest after three years of continuous service from the grant date and the values generally are amortized on a straight-line basis over the vesting term into Cost of sales, Selling, general and administrative expenses, or Research and development expenses, as appropriate.
During the ninethree months ended October 1, 2017,March 31, 2020, the company granted 136,96485,279 PSUs with a weighted-average grant date fair value of $74.28$217.49 per PSU. 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 stock market index at the start of the performance period, excluding companies that during the performance period are acquired or 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 the S&P 500 companies, which were 23.1%20.2% and 25.5%24.8%, respectively. Depending on the company’s Relative TSR performance at the end of the performance period, the recipient may earn betweenfrom 0% andto 200% of the target number of units. Vested units are settled in shares of the company’s common stock. PSU values are amortized on a straight-line basis over the vesting term into Cost of sales, Selling, general and administrative expenses, or Research and development expenses, as appropriate.
13.Stockholders' Equity
14. Stockholders' Equity
Zoetis is authorized to issue 6 billion shares of common stock and 1 billion shares of preferred stock.
In November 2014,December 2018, the company's Board of Directors authorized a $500 million$2.0 billion share repurchase program. This programAs of March 31, 2020, there was substantially completed as of December 31, 2016. In December 2016, the company's Board of Directors authorized an additional $1.5approximately $1.4 billion share repurchase program.remaining under this authorization. Purchases of Zoetis shares may be made at the discretion of management, depending on market conditions and business needs. As of October 1, 2017, there was approximately $1.1 billion remaining under these authorizations.

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Accumulated other comprehensive loss
Changes in common shares and treasury stock were as follows:
(MILLIONS) 
Common Shares Issued(a)

 
Treasury Stock(a)

Balance, December 31, 2015 501.81
 4.41
Share-based compensation(b)
 0.08
 (1.62)
Share repurchase program —
 4.86
Balance, October 2, 2016 501.89
 7.65
     
Balance, December 31, 2016 501.89
 9.04
Share-based compensation(b)
 —
 (1.42)
Share repurchase program —
 6.45
Balance, October 1, 2017 501.89
 14.06
(a)
Shares may not add due to rounding.
(b)
Includes the issuance of shares of common stock and the reissuance of shares from treasury stock in connection with the vesting of employee share-based awards. Treasury stock also includes the reacquisition of shares associated with the vesting of employee share-based awards to satisfy tax withholding requirements. For additional information regarding share-based compensation, see Note 12. Share-Based Payments.
Changes, net of tax, in accumulated other comprehensive loss, excluding noncontrolling interest, arewere as follows:
Currency Translation Adjustments
Other CurrencyAccumulated Other
Cash FlowNet InvestmentTranslationComprehensive
(MILLIONS OF DOLLARS)HedgesHedgesAdjustmentsBenefit PlansLoss
Balance, December 31, 2018$(4) $10  $(621) $(14) $(629) 
Other comprehensive income, net of tax—  8  23  —  31  
Balance, March 31, 2019$(4) $18  $(598) $(14) $(598) 
Balance, December 31, 2019$—  $21  $(724) $(23) $(726) 
Other comprehensive (loss)/income, net of tax(28) 17  (44) —  

(55) 
Balance, March 31, 2020$(28) $38  $(768) $(23) $(781) 

15. Earnings per Share
    Currency Translation
    
  Derivatives
 Adjustment
 Benefit Plans
 Accumulated Other
  Net Unrealized
 Net Unrealized
 Actuarial
 Comprehensive
(MILLIONS OF DOLLARS) Gains/(Losses)
 Gains/(Losses)
 Gains/(Losses)
 Loss
Balance, December 31, 2015 $(2) $(604) $(16) $(622)
Other comprehensive (loss)/income, net of tax (2) 114
 2
 114
Divestiture of noncontrolling interest(a)
 —
 2
 —
 2
Balance, October 2, 2016 $(4) $(488) $(14) $(506)
         
Balance, December 31, 2016 $8
 $(583) $(23) $(598)
Other comprehensive income, net of tax (11) 153
 1

143
Balance, October 1, 2017 $(3) $(430) $(22) $(455)
(a)
Reflects the divestiture of our share of our Taiwan joint venture. See Note 4. Acquisitions and Divestitures: Divestitures.
14.Earnings per Share
The following table presents the calculation of basic and diluted earnings per share:
 Three Months Ended Nine Months EndedThree Months Ended
 October 1,
 October 2,
 October 1,
 October 2,
March 31,
(MILLIONS OF DOLLARS AND SHARES, EXCEPT PER SHARE DATA) 2017
 2016
 2017
 2016
(MILLIONS OF DOLLARS AND SHARES, EXCEPT PER SHARE DATA)20202019
Numerator        Numerator
Net income before allocation to noncontrolling interests $296
 $237
 $782
 $665
Less: net loss attributable to noncontrolling interests (2) (2) (1) (2)
Net income attributable to Zoetis Inc. $298
 $239
 $783
 $667
Net incomeNet income$423  $312  
Denominator        Denominator
Weighted-average common shares outstanding 489.1
 495.2
 490.8
 496.3
Weighted-average common shares outstanding475.6  479.6  
Common stock equivalents: stock options, RSUs, PSUs and DSUs 3.3
 2.7
 3.1
 2.5
Common stock equivalents: stock options, RSUs, PSUs and DSUs3.4  3.5  
Weighted-average common and potential dilutive shares outstanding 492.4
 497.9
 493.9
 498.8
Weighted-average common and potential dilutive shares outstanding479.0  483.1  
        
Earnings per share attributable to Zoetis Inc. stockholders—basic $0.61
 $0.48
 $1.60
 $1.34
Earnings per share attributable to Zoetis Inc. stockholders—diluted $0.61
 $0.48
 $1.59
 $1.34
Earnings per share —basicEarnings per share —basic$0.89  $0.65  
Earnings per share —dilutedEarnings per share —diluted$0.88  $0.65  
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 three months ended October 1, 2017,March 31, 2020 and approximately 1 million for the nine months ended October 1, 2017,March 31, 2019, respectively.
16. Commitments and both the three and nine months ended October 2, 2016.Contingencies

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15.
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 7.8. Income Taxes.
A.Legal Proceedings
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 United StatesU.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
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that have been deemed reasonable by management, but the assessment process relies on estimates and assumptions that may prove to be incomplete or inaccurate, and unanticipated events and circumstances may occur that might cause us to change those estimates and assumptions.
Amounts recorded for legal and environmental contingencies can result from a complex series of judgments about future events and uncertainties and can rely on estimates and assumptions.
The principal matters to which we are a party are discussed below. In determining whether a pending matter is significant for financial reporting and disclosure purposes, we consider both quantitative and qualitative factors in order to assess materiality, such as, among other things, the amount of damages and the nature of any other relief sought in the proceeding, if such damages and other relief are specified; our view of the merits of the claims and of the strength of our defenses; whether the action purports to be a class action and our view of the likelihood that a class will be certified by the court; the jurisdiction in which the proceeding is pending; any experience that we or, to our knowledge, other companies have had in similar proceedings; whether disclosure of the action would be important to a reader of our financial statements, including whether disclosure might change a reader’s judgment about our financial statements in light of all of the information about the company that is available to the reader; the potential impact of the proceeding on our reputation; and the extent of public interest in the matter. In addition, with respect to patent matters, we consider, among other things, the financial significance of the product protected by the patent.
PregSure®
We have approximately 266 claims in Europe and New Zealand seeking damages related to calves claimed to have died of Bovine Neonatal Pancytopenia (BNP) on farms where PregSure BVD, a vaccine against Bovine Virus Diarrhea (BVD), was used. BNP is a rare syndrome that first emerged in cattle in Europe in 2006. Studies of BNP suggest a potential association between the administration of PregSure and the development of BNP, although no causal connection has been established. The cause of BNP is not known.
In 2010, we voluntarily stopped sales of PregSure BVD in Europe, and recalled the product at wholesalers while investigations into possible causes of BNP continued. In 2011, after incidences of BNP were reported in New Zealand, we voluntarily withdrew the marketing authorization for PregSure throughout the world.
We have settled approximately 168 of these claims for amounts that are not material individually or in the aggregate. Investigations into possible causes of BNP continue and these settlements may not be representative of any future claims resolutions.
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 five5 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 six6 defendants. We believe we have strong arguments against the claim, including defense strategies against any claim of joint and several liability.

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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 six6 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 entered into a cooperation agreement withand the prosecutor pursuantagreed to whichengage the services of a third-party consultant willto conduct a limited environmental assessment of the site. InThe site assessment was conducted during June 2017, the consultant initiated his assessment and inspection of the site. We expect that a final written report summarizing the results of the technical assessment will be made availablewas 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. The technical proposal remains pending.
Lascadoil Contamination in Animal Feed
An investigation by the U.S. Food and Drug Administration (FDA) and the Michigan Department of Agriculture is ongoing to determine how lascadoil, oil for industrial use, made its way into the alleged contamination of the feed supply of certain turkey and hog feed mills in Michigan.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. While it remains an open question as to how the lascadoil made its way into the animal feed, the allegations areThe investigation posited that lascadoil intended to be sold for reuse as biofuel wasShur-Green inadvertently sold to producers ofcontaminated soy oil who in turn, unknowinglywith 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 thenin turn unknowingly sold the contaminated soy oil to feed mills for use in animal feed. Indeed, related to the FDA investigation, Shur-Green Farms LLC, a producer of soy oil, recalled certain batches of soy oil allegedly contaminated with lascadoil on October 13, 2014.
During the course of its investigation, the FDA identified the process used to manufacture Zoetis’ Avatec®Avatec® (lasalocid sodium) and Bovatec®Bovatec® (lasalocid sodium) products as onethe possible source of the lascadoil, since lascadoil contains small amounts of lasalocid, the active ingredient found in both products. Zoetis has historically sold any and allthe industrial lascadoil byproduct to an environmental company specializing in waste disposal. The environmental company is contractually obligated to incinerate the lascadoil or resell it for use in biofuel.Shur-Green, through its broker, Heritage Interactive Services, LLC. Under the terms of the sale agreement, the environmental company islascadoil could only be incinerated or resold for use in biofuel and the agreement expressly prohibited fromthe reselling theof lascadoil to be usedfor 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
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complaint raises only one1 count against Zoetis for negligence. We filed an answer to the complaint on November 2, 2015, denying the allegation. On May 16, 2016, two2 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 three3 cases in Michigan for purposes of discovery and disposition. On July 11,28, 2017, we filed a motion for summary disposition on the grounds that plaintiffs have not identified any factualno genuine issues that need to be resolved by a juryof material fact exist and that Zoetis is entitled to judgment as a matter of law. On October 10,19, 2017, the Circuit Court granted our motion and dismissed all claims against Zoetis. On October 31, 2017, the plaintiffs filed motions for reconsideration of the Court's decision granting summary disposition. The Court, denied all such motions on December 6, 2017, for the same reasons cited in the Court’s original decision. On December 27, 2017, the plaintiffs filed a request with the Michigan Court of Appeals seeking an interlocutory (or interim) appeal of the lower Court’s decision, which we opposed on January 17, 2018. On July 5, 2018, the Court of Appeals denied the plaintiffs’ request for an interlocutory appeal. The case has been remanded back to the lower Court, where it will proceed to trial (unless settled) without Zoetis. The trial began on November 4, 2019. We have been advised that the remaining parties may have reached an agreement in principle to settle the dispute, but we have not yet received any formal notification from the Court that the case has concluded. Depending on the exact nature of the settlement, the plaintiffs may still have the option to seek an appeal of the lower Court’s decision granting Zoetis’ motion for summary disposition and dismissed allafter the final adjudication of plaintiffs’ claims against us. While the plaintiffs havecase.
Other Matters
On February 14, 2019, the rightGeneral Court of the European Union (General Court) annulled the January 11, 2016 decision of the European Commission (EC) that selective tax advantages granted by Belgium under its "excess profit" tax scheme constitute illegal state aid. On May 8, 2019, the EC filed an appeal to appeal the decision of the CircuitGeneral Court. On September 16, 2019, the EC opened separate in-depth investigations to assess whether Belgium excess profit rulings granted to 39 multinational companies, including Zoetis, constituted state aid for those companies. Due to the uncertainty with respect to the outcome of the appeal to be filed by the EC, the company has not reflected any potential benefits associated with the decision of the General Court wein its consolidated financial statements as of March 31, 2020. We will continue to believe that we have strong arguments against all claims.
Other Mattersmonitor the developments of the appeal and its ultimate resolution.
The European CommissionEC 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.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. UnderZoetis 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 UnionUnion. On January 24, 2019, the Court heard oral argument on the merits of the appeal, and are awaiting a ruling.we now await the Court’s decision.
B.Guarantees and Indemnifications
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 October 1, 2017,March 31, 2020, recorded amounts for the estimated fair value of these indemnifications were not significant.

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16.Segment and Other Revenue Information
A.Segment Information
Operating Segments
We manage our operations through two2 geographic operating segments: the United StatesU.S. and International. Each operating segment has responsibility for its commercial activities. Within each of these operating segments, we offer a diversified product portfolio, including vaccines, parasiticides, anti-infectives, medicated feed additives, animal health diagnostics and other pharmaceuticals, for both livestock and companion animal customers. Our chief operating decision maker uses the revenue and earnings of the two2 operating segments, among other factors, for performance evaluation and resource allocation.
In the first quarter of 2020, 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) R&D costs related to our aquaculture business, which were previously reported in our international commercial segment, are now reported in Other business activities; (ii) certain other miscellaneous costs, which were previously reported in international commercial segment results, are now reported in Corporate; and (iii) certain diagnostic and other miscellaneous costs, which were previously reported in our U.S. results, are now reported in Corporate.
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 Client Supply Services (CSS) contract manufacturing results, as well asour 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, which is responsible forincludes platform functions such as businessinformation technology, facilities, legal, finance, human resources, business development, certain diagnostic costs and communications, among others. These costs also include compensation costs, certain procurement costs and other miscellaneous operating expenses not charged to our operating segments, as well as interest income and expense.
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•Certain transactions and events such as (i) Purchase accounting adjustments, where we incur expenses associated with the amortization of fair value adjustments to inventory, intangible assets and property, plant and equipment; (ii) Acquisition-related activities, where we incur costs associated with acquiring and integrating newly acquired businesses, such as transaction costs and integration costs; and (iii) Certain significant items, which comprise substantive, unusual items that, either as a result of their nature or size, would not be expected to occur as part of our normal business on a regular basis, such as certain costs related to becoming an independent public company, restructuring charges and implementation costs associated with our cost-reduction/productivity initiatives that are not associated with an acquisition, certain asset impairment charges, certain legal and commercial settlements and the impact of divestiture-related gains and losses.
•Other unallocated includes (i) certain overhead expenses associated with our global manufacturing operations not charged to our operating segments; (ii) certain costs associated with businessinformation technology and finance that specifically support our global manufacturing operations; (iii) certain supply chain and global logistics costs; and (iv) certain 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 $9.3 billion at October 1, 2017, and $7.6 billion at December 31, 2016.


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Selected Statement of Income Information
Earnings
Depreciation and Amortization(a)
Three Months EndedThree Months Ended
March 31,March 31,
(MILLIONS OF DOLLARS)2020201920202019
U.S.
Revenue$786  $718  
Cost of sales167  147  
Gross profit619  571  
    Gross margin78.8 %79.5 %
Operating expenses125  110  
Other (income)/deductions-net1  —  
U.S. Earnings493  461  $13  $10  
International
Revenue(b)
728  718  
Cost of sales224  210  
Gross profit504  508  
    Gross margin69.2 %70.8 %
Operating expenses125  132  
Other (income)/deductions-net—  —  
International Earnings379  376  14  13  
Total operating segments872  837  27  23  
Other business activities(87) (80) 6  5  
Reconciling Items:
Corporate(173) (162) 22  14  
Purchase accounting adjustments(54) (66) 54  55  
Acquisition-related costs(7) (5) —  —  
Certain significant items(c)
11  (70) —  —  
Other unallocated(65) (73) 1  1  
Total Earnings(d)
$497  $381  $110  $98  
  Earnings 
Depreciation and Amortization(a)
  Three Months Ended Three Months Ended
  October 1,
 October 2,
 October 1,
 October 2,
(MILLIONS OF DOLLARS) 2017
 2016
 2017
 2016
U.S.        
Revenue $680
 $640
    
Cost of sales 141
 137
    
Gross profit 539
 503
    
    Gross margin 79.3% 78.6%    
Operating expenses 103
 101
    
Other (income)/deductions —
 —
    
U.S. Earnings 436
 402
 $7
 $7
         
International        
Revenue(b)
 654
 585
    
Cost of sales 213
 201
    
Gross profit 441
 384
    
    Gross margin 67.4% 65.6%    
Operating expenses 132
 128
    
Other (income)/deductions —
 —
    
International Earnings 309
 256
 10
 11
         
Total operating segments 745
 658
 17
 18
         
Other business activities (77) (71) 5
 7
Reconciling Items:        
Corporate (143) (159) 13
 11
Purchase accounting adjustments (23) (25) 22
 21
Acquisition-related costs (6) —
 —
 —
Certain significant items(c)
 (7) (16) (1) 2
Other unallocated (76) (54) 2
 1
Total Earnings(d)
 $413
 $333
 $58
 $60
(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 $170 million and $181 million for the three months ended March 31, 2020 and March 31, 2019, respectively.



















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Table(c) For the three months ended March 31, 2020, primarily represents a net gain resulting from net cash proceeds received pursuant to an agreement related to the 2016 sale of Contents

  Earnings 
Depreciation and Amortization(a)
  Nine Months Ended Nine Months Ended
  October 1,
 October 2,
 October 1,
 October 2,
(MILLIONS OF DOLLARS) 2017
 2016
 2017
 2016
U.S.        
Revenue $1,908
 $1,816
    
Cost of sales 412
 402
    
Gross profit 1,496
 1,414
    
    Gross margin 78.4% 77.9%    
Operating expenses 312
 293
    
Other (income)/deductions —
 —
    
U.S. Earnings 1,184
 1,121
 $21
 $20
         
International        
Revenue(b)
 1,903
 1,754
    
Cost of sales 645
 598
    
Gross profit 1,258
 1,156
    
    Gross margin 66.1% 65.9%    
Operating expenses 372
 361
    
Other (income)/deductions (1) 3
    
International Earnings 887
 792
 32
 33
         
Total operating segments 2,071
 1,913
 53
 53
         
Other business activities (224) (219) 17
 19
Reconciling Items:        
Corporate (437) (499) 38
 33
Purchase accounting adjustments (66) (79) 65
 64
Acquisition-related costs (8) (3) —
 —
Certain significant items(c)
 (10) 1
 1
 5
Other unallocated (231) (117) 5
 3
Total Earnings(d)
 $1,095
 $997
 $179
 $177
(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 $169certain U.S. manufacturing sites of $17 million, partially offset by CEO transition-related costs of $4 million. For the three months ended March 31, 2019, primarily represents a change in estimate related to inventory costing of $68 million and $472 million for the three and nine months ended October 1, 2017, respectively, and $157 million and $469 million for the three and nine months ended October 2, 2016, respectively.
(c)
For the three months ended October 1, 2017, Certain significant items primarily includes: (i) employee termination costs of $3 million, a reversal of exit costs of $1 million and consulting fees of $2 million, related to our operational efficiency initiative and supply network strategy, (ii) a net loss of $4 million on sales of certain manufacturing sites and products, including the anticipated disposal of our manufacturing site in Guarulhos, Brazil, related to our operational efficiency initiative and supply network strategy, and (iii) an adjustment of $1 million related to the requirement to cease depreciation of assets, located at our manufacturing site in Guarulhos Brazil, that are currently classified as held for sale.
For the three months ended October 2, 2016, Certain significant items primarily includes: (i) Zoetis stand-up costs of $1 million; (ii) a $3 million increase in certain employee termination accruals, exit costs of $1 million, accelerated depreciation of $2 million, inventory write-offs of $1 million, and consulting fees of $4 million related to our operational efficiency initiative, supply network strategy, and other restructuring activities; (iii) an impairment of finite-lived trademarks of $1 million related to a canine pain management product; and (iv) charges of $3 million associated with changes to our operating model. Stand-up costs include certain nonrecurring costs related to becoming an independent public company, such as the creation of standalone systems and infrastructure, site separation, new branding (including changes to the manufacturing process for required new packaging), and certain legal registration and patent assignment costs.
For the nine months ended October 1, 2017, Certain significant items primarily includes: (i) a reversal of previously accrued employee termination costs of $1 million, accelerated depreciation of $2 million and consulting fees of $5 million, related to our operational efficiency initiative and supply network strategy; (ii) a net loss of $6 million related to sales of certain manufacturing sites and products, including the anticipated disposal of our manufacturing site in Guarulhos, Brazil, related to our operational efficiency initiative and supply network strategy; (iii) charges of $3 million associated with changes to our operating model; (iv) income of $4 million related to an insurance recovery from commercial settlements in Mexico recorded in 2014 and 2016; and (v) an adjustment of $1 million related to the requirement to cease depreciation of assets, located at our manufacturing site in Guarulhos Brazil, that are currently classified as held for sale.
For the nine months ended October 2, 2016, Certain significant items primarily includes: (i) Zoetis stand-up costs of $18 million; (ii) a net gain of $27 million related to sales of certain manufacturing sites and products as a result of our operational efficiency initiative; (iii) a $20 million net reduction in certain employee termination accruals, partially offset by exit costs of $3 million, accelerated depreciation of $5 million, inventory write-offs of $1 million,

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and consulting fees of $14$2 million related to our operational efficiency initiative, supply network strategy and other restructuring activities; (iv) an impairment of finite-lived trademarks of $1 million; and (v) charges of $4 million associated with changes to our operating model.
(d)
Defined as income before provision for taxes on income.
B.Other Revenue Information
Revenue by Speciesstrategy. 
Species revenue are(d) Defined as follows:income before provision for taxes on income.
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  Three Months Ended Nine Months Ended
  October 1,
 October 2,
 October 1,
 October 2,
(MILLIONS OF DOLLARS) 2017
 2016
 2017
 2016
Livestock:        
Cattle $424
 $432
 $1,192
 $1,175
Swine 147
 145
 455
 441
Poultry 119
 111
 357
 351
Fish 39
 25
 79
 64
Other 25
 22
 63
 60
  754
 735
 2,146
 2,091
Companion Animal:        
Horses 34
 33
 104
 108
Dogs and Cats 546
 457
 1,561
 1,371
  580
 490
 1,665
 1,479
         
Contract Manufacturing 13
 16
 36
 41
         
Total revenue $1,347
 $1,241
 $3,847
 $3,611
Revenue by Major Product Category
Revenue by major product category are as follows:
  Three Months Ended Nine Months Ended
  October 1,
 October 2,
 October 1,
 October 2,
(MILLIONS OF DOLLARS) 2017
 2016
 2017
 2016
Anti-infectives $324
 $350
 $870
 $913
Vaccines 363
 324
 1,006
 935
Parasiticides 191
 158
 581
 492
Medicated feed additives 107
 99
 351
 365
Other pharmaceuticals 304
 255
 858
 724
Other non-pharmaceuticals 45
 39
 145
 141
Contract manufacturing 13
 16
 36
 41
Total revenue $1,347
 $1,241
 $3,847
 $3,611

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Review Report of Independent Registered Public Accounting Firm
The ShareholdersTo the Stockholders and Board of Directors
Zoetis Inc.:
Results of Review of Interim Financial Information
We have reviewed the accompanying condensed consolidated balance sheet of Zoetis Inc. and subsidiaries (the Company) as of October 1, 2017, andMarch 31, 2020, the related condensed consolidated statements of income, and comprehensive income, for the three and nine-month periods ended October 1, 2017, and October 2, 2016, and the related condensed consolidated statements of equity and cash flows for the nine-monththree-month periods ended October 1, 2017March 31, 2020 and October 2, 2016. These condensedMarch 31, 2019, and the related notes (collectively, the consolidated interim financial statements are the responsibility of the Company's management.

We conductedinformation). Based on our reviews, we are not aware of any material modifications that should be made to the consolidated interim financial information for it to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of December 31, 2019, and the related consolidated statements of income, comprehensive income, equity, and cash flows for the year then ended (not presented herein); and in our report dated February 13, 2020, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2019, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Basis for Review Results
This consolidated interim financial information is the responsibility of the Company’s management. 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 reviews in accordance with the standards of the PCAOB. A review of consolidated interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States),PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated financial statements as of October 1, 2017, and for the three and nine-month periods ended October 1, 2017, and October 2, 2016, referred to above for them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Zoetis Inc. and subsidiaries as of December 31, 2016, and the related consolidated statements of income, comprehensive income, equity, and cash flows for the year then ended (not presented herein); and in our report dated February 16, 2017, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2016, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ KPMG LLP
Short Hills, New Jersey
November 2, 2017May 6, 2020



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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview of our business
We are a global leader in the discovery, development, manufacture and commercialization of animal health medicines, vaccines, and vaccines,diagnostic products with a focus on both livestock and companion animals. For more than 6065 years, we have been committed to enhancing the health of animals and bringing solutions to our customers who raise and care for them.
We manage our operations through two geographic operating segments: the United States (U.S.) and International. Within each of these operating segments, we offer a diversified product portfolio for both livestock and companion animal customers in order to capitalize on local and regional trends and customer needs. See Notes to Condensed Consolidated Financial Statements— Statements — Note 16.17. Segment and Other Revenue Information.
We directly market our products to veterinarians and livestock producers located in approximately 45 countries across North America, Europe, Africa, Asia, Australia and South America, and are a market leader in nearly all of the major regions in which we operate. Through our efforts to establish an early and direct presence in many emerging markets, such as Brazil, China and Mexico, we believe we are one of the largest animal health medicines and vaccines business as measured by revenue across emerging markets as a whole. In markets where we do not have a direct commercial presence, we generally contract with distributors that provide logistics and sales and marketing support for our products.
We believe our investments in one of the industry’s largest sales organization,organizations, including our extensive network of technical and veterinary operations specialists, our high-quality manufacturing and reliability of supply, and our long track record of developing products that meet customer needs, has led to enduring and valued relationships with our customers. Our research and development (R&D) efforts enable us to deliver innovative products to address unmet needs and evolve our product lines so they remain relevant for our customers. Additionally,
Our products include over 300 products and product lines that we sell in over 100 countries for the prediction, prevention, detection and treatment of diseases and conditions that affect various livestock and companion animal species. The diversity of our product portfolio and our global operations provides stability to our overall business. For instance, in livestock, impacts on our revenue that may result from disease outbreaks or weather conditions in a particular market or region are often offset by increased sales in other regions from exports and species as consumers shift to other proteins.
In the first quarter of 2020, the company realigned certain management team’s focus on improving operationalresponsibilities. 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) R&D costs related to our aquaculture business, which were previously reported in our international commercial segment, are now reported in Other business activities; (ii) certain other miscellaneous costs, which were previously reported in international commercial segment results, are now reported in Corporate; and cost efficiencies increases(iii) certain diagnostics and other miscellaneous costs, which were previously reported in our U.S. results, are now reported in Corporate.
Certain reclassifications of prior year information have been made to conform to the likelihood of achieving our core growth strategies and enhancing long-term value for our shareholders.current year's presentation.
A summary of our 20172020 performance compared with the comparable 20162019 period follows:
% Change
Three Months EndedRelated to
March 31,Foreign
(MILLIONS OF DOLLARS)20202019TotalExchange
Operational(a)
Revenue$1,534  $1,455  5  (2) 7  
Net income423  312  36  (4) 40  
Adjusted net income(a)
455  424  7  (3) 10  
  Three Months Ended   Nine Months Ended  
  October 1,
 October 2,
 % October 1,
 October 2,
 %
(MILLIONS OF DOLLARS) 2017
 2016
 Change 2017
 2016
 Change
Revenue $1,347
 $1,241
 9 $3,847
 $3,611
 7
Net income attributable to Zoetis 298
 239
 25 783
 667
 17
Adjusted net income(a)
 322
 258
 25 844
 743
 14
(a) Operational growth and adjusted net income are non-GAAP financial measures. See the Non-GAAP financial measures section of this Management's Discussion and Analysis (MD&A) for more information.
(a)
Adjusted net income is a non-GAAP financial measure. See the "Adjusted net income" section of this Management's Discussion and Analysis (MD&A) for more information.
Our operating environment
For a description of our operating environment, including factors which could materially affect our business, financial condition, or future results, see "Our Operating Environment" in the MD&A of our 20162019 Annual Report on Form 10-K. Set forth below are updates to certain of the factors disclosed in our 20162019 Form 10-K.
Uncertainty Relating to COVID-19
We are closely monitoring the impact of the coronavirus (COVID-19) pandemic on all aspects of our business and geographies, including how it will impact our customers, workforce, suppliers and vendors. We are currently designated an essential business globally and have continued physical operations with respect to manufacturing and supply chain. While the COVID-19 pandemic did not have a significant impact on our results of operations during the first quarter of 2020, we anticipate that in the second quarter of 2020 the impacts of the COVID-19 pandemic are likely to be more significant and weak global economic conditions may exacerbate the ongoing impact of the pandemic. These impacts may be felt to a greater extent by us in the second quarter, in part, due to the timing of our international subsidiaries’ reporting, which for the second quarter of 2020 will include March, April and May.
Due to numerous uncertainties regarding COVID-19, we are unable to fully predict the impact that the COVID-19 pandemic will ultimately have on our financial position and operating results. These uncertainties include the severity of the virus, the duration of the outbreak and likelihood of recurrences, the short-term effects and ultimate effectiveness of measures in the U.S. and other countries to contain and treat the
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virus, governmental, business or other actions in response to the pandemic (which could include actions that result in limitations on, or disruptions to, our manufacturing, transportation and other operations, or mandates to provide products or services), impacts on our supply chain, the effect on customer demand, or changes to our operations. We cannot predict the impact that the COVID-19 pandemic will have on our customers, vendors and suppliers; however, any material effect on these parties could adversely impact us. In particular, our livestock customers have been, and may continue to be, negatively impacted by facility closures, reduced packing plant capacity, quarantines, travel bans and labor shortages, among other impacts.In addition, our companion animal customers have been, and may continue to be negatively impacted by lack of demand for veterinary services. Any impact on our customers could reduce the demand for our products and adversely impact our revenues. The health of our workforce, and our ability to meet staffing needs in our manufacturing operations and other critical functions also cannot be predicted and is vital to our operations. Further, the impacts of a potential worsening of global economic conditions and the continued disruptions to, and volatility in, the credit and financial markets, as well as other unanticipated consequences, remain unknown. In addition, in order to preserve liquidity, we may incur additional indebtedness, whether through the issuance of debt securities, drawdowns under our credit facility or otherwise.An increase in our outstanding indebtedness will result in additional interest expense.
The situation surrounding COVID-19 remains fluid, and we will continue to actively monitor the situation and may take actions that alter our business operations that we determine are in the best interests of our workforce, customers, vendors, suppliers, and other stakeholders, or as required by federal, state, or local authorities. It is not clear what the potential effects any such alterations or modifications may ultimately have on our business, including the effects on our customers, workforce, and prospects, or on our financial results for the remainder of fiscal 2020. However, we expect to see a more significant impact to our financial results due to the COVID-19 pandemic in the second quarter of 2020, which may also continue into the third quarter or beyond. Accordingly, current results and financial condition discussed herein may not be indicative of future operating results and trends.
For further information regarding the impact of COVID-19 on the Company, please see Item 1A, Risk Factors in this report.

Quarterly Variability of Financial Results
Our quarterly financial results are subject to variability related to a number of factors including but not limited to: the impact of the COVID-19 pandemic discussed above, weather patterns, herd management decisions, economic conditions, regulatory actions, competitive dynamics, disease outbreaks, product and geographic mix, timing of price increases and timing of investment decisions.
Disease outbreaksOutbreaks
Sales of our livestock products could be adversely affected by the outbreak of disease carried by animals. Outbreaks of disease may reduce regional or global sales of particular animal-derived food products or result in reduced exports of such products, either due to heightened export restrictions or import prohibitions, which may reduce demand for our products. Also, the outbreak of any highly contagious disease near our main production sites could require us to immediately halt production of our products at such sites or force us to incur substantial expenses in procuring raw materials or products elsewhere. Alternatively, sales of products that treat specific disease outbreaks may increase.
For example, outbreaks of highly pathogenic H5 avian flu affected (infected or exposed) 48 million birds in the United States in 2014 and 2015, and significantly impacted the egg and turkey industry. In March 2016, we were granted a conditional license from the United States Department of Agriculture (USDA) for a vaccine to help prevent avian influenza, and in June 2016, we were awarded a contract to supply the USDA with this vaccine for the National Veterinary Stockpile. The vaccine is intended for use in chickens as an aid in the prevention of disease caused by the H5N1 subtype of the virus. The USDA will determine if a vaccination program should be implemented. It is important to note that human infection with avian influenza viruses has not occurred from eating properly cooked poultry or poultry products. We are closely monitoring the developments as this situation unfolds and currently believe the impact on our 2017 global revenue will not be significant.

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Foreign exchange ratesExchange Rates
Significant portions of our revenue and costs are exposed to changes in foreign exchange rates. Our products are sold in more than 100 countries and, as a result, our revenue is influenced by changes in foreign exchange rates. For the ninethree months ended October 1, 2017,March 31, 2020, approximately 47%44% of our revenue was denominated in foreign currencies. 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. As we operate in multiple foreign currencies, including the Australian dollar,euro, Brazilian real, Chinese renminbi, Canadian dollar, euro,Australian dollar, U.K. pound and other currencies, changes in those currencies relative to the U.S. dollar will impact our revenue, cost of goods and expenses, and consequently, net income. Exchange rate fluctuations may also have an impact beyond our reported financial results and directly impact operations. These fluctuations may affect the ability to buy and sell our goods and services between markets impacted by significant exchange rate variances. For the ninethree months ended October 1, 2017,March 31, 2020, approximately 53%56% of our total revenue was in U.S. dollars. Our year-over-year total revenue growth was unfavorably impacted by approximately $8 million2% from changes in foreign currency values relative to the U.S. dollar.
Non-GAAP financial measures
We report information in accordance with U.S. generally accepted accounting principles (GAAP). Management also measures performance using non-GAAP financial measures that may exclude certain amounts from the most directly comparable GAAP measure. Despite the importance of these measures to management in goal setting and performance measurement, non-GAAP financial measures have no standardized meaning prescribed by U.S. GAAP and, therefore, have limits in their usefulness to investors and may not be comparable to the calculation of similar measures of other companies. We present certain identified non-GAAP measures solely to provide investors with useful information to more fully understand how management assesses performance.
Operational Growth
We believe that it is important to not only understand overall revenue and earnings growth, but also “operational growth.” Operational growth is a non-GAAP financial measure defined as revenue or earnings growth excluding the impact of foreign exchange. This measure provides information on the change in revenue and earnings as if foreign currency exchange rates had not changed between the current and prior periods to facilitate a period-to-period comparison. We believe this non-GAAP measure provides a useful comparison to previous periods for the company and investors, but should not be viewed as a substitute for U.S. GAAP reported growth.
Adjusted Net Income and Adjusted Earnings Per Share
Adjusted net income and the corresponding adjusted earnings per share (EPS) are non-GAAP financial measures of performance used by management. We believe these financial measures are useful supplemental information to investors when considered together with our U.S.
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GAAP financial measures. We report adjusted net income to portray the results of our major operations, and the discovery, development, manufacture and commercialization of our products, prior to considering certain income statement elements. We define adjusted net income and adjusted EPS as net income attributable to Zoetis and EPS before the impact of purchase accounting adjustments, acquisition-related costs and certain significant items.
We recognize that, as an internal measure of performance, the adjusted net income and adjusted EPS measures have limitations, and we do not restrict our performance management process solely to these metrics. A limitation of the adjusted net income and adjusted EPS measures is that they provide a view of our operations without including all events during a period, such as the effects of an acquisition or amortization of purchased intangibles, and do not provide a comparable view of our performance to other companies. The adjusted net income and adjusted EPS measures are not, and should not be viewed as, a substitute for U.S. GAAP reported net income and reported EPS. See the Adjusted Net Income section below for more information.
Analysis of the condensed consolidated statements of income
The following discussion and analysis of our statements of income should be read along with our condensed consolidated financial statements and the notes thereto included elsewhere in Part I— Item 1 of this Quarterly Report on Form 10-Q.
Three Months Ended
March 31,%
(MILLIONS OF DOLLARS)20202019Change
Revenue$1,534  $1,455  5  
Costs and expenses:
Cost of sales459  518  (11) 
% of revenue29.9 %35.6 %
Selling, general and administrative expenses389  369  5  
% of revenue25 %25 %
Research and development expenses107  102  5  
% of revenue7 %7 %
Amortization of intangible assets40  38  5  
Restructuring charges and certain acquisition-related costs9  5  80  
Interest expense, net of capitalized interest53  56  (5) 
Other (income)/deductions—net(20) (14) 43  
Income before provision for taxes on income497  381  30  
% of revenue32 %26 %
Provision for taxes on income74  69  7  
Effective tax rate14.9 %18.1 %
Net income$423  $312  36  
% of revenue28 %21 %
  Three Months Ended   Nine Months Ended  
  October 1,
 October 2,
 %
 October 1,
 October 2,
 %
(MILLIONS OF DOLLARS) 2017
 2016
 Change
 2017
 2016
 Change
Revenue $1,347
 $1,241
 9
 $3,847
 $3,611
 7
Costs and expenses:            
Cost of sales(a)
 435
 410
 6
 1,318
 1,198
 10
% of revenue 32% 33%   34% 33%  
Selling, general and administrative expenses(a)
 328
 345
 (5) 973
 1,003
 (3)
% of revenue 24% 28%   25% 28%  
Research and development expenses(a)
 96
 90
 7
 272
 268
 1
% of revenue 7% 7%   7% 7%  
Amortization of intangible assets(a)
 23
 21
 10
 68
 64
 6
Restructuring charges/(reversals) and certain acquisition-related costs 8
 4
 100
 7
 (15) *
Interest expense, net of capitalized interest 43
 41
 5
 125
 125
 —
Other (income)/deductions—net 1
 (3) *
 (11) (29) (62)
Income before provision for taxes on income 413
 333
 24
 1,095
 997
 10
% of revenue 31% 27%   28% 28%  
Provision for taxes on income 117
 96
 22
 313
 332
 (6)
Effective tax rate 28.3% 28.8%   28.6% 33.3%  
Net income before allocation to noncontrolling interests 296
 237
 25
 782
 665
 18
Less: Net income attributable to noncontrolling interests (2) (2) —
 (1) (2) (50)
Net income attributable to Zoetis $298
 $239
 25
 $783
 $667
 17
% of revenue 22% 19%   20% 18%  

* Calculation not meaningful.
Certain amounts and percentages may reflect rounding adjustments.
(a)
Amortization expense related to finite-lived acquired intangible assets that contribute to our ability to sell, manufacture, research, market and distribute products, compounds and intellectual property is included in Amortization of intangible assets as these intangible assets benefit multiple business functions. Amortization expense related to finite-lived acquired intangible assets that are associated with a single function is included in Cost of sales, Selling, general and administrative expenses or Research and development expenses, as appropriate.
Revenue
Three months ended October 1, 2017March 31, 2020 vs.three months ended October 2, 2016March 31, 2019
Total revenue increased by $106$79 million, or 9%5%, in the three months ended October 1, 2017,March 31, 2020, compared with the three months ended October 2, 2016, reflecting higher operational revenueMarch 31, 2019, an increase of $103 million, or 8%. Operational revenue growth was primarily a result of increased sales from new product launches and our dermatology portfolio.
Foreign exchange increased reported revenue growth by $3 million.

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Nine months ended October 1, 2017vs.nine months ended October 2, 2016
Total revenue increased by $236$100 million, or 7%, in the nine months ended October 1, 2017, compared with the nine months ended October 2, 2016, reflecting higheron an operational revenue of $244 million, or 7%.basis. Operational revenue growth was comprised primarily of the following:
•price growth of approximately 3%;
•volume growth from new products of approximately 2%;
•increased salesvolume from in-line products of approximately 1%, driven by our key dermatology portfolioproducts; and new product launches,
•recent acquisitions which contributed approximately 7%; and
growth of our in-line products, which contributed approximately 1%, due to price increases,
partially offset by:
product rationalizations as part of our operational efficiency initiative, which resulted in a decline of approximately 1%.
Foreign exchange reduceddecreased reported revenue growth by $8 million.approximately 2%.
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Costs and Expenses
Cost of sales
Three Months Ended
March 31,%
(MILLIONS OF DOLLARS)20202019Change
Cost of sales$459  $518  (11) 
% of revenue29.9 %35.6 %
Cost of sales            
  Three Months Ended   Nine Months Ended  
  October 1,
 October 2,
 % October 1,
 October 2,
 %
(MILLIONS OF DOLLARS) 2017
 2016
 Change 2017
 2016
 Change
Cost of sales $435
 $410
 6 $1,318
 $1,198
 10
% of revenue 32.3% 33.0%   34.3% 33.2%  
Certain amounts and percentages may reflect rounding adjustments.
Three months ended October 1, 2017March 31, 2020 vs.three months ended October 2, 2016March 31, 2019
Cost of sales increased by $25 million, or 6%,as a percentage of revenue was 29.9% in the three months ended October 1, 2017,March 31, 2020 compared with 35.6% in the three months ended October 2, 2016,March 31, 2019. The decrease was primarily as a result of:
an increase•a change in sales volume; and
an increase in manufacturing and supply costs, primarilyestimate related to the increaseinventory costing in sales volume,2019;
•price increases; and
•favorable foreign exchange,
partially offset by:
a decrease in inventory obsolescence, scrap•unfavorable product mix; and other charges; and
•the nonrecurrenceinclusion of charges reflecting fair value adjustments to inventory related to the acquisition of Pharmaq.recent acquisitions.
Nine months ended October 1, 2017 vs. nine months ended October 2, 2016
Cost of sales increased by $120 million, or 10%, in the nine months ended October 1, 2017, compared with the nine months ended October 2, 2016, primarily as a result of:
the timing of the recognition of certain manufacturing and supply costs; and
an increase in sales volume,
partially offset by:
the nonrecurrence of charges reflecting fair value adjustments to inventory related to the acquisition of Pharmaq; and
a decrease in inventory obsolescence, scrap and other charges.
Selling, general and administrative expenses    
  Three Months Ended   Nine Months Ended  
  October 1,
 October 2,
 %
 October 1,
 October 2,
 %
(MILLIONS OF DOLLARS) 2017
 2016
 Change
 2017
 2016
 Change
Selling, general and administrative expenses $328
 $345
 (5) $973
 $1,003
 (3)
% of revenue 24% 28%   25% 28%  
Certain amounts and percentages may reflect rounding adjustments.

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Selling, general and administrative expenses
Three Months Ended
March 31,%
(MILLIONS OF DOLLARS)20202019Change
Selling, general and administrative expenses$389  $369  5  
% of revenue25 %25 %
Three months ended October 1, 2017March 31, 2020 vs. three months ended October 2, 2016March 31, 2019
Selling, general & administrative (SG&A)SG&A expenses decreasedincreased by $17$20 million, or 5%, in the three months ended October 1, 2017,March 31, 2020, compared with the three months ended October 2, 2016,March 31, 2019, primarily as a result of:
a reduction in the general and administrative •expenses driven by our operational efficiency initiative;
a decline in certain compensation-related expenses;
a reduction in consulting charges related to our operational efficiency initiative;recent acquisitions;
•investments to support revenue growth; and
a reduction•an increase in the amount of additional costs related to becoming an independent public company,depreciation,
partially offset by:
•
higher advertising and promotional spending associated with new products and Apoquel®; and
higher distribution expenses associated with higher sales volumes.•favorable foreign exchange.
Nine months ended October 1, 2017vs.nine months ended October 2, 2016
Research and development expenses
Three Months Ended
March 31,%
(MILLIONS OF DOLLARS)20202019Change
Research and development expenses$107  $102  5  
% of revenue7 %7 %
Selling, general & administrative (SG&A) expenses decreased by $30 million, or 3%, in the nine months ended October 1, 2017, compared with the nine months ended October 2, 2016, primarily as a result of:
a reduction in the amount of additional costs related to becoming an independent public company;
a decline in certain compensation-related expenses;
a reduction in the general and administrative expenses driven by our operational efficiency initiative;
a reduction in consulting charges related to our operational efficiency initiative; and
lower bad debt expense,
partially offset by:
•
higher advertising and promotional spending associated with new products and Apoquel®; and
higher distribution expenses associated with higher sales volumes.
Research and development expenses 


          
  Three Months Ended   Nine Months Ended  
  October 1,
 October 2,
 % October 1,
 October 2,
 %
(MILLIONS OF DOLLARS) 2017
 2016
 Change 2017
 2016
 Change
Research and development expenses $96
 $90
 7 $272
 $268
 1
% of revenue 7% 7%   7% 7%  
Certain amounts and percentages may reflect rounding adjustments.
Three months ended October 1, 2017March 31, 2020 vs. three months ended October 2, 2016March 31, 2019
R&D expenses increased by $6$5 million, or 7%5%, in the three months ended October 1, 2017,March 31, 2020, compared with the three months ended October 2, 2016,March 31, 2019, primarily as a result of:
•increased variable expenses due tospending driven by project spending;investments; and
the inclusion of the veterinary diagnostics business acquired•an increase in 2016 and the Irish biologic therapeutics business acquired in 2017; and
certain compensation-related expenses,
partially offset by:
a reduction in research and development expenses driven by our operational efficiency initiative.•favorable foreign exchange.
Nine months ended October 1, 2017vs.nine months ended October 2, 2016
R&D expenses increased by $4 million, or 1%, in the nine months ended October 1, 2017, compared with the nine months ended October 2, 2016, primarily as a result of:
increased variable expenses due to project spending; and
the inclusion of the veterinary diagnostics business acquired in 2016 and the Irish biologic therapeutics business acquired in 2017,
partially offset by:
a reduction in research and development expenses driven by our operational efficiency initiative.



29
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Amortization of intangible assets            
  Three Months Ended   Nine Months Ended  
  October 1,
 October 2,
 % October 1,
 October 2,
 %
(MILLIONS OF DOLLARS) 2017
 2016
 Change 2017
 2016
 Change
Amortization of intangible assets $23
 $21
 10 $68
 $64
 6
Certain amounts and percentages may reflect rounding adjustments.
Amortization of intangible assets
Three Months Ended
March 31,%
(MILLIONS OF DOLLARS)20202019Change
Amortization of intangible assets$40  $38  5  
Three months ended October 1, 2017March 31, 2020 vs. three months ended October 2, 2016March 31, 2019
Amortization of intangible assets increased by $2was $40 million or 10%, in the three months ended October 1, 2017,March 31, 2020 compared with $38 million in the three months ended October 2, 2016,March 31, 2019, primarily as a result of certain intangible assets acquired in 2015 as part of the Pharmaq acquisition, being placed into service during the first quarter of 2017.2019.
Nine months ended October 1, 2017 vs. nine months ended October 2, 2016
Amortization of intangible assets increased by $4 million, or 6%, in the nine months ended October 1, 2017, compared with the nine months ended October 2, 2016, primarily as a result of certain intangible assets, acquired in 2015 as part of the Pharmaq acquisition, being placed into service during the first quarter of 2017.
Restructuring charges/(reversals) and certain acquisition-related costs  
  Three Months Ended   Nine Months Ended  
  October 1,
 October 2,
 % October 1,
 October 2,
 %
(MILLIONS OF DOLLARS) 2017
 2016
 Change 2017
 2016
 Change
Restructuring charges/(reversals) and certain acquisition-related costs $8
 $4
 100 $7
 $(15) *
* Calculation not meaningful.
Certain amounts and percentages may reflect rounding adjustments.
During 2015, we launched a comprehensive operational efficiency program, which is incremental to the previously announced supply network strategy. These initiatives have focused on reducing complexity in our product portfolios, changing our selling approach in certain markets and reducing our presence in certain countries, and planning to sell or exit ten manufacturing sites over a long term period. We are also continuing to optimize our resource allocation and efficiency by reducing resources associated with non-customer facing activities and operating more efficiently as a result of less internal complexity and more standardization of processes. As part of this initiative, we planned to reduce certain positions through divestitures, normal attrition and involuntary terminations by approximately 2,000 to 2,500, subject to consultations with works councils and unions in certain countries. In 2016, the operations of the Guarulhos, Brazil manufacturing site, including approximately 300 employees, were transferred to us from Pfizer, which increased our range of planned reduction in certain positions to 2,300 to 2,800. Including divestitures, as of October 1, 2017, approximately 2,200 positions have been eliminated and the comprehensive operational efficiency program is substantially complete. We expect additional reductions through divestitures related to our supply network strategy over the next several years.
Restructuring charges and certain acquisition-related costs
Three Months Ended
March 31,%
(MILLIONS OF DOLLARS)20202019Change
Restructuring charges and certain acquisition-related costs$9  $5  80  
Our acquisition-related costs primarily relate to restructuring charges for employees, assets and activities that will not continue in the future, as well as integration costs. The majority of ourthese net restructuring charges generally relateare related to termination costs, but we have also exited a number of distributor and other contracts and performed certain facility rationalization efforts. Our integration costs are generally comprised of consulting costs related to the integration of systems and processes, as well as product transfer costs.
For additional information regarding restructuring charges and acquisition-related costs, see Notes to Condensed Consolidated Financial Statements— Note 5.6. Restructuring Charges and Other Costs Associated with Acquisitions, Cost-Reduction and Cost-Reduction/Productivity Initiatives.
Three months ended October 1, 2017March 31, 2020 vs. three months ended October 2, 2016March 31, 2019
The change in restructuringRestructuring charges and certain acquisition-related costs fromincreased by $4 million, or 80%, in the three months ended October 2, 2016, to $8 million inMarch 31, 2020compared with the three months ended October 1, 2017, is primarily a resultMarch 31, 2019. Restructuring charges and certain acquisition-related costs in the three months ended March 31, 2020 consisted of integration costs related to recent acquisitions and restructuring charges related to CEO transition-related costs. Restructuring charges and certain acquisition-related costs in the three months ended March 31, 2019 included integration costs and employee terminationstermination costs related toincurred as a result of the acquisition of an Irish biologic therapeutics companyAbaxis in the third quarter of 2017.2018.
Nine months ended October 1, 2017 vs. nine months ended October 2, 2016
The change in restructuring charges and certain acquisition-related costs from a $15 million reversal in the nine months ended October 2, 2016, to $7 million in the nine months ended October 1, 2017, is primarily a result of integration costs and employee terminations costs related to the acquisition of an Irish biologic therapeutics company in the third quarter of 2017, and a net reduction in employee termination charges in the first half of 2016, associated with our operational efficiency initiative, primarily as a result of higher than expected voluntary attrition rates experienced in the first half of 2016.

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Interest expense, net of capitalized interest           
  Three Months Ended   Nine Months Ended  
  October 1,
 October 2,
 % October 1,
 October 2,
 %
(MILLIONS OF DOLLARS) 2017
 2016
 Change 2017
 2016
 Change
Interest expense, net of capitalized interest $43
 $41
 5 $125
 $125
 —
Certain amounts and percentages may reflect rounding adjustments.
Interest expense, net of capitalized interest
Three Months Ended
March 31,%
(MILLIONS OF DOLLARS)20202019Change
Interest expense, net of capitalized interest$53  $56  (5) 
Three months ended October 1, 2017March 31, 2020 vs. three months ended October 2, 2016March 31, 2019
Interest expense, net of capitalized interest, increased $2decreased by $3 million, or 5% in the three months ended March 31, 2020, compared with the three months ended March 31, 2019, primarily as a result of gains on cross-currency interest rate swaps.
Other (income)/deductions—net
Three Months Ended
March 31,%
(MILLIONS OF DOLLARS)20202019Change
Other (income)/deductions—net$(20) $(14) 43  
Three months ended March 31, 2020 vs. three months ended March 31, 2019
Other (income)/deductions—net was income of $20 million for the three months ended March 31, 2020 compared with income of $14 million in the three months ended October 1, 2017, compared with the three months ended October 2, 2016,March 31, 2019, primarily due to the issuanceas a result of $1.25 billion aggregate principal amounta net gain of our senior notes in September 2017.
Nine months ended October 1, 2017 vs. nine months ended October 2, 2016
Interest expense, net of capitalized interest, was flat in the nine months ended October 1, 2017, compared with the nine months ended October 2, 2016, primarily due to the issuance of $1.25 billion aggregate principal amount of our senior notes in September 2017, offset by the impact of the $400 million of senior notes that matured in the first quarter of 2016.
Other (income)/deductions—net            
  Three Months Ended   Nine Months Ended  
  October 1,
 October 2,
 % October 1,
 October 2,
 %
(MILLIONS OF DOLLARS) 2017
 2016
 Change 2017
 2016
 Change
Other (income)/deductions—net $1
 $(3) * $(11) $(29) (62)
* Calculation not meaningful.
Certain amounts and percentages may reflect rounding adjustments.
Three months ended October 1, 2017vs.three months ended October 2, 2016
The change in Other (income)/deductions—net from income of $3$17 million in the three months ended October 2,March 31, 2020 related to net cash proceeds received pursuant to an agreement related to the 2016 sale of certain U.S. manufacturing sites, partially offset by higher foreign currency losses, lower royalty income and lower interest income due to deductionslower interest rates as compared to the prior year period.
27 |
Table of $1 million in theContents
Provision for taxes on income
Three Months Ended
March 31,%
(MILLIONS OF DOLLARS)20202019Change
Provision for taxes on income$74  $69  7  
Effective tax rate14.9 %18.1 %
Three months ended March 31, 2020 vs. three months ended October 1, 2017, is primarily a result of:March 31, 2019
a net loss of $4 millionOur effective tax rate was 14.9% for the three months ended October 1, 2017, related to sales of certain manufacturing sites and products, including the anticipated disposal of our manufacturing site in Guarulhos, Brazil, related to our operational efficiency initiative and supply network strategy; and
higher foreign currency losses, primarily driven by costs related to hedging and exposures to certain emerging market currencies.
Nine months ended October 1, 2017vs.nine months ended October 2, 2016
The change in Other (income)/deductions—net from income of $29 million in the nine months ended October 2, 2016, to income of $11 million in the nine months ended October 1, 2017, is primarily a result of:
a net gain of $27 million in the first nine months of 2016March 31, 2020, compared to a net loss of $6 million in the first nine months of 2017, related to sales of certain manufacturing sites and products, as part of our operational efficiency initiative and supply network strategy,
partially offset by:
an insurance recovery of $4 million related to commercial settlements in Mexico in 2014 and 2016;
lower foreign currency losses, primarily driven by costs related to hedging and exposures to certain emerging market currencies; and
a settlement refund and reimbursement of legal fees related to costs incurred by Pharmaq prior to the acquisition in 2015.
Provision for taxes on income            
  Three Months Ended   Nine Months Ended  
  October 1,
 October 2,
 % October 1,
 October 2,
 %
(MILLIONS OF DOLLARS) 2017
 2016
 Change 2017
 2016
 Change
Provision for taxes on income $117
 $96
 22 $313
 $332
 (6)
Effective tax rate 28.3% 28.8%   28.6% 33.3%  
Certain amounts and percentages may reflect rounding adjustments.
Three months ended October 1, 2017 vs. three months ended October 2, 2016
The effective tax rate was 28.3%with 18.1% for the three months ended October 1, 2017, compared with 28.8% for the three months ended October 2, 2016.March 31, 2019. The lower effective tax rate for the three months ended October 1, 2017,March 31, 2020, was primarily attributable to:

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changes in the jurisdictional mix of earnings, which includes the impact of the location of earnings from operations•a $23 million and repatriation costs. The jurisdictional mix of earnings can vary as a result of repatriation decisions and operating fluctuations in the normal course of business and the impact of non-deductible items.
Nine months ended October 1, 2017 vs. nine months ended October 2, 2016
The effective tax rate was 28.6% for the nine months ended October 1, 2017, compared with 33.3% for the nine months ended October 2, 2016. The lower effective tax rate for the nine months ended October 1, 2017, was primarily attributable to:
a $38$13 million net discrete tax expensebenefit recorded in the first half of 2016,three months ended March 31, 2020 and 2019, respectively, related to changes in uncertain tax positions due to the impact of the European Commission’s negative decision on the excess profits rulingstax benefits for share-based payments; and
•a $6 million discrete tax benefit recorded in Belgium, the three months ended March 31, 2020 related to a remeasurement of deferred taxes resulting from the integration of acquired businesses,
partially offset by a revaluation of the company's deferred tax assets and liabilities using the Belgium tax rates expected to be in place going forward as a result of the decision;by:
•changes 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 and operating fluctuations in the normal course of business and the impact of non-deductible items; and
a $8 million and $7 million discrete tax benefit recorded in 2017 and 2016, respectively, related to the excess tax benefits for share-based payments recognized as a component of Provision for taxes on income; and
•a $3 million and $10$4 million discrete tax benefit recorded in the first quarter of 2017three months ended March 31, 2020 and 2016,2019, respectively, related to a revaluationremeasurement of deferred taxes as a result of a changechanges in non-U.S. statutory tax rates.


32 |


Operating Segment Results
We believe that it is important to not only understand overall revenue and earnings growth, but also “operational growth.” Operational growth is defined as revenue or earnings growth excluding the impact of foreign exchange.
On a global basis, the mix of revenue between livestock and companion animal products was as follows:
% Change
Three Months EndedRelated to
March 31,Foreign
(MILLIONS OF DOLLARS)20202019TotalExchangeOperational
U.S.
Companion animal$499  $445  12  —  12  
Livestock287  273  5  —  5  
786  718  9  —  9  
International
Companion animal298  284  5  (3) 8  
Livestock430  434  (1) (3) 2  
728  718  1  (3) 4  
Total
Companion animal797  729  9  (1) 10  
Livestock717  707  1  (2) 3  
Contract manufacturing & human health20  19  5  —  5  
$1,534  $1,455  5  (2) 7  
    % Change
  Three Months Ended   Related to
  October 1,
 October 2,
   Foreign
  
(MILLIONS OF DOLLARS) 2017
 2016
 Total
 Exchange
 Operational
U.S.          
Livestock $319
 $341
 (6) —
 (6)
Companion animal 361
 299
 21
 —
 21
  680
 640
 6
 —
 6
International          
Livestock 435
 394
 10
 1
 9
Companion animal 219
 191
 15
 —
 15
  654
 585
 12
 1
 11
           
Total 
        
Livestock 754
 735
 3
 1
 2
Companion animal 580
 490
 18
 (1) 19
Contract manufacturing 13
 16
 (19) 3
 (22)
  $1,347
 $1,241
 9
 1
 8

Certain amounts and percentages may reflect rounding adjustments.
28 |
    % Change
  Nine Months Ended   Related to
  October 1,
 October 2,
   Foreign
  
(MILLIONS OF DOLLARS) 2017
 2016
 Total
 Exchange
 Operational
U.S.          
Livestock $870
 $891
 (2) —
 (2)
Companion animal 1,038
 925
 12
 —
 12
  1,908
 1,816
 5
 —
 5
International          
Livestock 1,276
 1,200
 6
 —
 6
Companion animal 627
 554
 13
 (2) 15
  1,903
 1,754
 8
 (1) 9
           
Total          
Livestock 2,146
 2,091
 3
 —
 3
Companion animal 1,665
 1,479
 13
 —
 13
Contract manufacturing 36
 41
 (12) —
 (12)
  $3,847
 $3,611
 7
 —
 7
Certain amounts and percentages may reflect rounding adjustments.


33 |




Earnings by segment and the operational and foreign exchange changes versus the comparable prior year period were as follows:
   % Change% Change
 Three Months Ended   Related toThree Months EndedRelated to
 October 1,
 October 2,
   Foreign March 31,Foreign
(MILLIONS OF DOLLARS) 2017
 2016
 Total
 Exchange Operational(MILLIONS OF DOLLARS)20202019TotalExchangeOperational
U.S.       
U.S.:U.S.:
Revenue $680
 $640
 6
 — 6Revenue$786  $718  9  —  9  
Cost of Sales 141
 137
 3
 — 3Cost of Sales167  147  14  —  14  
Gross Profit 539
 503
 7
 — 7Gross Profit619  571  8  —  8  
Gross Margin 79.3% 78.6%   Gross Margin78.8 %79.5 %
Operating Expenses $103
 $101
 2
 — 2Operating Expenses125  110  14  —  14  
Other (income)/deductions —
 —
 —
 — —
Other (income)/deductions-netOther (income)/deductions-net1  —  *  *  *  
U.S. Earnings 436
 402
 8
 — 8U.S. Earnings493  461  7  —  7  
       
International       
International:International:
Revenue 654
 585
 12
 1 11Revenue728  718  1  (3) 4  
Cost of Sales 213
 201
 6
 — 6Cost of Sales224  210  7  —  7  
Gross Profit 441
 384
 15
 1 14Gross Profit504  508  (1) (4) 3  
Gross Margin 67.4% 65.6%   Gross Margin69.2 %70.8 %
Operating Expenses $132
 $128
 3
 1 2Operating Expenses125  132  (5) (3) (2) 
Other (income)/deductions —
 —
 —
 — —
Other (income)/deductions-netOther (income)/deductions-net—  —  *  *  *  
International Earnings 309
 256
 21
 2 19International Earnings379  376  1  (4) 5  
       
Total operating segments 745
 658
 13
 — 13Total operating segments872  837  4  (2) 6  
Other business activities (77) (71) 8
 Other business activities(87) (80) 9  
Reconciling Items:       Reconciling Items:
Corporate (143) (159) (10) Corporate(173) (162) 7  
Purchase accounting adjustments (23) (25) (8) Purchase accounting adjustments(54) (66) (18) 
Acquisition-related costs (6) —
 *
 Acquisition-related costs(7) (5) 40  
Certain significant items (7) (16) (56) Certain significant items11  (70) *  
Other unallocated (76) (54) 41
 Other unallocated(65) (73) (11) 
Income before provision for taxes on income $413
 $333
 24
 
Total EarningsTotal Earnings$497  $381  30  
* Calculation not meaningful.
Certain amounts and percentages may reflect rounding adjustments.


34 |



    % Change
  Nine Months Ended   Related to
  October 1,
 October 2,
   Foreign
  
(MILLIONS OF DOLLARS) 2017
 2016
 Total
 Exchange
 Operational
U.S.          
Revenue $1,908
 $1,816
 5
 —
 5
Cost of Sales 412
 402
 2
 —
 2
Gross Profit 1,496
 1,414
 6
 —
 6
Gross Margin 78.4% 77.9%      
Operating Expenses $312
 $293
 6
 —
 6
Other (income)/deductions —
 —
 —
 —
 —
U.S. Earnings 1,184
 1,121
 6
 —
 6
           
International          
Revenue 1,903
 1,754
 8
 (1) 9
Cost of Sales 645
 598
 8
 —
 8
Gross Profit 1,258
 1,156
 9
 (1) 10
Gross Margin 66.1% 65.9%      
Operating Expenses $372
 $361
 3
 —
 3
Other (income)/deductions (1) 3
 *
 *
 *
International Earnings 887
 792
 12
 (1) 13
           
Total operating segments 2,071
 1,913
 8
 (1) 9
Other business activities (224) (219) 2
    
Reconciling Items:          
Corporate (437) (499) (12)    
Purchase accounting adjustments (66) (79) (16)    
Acquisition-related costs (8) (3) *
    
Certain significant items (10) 1
 *
    
Other unallocated (231) (117) 97
    
Income before provision for taxes on income $1,095
 $997
 10
    
* Calculation not meaningful.
Certain amounts and percentages may reflect rounding adjustments.


Three months ended October 1, 2017March 31, 2020 vs. three months ended October 2, 2016March 31, 2019
U.S. operating segment
U.S. segment revenue increased by $40$68 million, or 6%9%, in the three months ended October 1, 2017,March 31, 2020, compared with the three months ended October 2, 2016,March 31, 2019, reflecting declinesincreases of approximately $22 million in livestock products and growth of approximately $62$54 million in companion animal products and increases of approximately $14 million in livestock products.
Livestock•Companion animal revenue declinegrowth was driven by decreased sales of cattle products due to the impact of promotional activities in the prior year and continued lower disease risk and incidence in the feedlot sector. In addition, certain medicated feed additive products for cattle and swine were negatively impacted by livestock producers’ continued implementation of the Veterinary Feed Directive, and we expect this trend to continue for the remainder of 2017. The decline in cattle and swine products was partially offsetprimarily by increased sales of the key dermatology portfolio as well as our Simparica franchise, including some initial stocking of Simparica Trio® our new triple combination parasiticide. Additionally, companion animal sales benefited from the recent acquisitions of Platinum Performance, as well as a number of regional diagnostic reference labs. Partially offsetting this growth was a decline in our diagnostic business.
•Livestock revenue increased primarily due to poultry and swine partially offset by cattle. Poultry growth was driven by increased sales of alternatives to antibiotic medicated feed additive products.additives and swine increased due to revenues in our premium anti-infective products as well as vaccines . Cattle decrease was primarily due to continued weakness across both the beef and dairy cattle sectors.
•
Companion animal revenue growth was driven by increased sales in our dermatology portfolio, in addition to several other new products, primarily Simparica®, our oral parasiticide.
U.S. segment earnings increased by $34$32 million, or 8%7%, in the three months ended October 1, 2017,March 31, 2020, compared with the three months ended October 2, 2016,March 31, 2019, primarily due to revenueto.revenue growth, with improved gross margin, partially offset by a decrease in gross margin and higher operating expenses relateddue to promotional activity for new products and Apoquel®.

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recent acquisitions.
International operating segment
International segment revenue increased by $69$10 million, or 12%1%, in the three months ended October 1, 2017,March 31, 2020, compared with the three months ended October 2, 2016.March 31, 2019. Operational revenue increased by $66$31 million, or 11%4%, driven by growth of approximately $38$22 million in livestockcompanion animal products and growth of approximately $28$9 million in livestock products.
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•Companion animal operational revenue growth resulted primarily from increased sales across our Simparica franchise, including the launch of Simparica Trio in certain markets in the EU. Also contributing to growth in the quarter was our key dermatology portfolio and new diagnostic accounts in the U.K. and other key markets. Sales of companion animal products.products in China also continued to grow rapidly driven by strong underlying dynamics in the market and despite the impact of COVID-19.
•Livestock operational revenue growth was driven by increased sales in swine, fish and poultry while cattle was flat for the quarter. Sales of fishswine products grew as a result of expanding herd production and balanced growth across other species. Fish product sales grew due to a new product in Norway, as well as in-line product growth across various markets, including Chile. Cattle product growth reflects favorable performance in Brazil, Argentina and Australia, and swine growth was driven by new products across Europe and Asia.
•
Companion animal revenue growth resulted primarily from increased sales of Simparica and Apoquel®. Sales also benefited from growth in vaccines in China.
Additionally, segment revenue was favorably impacted by foreign exchange, which increased revenue by approximately $3 million, or 1%, primarily driven by the appreciation of the euro.
International segment earnings increased by $53 million, or 21%,biosecurity measures in the three months ended October 1, 2017, compared with the three months ended October 2, 2016. Operational earnings growth was $50 million, or 19%wake of African Swine Fever in China. Alpha Flux®, primarily due to higher revenue with improved gross margin, partially offset by higher operating expenses.
Nine months ended October 1, 2017 vs. nine months ended October 2, 2016
U.S. operating segment
U.S. segment revenue increased by $92 million, or 5%,a recently launched parasiticide that controls sea lice in the nine months ended October 1, 2017, compared with the nine months ended October 2, 2016, reflecting declines of approximately $21 million in livestock products and growth of approximately $113 million in companion animal products.
Livestock revenue decreased primarily due to lower sales of cattle and swine products. Sales of cattle products declined due to lower disease risk and incidence in the feedlot sector, along with the impact of promotional activities in the prior year. In swine, the decline was driven by competition. Certain medicated feed additive products for both cattle and swine were negatively impacted by livestock producers’ implementation of the Veterinary Feed Directive, and we expect this trend to continue for the remainder of 2017. Partially offsetting this decline was growth in poultry product sales, due to increased sales of medicated feed additives.
•
Companion animal revenue growth was driven primarily by our dermatology portfolio, in addition to new products, particularly Simparica®. Growth was tempered by the prior year’s initial sales of other products into expanded distribution relationships, as well as lower sales of our pain products due to competition.
U.S. segment earnings increased by $63 million, or 6%, in the nine months ended October 1, 2017, compared with the nine months ended October 2, 2016, primarily due to revenue growth and improved gross margins, partially offset by higher operating expenses related to promotional activity for new products and Apoquel®.
International operating segment
International segment revenue increased by $149 million, or 8% in the nine months ended October 1, 2017, compared with the nine months ended October 2, 2016. Operational revenue increased by $157 million, or 9%, driven by growth of approximately $76 million in livestock products and growth of approximately $81 million in companion animal products.
Livestock growth was driven primarily by increased sales of cattle, swine, and fish products. Growth of cattle products was driven by Latin American markets, while Chinasalmon, was the primary driver of swine growth.growth in fish. Growth in our poultry portfolio was the result of fish products was driven by new productsprice increases taken in Argentina, Mexico and in-line product growth across various markets. Growth was partially offset by product rationalizations, primarily impacting poultry and swine product sales.Brazil.
•
Companion animal revenue growth resulted primarily from increased sales of our dermatology portfolio, in addition to new products, primarily Simparica®. Sales also benefited from increased demand for our vaccines portfolio in China due to field force expansions and increasing medicalization rates.
•Additionally, International segment revenue was unfavorably impacted by foreign exchange, which decreased revenue by approximately $8$21 million, or 1%3%, primarily driven by the depreciation of the U.K. pound, Egyptian pound,Brazilian real, euro, Argentine peso, and Turkish Lira, partially offset by appreciation of the Brazilian real.Australian dollar.
International segment earnings increased by $95$3 million, or 12%1%, in the ninethree months ended October 1, 2017,March 31, 2020, compared with the ninethree months ended October 2, 2016.March 31, 2019. Operational earnings growth was $102$19 million, or 13%5%, primarily due to higher revenue and improved gross margin, partlylower operating expenses, partially offset by higher operating expenses.lower gross margin..
Other business activities
Other business activities includes our Client Supply Services (CSS) contract manufacturing results, as well asour 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 respective regionalInternational segment.

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Three months ended October 1, 2017March 31, 2020 vs. three months ended October 2, 2016March 31, 2019
Other business activities net loss increased by $6$7 million, or 8%, in the three months ended October 1, 2017,March 31, 2020, compared with the three months ended October 2, 2016,March 31, 2019, reflecting an increase in variable R&D expenses driven by higher project spending and the inclusion of the veterinary diagnostics business acquired in 2016 and the Irish biologic therapeutics business acquired in 2017, as well as higher compensation-related expenses.
Nine months ended October 1, 2017 vs. nine months ended October 2, 2016
Other business activities net loss increased by $5 million, or 2% in the nine months ended October 1, 2017, compared with the nine months ended October 2, 2016, reflectingcosts due to an increase in variable R&D expenses driven by higher project spendinginvestments, and the inclusion of the veterinary diagnostics business acquired in 2016 and the Irish biologic therapeutics business acquired in 2017, partially offset by a reduction in fixed R&D spending driven by our operational efficiency initiative.compensation-related costs.
Reconciling items
Reconciling items include certain costs that are not allocated to our operating segments results, such as costs associated with the following:
•Corporate,which includes certain costs associated with businessinformation technology, facilities, legal, finance, human resources, business development and communications, among others. These costs also include certain compensation costs, certain procurement costs, and other miscellaneous operating expenses that are not charged to our operating segments, as well as interest income and expense;
•Certain transactions and events such as (i) Purchase accounting adjustments, which includes expenses associated with the amortization of fair value adjustments to inventory, intangible assets, and property, plant and equipment; (ii) Acquisition-related activities, which includes costs for acquisition and integration; and (iii) Certain significant items, which includes non-acquisition-related restructuring charges, certain asset impairment charges, stand-up costs, certain legal and commercial settlements, and costs associated with cost reduction/productivity initiatives; and
•Other unallocated, which includes (i) certain overhead expenses associated with our global manufacturing operations not charged to our operating segments; (ii) certain costs associated with businessinformation technology and finance that specifically support our global manufacturing operations; (iii) certain supply chain and global logistics costs; and (iv) certain procurement costs.
Three months ended October 1, 2017March 31, 2020 vs. three months ended October 2, 2016March 31, 2019
Corporate expenses decreasedincreased by $16$11 million, or 10%7%, in the three months ended October 1, 2017,March 31, 2020, compared with the three months ended October 2, 2016,March 31, 2019, primarilydue to a decrease in certain compensation costs not allocated to our operating segments and a reductionincrease in expenses driven by our operational efficiency initiative.related to depreciation and professional services.
Other unallocated expenses increaseddecreased by $22$8 million, or 41%11%, in the three months ended October 1, 2017,March 31, 2020, compared with the three months ended October 2, 2016,March 31, 2019, primarilydue to higher globalcontinued cost improvements and efficiencies in our manufacturing and supply costs and the unfavorable impact of foreign exchange.network..
Nine months ended October 1, 2017 vs. nine months ended October 2, 2016
Corporate expenses decreased by $62 million, or 12%, in the nine months ended October 1, 2017, compared with the nine months ended October 2, 2016, primarilydue to the favorable impact of foreign exchange, a decrease in certain compensation costs not allocated to our operating segments and a reduction in expenses driven by our operational efficiency initiative.
Other unallocated expenses increased by $114 million, or 97%, in the nine months ended October 1, 2017, compared with the nine months ended October 2, 2016, primarilydue to timing of the recognition of certain manufacturing and supply costs, the unfavorable impact of foreign exchange and higher global manufacturing and supply costs.
See Notes to Condensed Consolidated Financial Statements—Note 16.17. Segment and Other Revenue Information for further information.
Adjusted net income
General description of adjusted net income (a non-GAAP financial measure)
Adjusted net income is an alternative view of performance used by management, and we believe that investors’ understanding of our performance is enhanced by disclosing this performance measure. We report adjusted net income to portray the results of our major operations, the discovery, development, manufacture and commercialization of our products, prior to considering certain income statement elements. We have defined adjusted net income as net income attributable to Zoetis before the impact of purchase accounting adjustments, acquisition-related costs and certain significant items described below. The adjusted net income measure is not, and should not be viewed as, a substitute for U.S. GAAP reported net income attributable to Zoetis.
The adjusted net income measure is an important internal measurement for us. WeAdditionally, we measure our overall performance on this basis in conjunction with other performance metrics. The following are examples of how the adjusted net income measure is utilized:
•senior management receives a monthly analysis of our operating results that is prepared on an adjusted net income basis;
•our annual budgets are prepared on an adjusted net income basis; and
•other goal setting and performance measurements.

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Despite the importance of this measure to management in goal setting and performance measurement, adjusted net income is a non-GAAP financial measure that has no standardized meaning prescribed by U.S. GAAP and, therefore, may not be comparable to the calculation of similar measures of other companies. Adjusted net income is presented to permit investors to more fully understand how management assesses performance.
We also recognize that, as an internal measure of performance, the adjusted net income measure has limitations, and we do not restrict our performance management process solely to this metric. A limitation of the adjusted net income measure is that it provides a view of our operations without including all events during a period, such as the effects of an acquisition or amortization of purchased intangibles, and does not provide a comparable view of our performance to other companies. We also use other specifically tailored metrics designed to achieve the highest levels of performance.  
Purchase accounting adjustments
Adjusted net income is calculated prior to considering certain significant purchase accounting impacts that result from business combinations and net asset acquisitions. These impacts, primarily associated with the acquisition of Abaxis (acquired in July 2018), the Pharmaq business (acquired in November 2015), certain assets of Abbott Animal Health (acquired in February 2015), King Animal Health (KAH) (acquired in 2011), Fort Dodge Animal Health (FDAH) (acquired in 2009), and Pharmacia Animal Health business (acquired in 2003), include amortization related to the increase in fair value of the acquired finite-lived intangible assets and depreciation related to the increase/decrease to fair value of the acquired fixed assets. Therefore, the adjusted net income measure includes the revenue earned upon the sale of the acquired products without considering the aforementioned significant charges.
While certain purchase accounting adjustments can occur through 20 or more years, this presentation provides an alternative view of our performance that is used by management to internally assess business performance. We believe the elimination of amortization attributable to acquired intangible assets provides management and investors an alternative view of our business results by providing a degree of parity to internally developed intangible assets for which R&D costs previously have been expensed.
A completely accurate comparison of internally developed intangible assets and acquired intangible assets cannot be achieved through adjusted net income. These components of adjusted net income are derived solely from the impact of the items listed above. We have not factored in the impact of any other differences in experience that might have occurred if we had discovered and developed those intangible assets on our own, and this approach does not intend to be representative of the results that would have occurred in those circumstances. For example, our R&D costs in total, and in the periods presented, may have been different; our speed to commercialization and resulting revenue, if any, may have been different; or our costs to manufacture may have been different. In addition, our marketing efforts may have been received differently by our customers. As such, in total, there can be no assurance that our adjusted net income amounts would have been the same as presented had we discovered and developed the acquired intangible assets.
Acquisition-related costs
Adjusted net income is calculated prior to considering transaction and integration costs associated with significant business combinations or net asset acquisitions because these costs are unique to each transaction and represent costs that were incurred to acquire and integrate certain businesses as a result of the acquisition decision. We have made no adjustments for the resulting synergies.
We believe that viewing income prior to considering these charges provides investors with a useful additional perspective because the significant costs incurred in a business combination result primarily from the need to eliminate duplicate assets, activities or employees––a natural result of acquiring a fully integrated set of activities. For this reason, we believe that the costs incurred to convert disparate systems, to close duplicative facilities or to eliminate duplicate positions (for example, in the context of a business combination) can be viewed differently from those costs incurred in the ordinary course of business.
The integration costs associated with a business combination may occur over several years, with the more significant impacts generally ending within three years of the transaction. Because of the need for certain external approvals for some actions, the span of time needed to achieve certain restructuring and integration activities can be lengthy. For example, due to the regulated nature of the animal health medicines, vaccines and vaccinesdiagnostics business, the closure of excess facilities can take several years, as all manufacturing changes are subject to extensive validation and testing and must be approved by the FDAU.S. Food and Drug Administration and/or other regulatory authorities.
Certain significant items
Adjusted net income is calculated prior to consideringexcluding certain significant items. Certain significant items represent substantive, unusual items that are evaluated on an individual basis. Such evaluation considers both the quantitative and the qualitative aspect of their unusual nature. Unusual, in this context, may represent items that are not part of our ongoing business; items that, either as a result of their nature or size, we would not expect to occur as part of our normal business on a regular basis; items that would be nonrecurring; or items that relate to products that we no longer sell. While not all-inclusive, examples of items that could be included as certain significant items would be costs related to becoming an independent public company; a major non-acquisition-related restructuring charge and associated implementation costs for a program that is specific in nature with a defined term, such as those related to our non-acquisition-related cost-reduction and productivity initiatives; amounts related to disposals of products or facilities that do not qualify as discontinued operations as defined by U.S. GAAP; certain intangible asset impairments; adjustments related to the resolution of certain tax positions; significant currency devaluation; the impact of adopting certain significant, event-driven tax legislation; or charges related to legal matters. See Notes to Condensed Consolidated Financial Statements—Note 15.16. Commitments and Contingencies. Our normal, ongoing defense costs or settlements of and accruals on legal matters made in the normal course of our business would not be considered certain significant items.

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Reconciliation
A reconciliation of net income, attributable to Zoetis, as reported under U.S. GAAP, to adjusted net income follows:  
 Three Months Ended   Nine Months Ended  Three Months Ended
 October 1,
 October 2,
 %
 October 1,
 October 2,
 %
March 31,%
(MILLIONS OF DOLLARS) 2017
 2016
 Change
 2017
 2016
 Change
(MILLIONS OF DOLLARS)20202019Change
GAAP reported net income attributable to Zoetis $298
 $239
 25
 $783
 $667
 17
GAAP reported net incomeGAAP reported net income$423  $312  36  
Purchase accounting adjustments—net of tax 16
 18
 (11) 50
 45
 11
Purchase accounting adjustments—net of tax32  46(30) 
Acquisition-related costs—net of tax 4
 —
 *
 5
 4
 25
Acquisition-related costs—net of tax8  4  100  
Certain significant items—net of tax 4
 1
 *
 6
 27
 (78)Certain significant items—net of tax(8) 62  *  
Non-GAAP adjusted net income(a)
 $322
 $258
 25
 $844
 $743
 14
Non-GAAP adjusted net income(a)
$455  $424  7  
*Calculation not meaningful.
Certain amounts(a) The effective tax rate on adjusted pretax income is 16.8% and percentages may reflect rounding adjustments.18.8% for the three months ended March 31, 2020, and March 31, 2019, respectively. The lower effective tax rate for the three months ended March 31, 2020, compared with the three months ended March 31, 2019, was primarily attributable to a $23 million and $13 million discrete tax benefit recorded in the three months ended March 31, 2020 and 2019, respectively, related to the excess tax benefits for share-based payments, partially offset by changes in the jurisdictional mix of earnings, which includes the impact of the location of earnings as well as repatriation costs.
(a)
The effective tax rate on adjusted pretax income is 28.7% and 31.6% for the three months ended October 1, 2017 and October 2, 2016, respectively. The lower effective tax rate for the three months ended October 1, 2017, compared with the three months ended October 2, 2016, was primarily attributable to changes in the jurisdictional mix of earnings, which includes the impact of the location of earnings as well as repatriation costs.
The effective tax rate on adjusted pretax income is 28.5% and 31.3% for the nine months ended October 1, 2017, and October 2, 2016, respectively. The lower effective tax rate for the nine months ended October 1, 2017, compared with the nine months ended October 2, 2016, was primarily attributable to changes in the jurisdictional mix of earnings, which includes the impact of the location of earnings as well as repatriation costs, and a $8 million and $7 million discrete tax benefit recorded in 2017 and 2016, respectively, related to the excess tax benefits for share-based payments recognized as a component of Provision for taxes on income.
A reconciliation of reported diluted earnings per share (EPS), as reported under U.S. GAAP, to non-GAAP adjusted diluted EPS follows:
Three Months Ended
March 31,%
20202019Change
Earnings per share—diluted(a):
GAAP reported EPS —diluted$0.88  $0.65  35  
Purchase accounting adjustments—net of tax0.07  0.09  (22) 
Acquisition-related costs—net of tax0.02  0.01  100  
Certain significant items—net of tax(0.02) 0.13  *  
Non-GAAP adjusted EPS—diluted$0.95  $0.88  8  
  Three Months Ended   Nine Months Ended  
  October 1,
 October 2,
 %
 October 1,
 October 2,
 %
  2017
 2016
 Change
 2017
 2016
 Change
Earnings per share—diluted(a):
            
GAAP reported EPS attributable to Zoetis—diluted $0.61
 $0.48
 27
 $1.59
 $1.34
 19
Purchase accounting adjustments—net of tax 0.02
 0.04
 (50) 0.10
 0.09
 11
Acquisition-related costs—net of tax 0.01
 —
 —
 0.01
 0.01
 —
Certain significant items—net of tax 0.01
 —
 —
 0.01
 0.05
 (80)
Non-GAAP adjusted EPS—diluted $0.65
 $0.52
 25
 $1.71
 $1.49
 15
* Calculation not meaningful.
Certain amounts(a) Diluted earnings per share was computed using the weighted-average common shares outstanding during the period plus the common stock equivalents related to stock options, restricted stock units, performance-vesting restricted stock units and percentages may reflect rounding adjustments.deferred stock units.
(a)
Diluted earnings per share was computed using the weighted-average common shares outstanding during the period plus the common stock equivalents related to stock options, RSUs, PSUs and DSUs.
Adjusted net income includes the following charges for each of the periods presented:
Three Months Ended
March 31,
(MILLIONS OF DOLLARS)20202019
Interest expense, net of capitalized interest$53  $56  
Interest income6  10  
Income taxes92  98  
Depreciation47  38  
Amortization9  5  

32 |
  Three Months Ended Nine Months Ended
  October 1,
 October 2,
 October 1,
 October 2,
(MILLIONS OF DOLLARS) 2017
 2016
 2017
 2016
Interest expense, net of capitalized interest $43
 $41
 $125
 $125
Interest income 3
 2
 8
 6
Income taxes 129
 118
 336
 337
Depreciation 33
 34
 100
 96
Amortization 4
 3
 13
 12

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Adjusted net income, as shown above, excludes the following items:
Three Months Ended
March 31,
(MILLIONS OF DOLLARS)20202019
Purchase accounting adjustments:
Amortization and depreciation(a)
$52  $52  
Cost of sales(b)
2  14  
Total purchase accounting adjustments—pre-tax54  66  
Income taxes(c)
22  20  
Total purchase accounting adjustments—net of tax32  46  
Acquisition-related costs:
Integration costs6  1  
Restructuring costs1  4  
Total acquisition-related costs—pre-tax7  5  
Income taxes(c)
(1) 1  
Total acquisition-related costs—net of tax8  4  
Certain significant items:
Operational efficiency initiative(d)
(17) —  
Supply network strategy(e)
2  2  
Other restructuring charges and cost-reduction/productivity initiatives(f)
2  —  
Other(g)
2  68  
Total certain significant items—pre-tax(11) 70  
Income taxes(c)
(3) 8  
Total certain significant items—net of tax(8) 62  
Total purchase accounting adjustments, acquisition-related costs, and certain significant items—net of tax$32  $112  
  Three Months Ended Nine Months Ended
  October 1,
 October 2,
 October 1,
 October 2,
(MILLIONS OF DOLLARS) 2017
 2016
 2017
 2016
Purchase accounting adjustments:        
Amortization and depreciation(a)
 $21
 $18
 $61
 $57
Cost of sales(b)
 2
 7
 5
 22
Total purchase accounting adjustments—pre-tax 23
 25
 66
 79
Income taxes(c)
 7
 7
 16
 34
Total purchase accounting adjustments—net of tax 16
 18
 50
 45
Acquisition-related costs:        
Integration costs 2
 —
 4
 2
Restructuring costs(d)
 4
 —
 4
 —
Other —
 —
 —
 1
Total acquisition-related costs—pre-tax 6
 —
 8
 3
Income taxes(c)
 2
 —
 3
 (1)
Total acquisition-related costs—net of tax 4
 —
 5
 4
Certain significant items:        
Operational efficiency initiative(e)
 (1) 9
 4
 (36)
Supply network strategy(f)
 8
 2
 7
 13
Other restructuring charges and cost-reduction/productivity initiatives —
 —
 —
 (1)
Certain asset impairment charges(g)
 —
 1
 —
 1
Stand-up costs(h)
 —
 1
 —
 18
Other(i)
 —
 3
 (1) 4
Total certain significant items—pre-tax 7
 16
 10
 (1)
Income taxes(c)
 3
 15
 4
 (28)
Total certain significant items—net of tax 4
 1
 6
 27
         
Total purchase accounting adjustments, acquisition-related costs, and certain significant items—net of tax $24
 $19
 $61
 $76

Certain(a)  Amortization and depreciation expenses related to Purchase accounting adjustments with respect to identifiable intangible assets and property, plant and equipment.
(b) Amortization and depreciation expense, as well as fair value adjustments to acquired inventory.
(c)  Income taxes include the tax effect of the associated pre-tax amounts, may reflect rounding adjustments.calculated by determining the jurisdictional location of the pre-tax amounts and applying that jurisdiction's applicable tax rate.
(a)
Amortization and depreciation expenses related to Purchase accounting adjustments with respect to identifiable intangible assets and property, plant and equipment.
(b)
Amortization and depreciation expense, as well as fair value adjustments to acquired inventory.
(c)
Income taxes include the tax effect of the associated pre-tax amounts, calculated by determining the jurisdictional location of the pre-tax amounts and applying that jurisdiction's applicable tax rate.
Income taxes in Purchase accounting adjustments for the nine months ended October 1, 2017, also includes a tax benefit related to the revaluation of deferred taxes as a result of a change in tax rates and a net tax charge related to prior period tax adjustments. Income taxes in Purchase accounting adjustments for the nine months ended October 2, 2016, includes a tax benefit related to the revaluation of deferred taxes as a result of a change in tax rates.
Income taxes in Acquisition-related costs for the nine months ended October 2, 2016, includes a tax charge related to the acquisition of certain assets of Abbott Animal Health.
Income taxes in Certain significant items for the nine months ended October 1, 2017, also includes a net charge of approximately $1 million related to the revaluation of the company’s deferred tax assets and liabilities, using the rates expected to be in place at the time of the reversal. Income taxes in Certain significant items for the nine months ended October 2, 2016, includes: (i) a net tax benefit of approximately $7 million recorded in the third quarter of 2016, related to a revaluation of the company's deferred tax assets and liabilities using the tax rates expected to be in place going forward as a result of the implementation of certain operational changes; and (ii) a net tax charge of approximately $38 million recorded in the first half of 2016, related to the impact of the European Commission’s negative decision on the excess profits rulings in Belgium. This net charge represents the recovery of prior tax benefits for the periods 2013 through 2015 offset by the revaluation of the company’s deferred tax assets and liabilities using the rates expected to be in place at the time of the reversal, and does not include any benefits associated with a successful appeal of the decision.
(d)
For the three and nine months ended October 1, 2017, represents employee termination costs related to the acquisition of an Irish biologic therapeutics company in the third quarter of 2017.
(e)
For the three months ended October 1, 2017, represents employee termination costs of $1 million, a reversal of $1 million related to exit costs, and an adjustment to the net gain related to sales of certain manufacturing sites and products of $1 million. For the nine months ended October 1, 2017, represents consulting fees of $1 million, employee termination costs of $2 million, and a net loss related to sales of certain manufacturing sites and products of $1 million.
For the three months ended October 2, 2016, includes inventory write-offs of $1 million, consulting fees of $4 million, employee termination costs of $3 million, and exit costs of $1 million. For the nine months ended October 2, 2016, includes inventory write-offs of $1 million, accelerated depreciation of $1 million, consulting fees of $11 million, a reduction in employee termination accruals of $26 million reversal, exit costs of $4 million, and a net gain related to divestitures of $27 million.

 Income taxes in Purchase accounting adjustments also includes a tax benefit related to a remeasurement of deferred taxes resulting from the integration of acquired businesses for the three months ended March 31, 2020, in addition to a tax benefit related to a remeasurement of deferred taxes as a result of changes in non-U.S. statutory tax rates, for the three months ended March 31, 2020 and March 31, 2019.
        Income taxes in Acquisition-related costs also includes a tax charge related to a remeasurement of deferred taxes resulting from the integration of acquired businesses for the three months ended March 31, 2020.  
(d) For the three months ended March 31, 2020, represents a net gain resulting from net cash proceeds pursuant to an agreement related to the 2016 sale of certain U.S. manufacturing sites.
(e) Represents consulting fees related to cost-reduction and productivity initiatives.
(f) For the three months ended March 31, 2020, represents employee termination costs incurred as a result of the CEO transition.
(g) For the three months ended March 31, 2020, primarily represents CEO transition-related costs. For the three months ended March 31, 2019, primarily represents a change in estimate related to inventory costing.

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(f)
For the three months ended October 1, 2017, represents consulting fees of $2 million, employee termination costs of $2 million, a net loss of $5 million related to sales of certain manufacturing sites and products, including the anticipated disposal of our manufacturing site in Guarulhos, Brazil, and an adjustment of $1 million related to the requirement to cease depreciation of assets, located at our manufacturing site in Guarulhos Brazil, that are currently classified as held for sale. For the nine months ended October 1, 2017, represents accelerated depreciation of $2 million, consulting fees of $4 million, a reversal of previously accrued employee terminations costs of $3 million, a net loss of $5 million related to sales of certain manufacturing sites and products, including the anticipated disposal of our manufacturing site in Guarulhos, Brazil, and an adjustment of $1 million related to the requirement to cease depreciation of assets, located at our manufacturing site in Guarulhos Brazil, that are currently classified as held for sale.
For the three months ended October 2, 2016, represents accelerated depreciation. For the nine months ended October 2, 2016, includes accelerated depreciation charges of $4 million, consulting fees of $3 million and employee termination costs of $6 million.
(g)
For the three and nine months ended October 2, 2016, represents an impairment of finite-lived trademarks related to a canine pain management product.
(h)
Certain nonrecurring costs related to becoming an independent public company, such as the creation of standalone systems and infrastructure, site separation, new branding (including changes to the manufacturing process for required new packaging), and certain legal registration and patent assignment costs.
(i)
For the nine months ended October 1, 2017, primarily represents costs associated with changes to our operating model of $3 million, and income of $4 million related to an insurance recovery from commercial settlements in Mexico recorded in 2014 and 2016.
For the three and nine months ended October 2, 2016, represents costs associated with changes to our operating model.




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The classification of the above items excluded from adjusted net income are as follows:
Three Months Ended
March 31,
(MILLIONS OF DOLLARS)20202019
Cost of sales:
Purchase accounting adjustments$2  $14  
Consulting fees2  2  
Other—  68  
   Total Cost of sales4  84  
Selling, general & administrative expenses:
Purchase accounting adjustments18  18  
Other2  —  
   Total Selling, general & administrative expenses20  18  
Amortization of intangible assets:
Purchase accounting adjustments34  34  
   Total Amortization of intangible assets34  34  
Restructuring charges/(reversals) and certain acquisition-related costs:
Integration costs6  1  
Employee termination costs3  4  
   Total Restructuring charges/(reversals) and certain acquisition-related costs9  5  
Other (income)/deductions—net:
Net (gain)/loss on sale of assets(17) —  
   Total Other (income)/deductions—net(17) —  
Provision for taxes on income18  29  
Total purchase accounting adjustments, acquisition-related costs, and certain significant items—net of tax$32  $112  
  Three Months Ended Nine Months Ended
  October 1,
 October 2,
 October 1,
 October 2,
(MILLIONS OF DOLLARS) 2017
 2016
 2017
 2016
Cost of sales:        
Purchase accounting adjustments $2
 $7
 $5
 $22
Accelerated depreciation —
 2
 2
 4
Inventory write-offs —
 1
 —
 1
Consulting fees 2
 —
 4
 3
Stand-up costs —
 (3) —
 (1)
Other (1) —
 —
 —
   Total Cost of sales 3
 7
 11
 29
         
Selling, general & administrative expenses:        
Purchase accounting adjustments 1
 1
 4
 4
Accelerated depreciation —
 —
 —
 1
Consulting fees —
 4
 1
 11
Stand-up costs —
 4
 —
 19
Other —
 3
 2
 4
   Total Selling, general & administrative expenses 1
 12
 7
 39
         
Research & development expenses:        
Purchase accounting adjustments 1
 —
 2
 1
   Total Research & development expenses 1
 —
 2
 1
         
Amortization of intangible assets:        
Purchase accounting adjustments 19
 17
 55
 52
   Total Amortization of intangible assets 19
 17
 55
 52
         
Restructuring (reversals)/ charges and certain acquisition-related costs:        
Integration costs 2
 —
 4
 2
Employee termination costs 7
 3
 3
 (20)
Exit costs (1) 1
 —
 3
   Total Restructuring (reversals)/ charges and certain acquisition-related costs 8
 4
 7
 (15)
         
Other (income)/deductions—net:        
Net loss/(gain) on sale of assets 4
 —
 6
 (27)
Acquisition-related costs —
 —
 —
 1
Asset impairments —
 1
 —
 1
Other —
 —
 (4) —
   Total Other (income)/deductions—net 4
 1
 2
 (25)
         
Provision for taxes on income 12
 22
 23
 5
         
Total purchase accounting adjustments, acquisition-related costs, and certain significant items—net of tax $24
 $19
 $61
 $76

Certain amounts may reflect rounding adjustments.
Analysis of the condensed consolidated statements of comprehensive income
Substantially all changes in other comprehensive income for the periods presented are related to foreign currency translation adjustments. These changes result from the strengthening or weakening of the U.S. dollar as compared to the currencies in the countries in which we do business. The gains and losses associated with these changes are deferred on the balance sheet in Accumulated other comprehensive loss until realized.

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Analysis of the condensed consolidated balance sheets
October 1, 2017March 31, 2020 vs. December 31, 20162019
For a discussion about the changes in Cash and cash equivalents, Short-term borrowings, Current portion of long-term debt, and Long-term debt, net of discount and issuance costs, see “Analysis of financial condition, liquidity and capital resources” below.
Accounts receivable,Receivable, less allowance for doubtful accounts increaseddecreased as a result of thelower sales related to seasonality and timing of customer collectionspayments and the impact of foreign exchange.rebate credits issued to customers.
Assets heldInventories increased due to increases in safety stock levels and for sale and Liabilities associated with assets held for sale increased as a result of an agreement to sell our manufacturing site in Guarulhos, Brazil. See Notes to Condensed Consolidated Financial Statements— Note 4. Acquisitions and Divestitures: Assets Held for Sale.new product launch.
Other current assetsincreased primarily as a result of the timing of U.S. income tax payments as well as other higher prepaid expenses.and an increase in fair value of cross-currency interest rate swap contracts.
Property, plant and equipment, less accumulated depreciation increased primarily as a result of capital spending, offset by depreciation expense and a reclassification to Assets Held for Sale as a result of an agreement to sell our manufacturing site in Guarulhos, Brazil. See Notes to Condensed Consolidated Financial Statements—Note 4. Acquisitions and Divestitures: Assets Held for Sale
Identifiable intangible assets, less accumulated amortization increased primarily due to the acquisition of an Irish biologic therapeutics company in the third quarter of 2017, as well as the consolidation of a European livestock monitoring company, a variable interest entity of which Zoetis is the primary beneficiary, and the acquisition of a Norwegian fish vaccination company, both in the first quarter of 2017, and the impact of foreign exchange. This was partially offset by amortization expense. See Notes to Condensed Consolidated Financial Statements— Note 10. Goodwill and Other Intangible Assets.
Goodwill increased as a result of the impact of foreign exchange, as well as the acquisition of an Irish biologic therapeutics company, and the consolidation of a European livestock monitoring company, a variable interest entity of which Zoetis is the primary beneficiary, partially offset by the reclassification to Assets Held for Sale as a result of an agreement to sell our manufacturing site in Guarulhos, Brazil. See Notes to Condensed Consolidated Financial Statements— Note 4. Acquisitions and Divestitures: Assets Held for Sale and Note 10. Goodwill and Other Intangible Assets.
The net changes in Deferred tax assets, Deferred tax liabilities, Income taxes payable and Other taxes payable primarily reflect adjustments to the accrual for the income tax provision for the nine months of 2017, as well as the impact of the revaluation of deferred taxes as a result of a change in tax rates. See Notes to Condensed Consolidated Financial Statements— Note 7. Income Taxes.
Accounts payable decreased as a result of the timing of payments.
Accrued expenses decreased primarily as a result of a decrease in accrued interest expense as well as payment of employee termination costs primarily associated with the acquisition of Abaxis.
Accrued compensation and related itemsdecreased primarily due to payment of 20162019 annual bonuses to eligible employees and 20162019 employee savings plan contributions, partially offset by the pro rata accrual of similar items for 2017.2020.
Accrued expenses
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The net changes in Noncurrent deferred tax assets, Noncurrent deferred tax liabilities, Income taxes payable and Other current liabilities decreased taxes payable primarily reflect adjustments to the accrual for the income tax provision, the timing of income tax payments, and the impact of the remeasurement of deferred taxes as a result of paymentchanges in tax rates and the integration of accrued expenses, including employee termination costs associated with operational efficiency initiatives. See Notesacquired businesses.
Other noncurrent liabilities increased primarily due to Condensed Consolidated Financial Statements— Note 5. Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives.the mark-to-mark adjustment of cross-currency interest rate swaps.
For an analysis of the changes in Total Equity, see the Condensed Consolidated Statements of Equity and Notes to Condensed Consolidated Financial Statements— Note 13.14. Stockholders' Equity.
Analysis of the condensed consolidated statements of cash flows
 Nine Months Ended Three Months Ended
 October 1,
 October 2,
 %March 31,%
(MILLIONS OF DOLLARS) 2017
 2016
 Change(MILLIONS OF DOLLARS)20202019Change
Net cash provided by (used in):      Net cash provided by (used in):
Operating activities $738
 $427
 73Operating activities$408  $389  5  
Investing activities (216) (155) 39Investing activities(57) (23) *  
Financing activities 716
 (775) *Financing activities(328) (243) 35  
Effect of exchange-rate changes on cash and cash equivalents 16
 —
 *Effect of exchange-rate changes on cash and cash equivalents(6) 3  *  
Net increase (decrease) in cash and cash equivalents $1,254
 $(503) *
Net increase in cash and cash equivalentsNet increase in cash and cash equivalents$17  $126  (87) 
*Calculation not meaningful.
Certain amounts and percentages may reflect rounding adjustments.
Operating activities
NineThree months endedOctober 1, 2017 March 31, 2020 vs. ninethree months endedOctober 2, 2016 March 31, 2019
Net cash provided by operating activities was $738$408 million for the ninethree months ended October 1, 2017, compared with net cash provided by operating activities of $427March 31, 2020, and $389 million for the ninethree months ended October 2, 2016.March 31, 2019. The increase in operating cash flowsnet income after non-cash adjustments was primarily attributable to thepartially offset by timing of receipts and payments in the ordinary course of business and higher income before allocation to noncontrolling interests, partially offset by higher U.S. income tax payments.

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business.
Investing activities
NineThree months endedOctober 1, 2017 March 31, 2020 vs. ninethree months endedOctober 2, 2016 March 31, 2019
Our net cash used in investing activities was $216$57 million for the ninethree months ended October 1, 2017,March 31, 2020, compared with net cash used in investing activities of $155$23 million for the ninethree months ended October 2, 2016.March 31, 2019. The net cash used in investing activities for 20172020 was primarily due primarily to purchasescapital expenditures, partially offset by proceeds from cross-currency interest rate swaps and proceeds resulting from a contingent payment received pursuant to an agreement related to the 2016 sale of property, plant and equipment and the acquisitions of an Irish biologic therapeutics company and a Norwegian fish vaccination company.certain U.S. manufacturing sites. The net cash used in investing activities for 20162019 was primarily due primarily to purchases of property, plant and equipment, and the acquisition of a livestock business in South America, partially offset by proceeds from the salematurities of certain manufacturing sitesdebt securities and products as part of the operational efficiency initiative.proceeds from cross-currency interest rate swaps.
Financing activities
NineThree months endedOctober 1, 2017 March 31, 2020 vs. ninethree months endedOctober 2, 2016 March 31, 2019
Our net cash provided byused in financing activities was $716$328 million for the ninethree months ended October 1, 2017,March 31, 2020, compared with net cash used in financing activities of $775$243 million for the ninethree months ended October 2, 2016.March 31, 2019. The net cash provided byused in financing activities for 20172020 was primarily attributable to proceeds received from the issuance of senior notes in September 2017, partially offset by the purchase of treasury shares and the payment of dividends.dividends, partially offset by net proceeds in connection with the issuance of common stock under our equity incentive plan. The net cash used in financing activities for 20162019 was due primarily attributable to the senior note payment in February 2016, the purchase of treasury shares, the payment of dividends, the payment of short-term borrowings, the payment of contingent consideration related to the 2016 acquisition of certain intangible assets related to our livestock product portfolio and the contingent consideration2018 acquisition of a manufacturing business in Ireland, and the payment to Abbott.of short-term borrowings.
Analysis of financial condition, liquidity and capital resources
While we believe our cash and cash equivalents on hand, our operating cash flows and our existing financing arrangements will be sufficient to support our future cash needs, this may be subject to the environment in which we operate. Risks to our meetingability to meet future funding requirements include global economic conditions described in the following paragraph.
Global financial markets may be impacted by macroeconomic, business and financial volatility. As markets change, we will continue to monitor our liquidity position, but there can be no assurance that a challenging economic environment or an economic downturn will not impact our liquidity or our ability to obtain future financing.
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Selected measures of liquidity and capital resources
Certain relevant measures of our liquidity and capital resources follow:
March 31,December 31,
(MILLIONS OF DOLLARS)20202019
Cash and cash equivalents$1,951  $1,934  
Accounts receivable, net(a)
965  1,086  
Current portion of long-term debt500  500  
Long-term debt, net of discount and issuance costs5,963  5,947  
Working capital3,051  2,942  
Ratio of current assets to current liabilities2.77:12.63:1
 October 1,
 December 31,
(MILLIONS OF DOLLARS)2017
 2016
Cash and cash equivalents$1,981
 $727
Accounts receivable, net(a)
1,009
 913
Short-term borrowings—
 —
Current portion of long-term debt750
 —
Long-term debt4,952
 4,468
Working capital3,148
 2,273
Ratio of current assets to current liabilities2.80:1
 3.03:1
(a) Accounts receivable are usually collected over a period of 45 to 75 days. For the three months ended March 31, 2020, compared with December 31, 2019, the number of days that accounts receivables are outstanding remained approximately the same. We regularly monitor our accounts receivable for collectability, particularly in markets where economic conditions remain uncertain. We believe that our allowance for doubtful accounts is appropriate. Our assessment is based on such factors as past due aging, historical and expected collection patterns, the financial condition of our customers, the robust nature of our credit and collection practices and the economic environment.
(a)
Accounts receivable are usually collected over a period of 60 to 90 days. For the nine months ended October 1, 2017, compared with December 31, 2016, the number of days that accounts receivables are outstanding remained approximately the same. We regularly monitor our accounts receivable for collectability, particularly in markets where economic conditions remain uncertain. We believe that our allowance for doubtful accounts is appropriate. Our assessment is based on such factors as past due aging, historical and expected collection patterns, the financial condition of our customers, the robust nature of our credit and collection practices and the economic environment.
For additional information about the sources and uses of our funds, see the Analysis of the condensed consolidated balance sheets and Analysis of the condensed consolidated statements of cash flows sections of this MD&A.
Credit facility and other lines of credit
In December 2016,, we entered into an amended and restated revolving credit agreement with a syndicate of banks providing for a five-yearmulti-year $1.0 billion senior unsecured revolving credit facility (the credit facility), which expires in. In December 2021.2018, 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 3.50:1.3.5:1. Upon entering into a material acquisition, the maximum total leverage ratio increases to 4.00:4:1,, and extends until the fourth full consecutive fiscal quarter ended immediately following the consummation of a material acquisition. The credit facility also contains a clause which adds back to Adjusted Consolidated EBITDA, any operational efficiency restructuring charge (defined as charges recorded by the company during the period commencing on October 1, 2016 and ending December 31, 2019, related to operational efficiency initiatives), provided that for any twelve-month period such charges added back to Adjusted Consolidated EBITDA shall not to exceed $100 million in the aggregate.
The credit facility also contains a financial covenant requiring that we maintain a minimum interest coverage ratio (the ratio of EBITDA at the end of the period to interest expense for such period) of 3.50:1.1. In addition, the credit facility contains other customary covenants.

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TableWe were in compliance with all financial covenants as of Contents

March 31, 2020 and December 31, 2019. There were no amounts drawn under the credit facility as of March 31, 2020 or December 31, 2019.
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 October 1, 2017,March 31, 2020, we had access to $77$75 million of lines of credit which expire at various times throughout 2017 and 2018through 2020, and are generally renewed annually. We did not have anyThere were no borrowings outstanding related to these facilities as of October 1, 2017 andMarch 31, 2020 or December 31, 2016.2019.
Domestic and international short-term funds
Many of our operations are conducted outside the United States.U.S. The amount of funds held in the United StatesU.S. will fluctuate due to the timing of receipts and payments in the ordinary course of business and due to other reasons, such as business development activities. As part of our ongoing liquidity assessments, we regularly monitor the mix of U.S. and international cash flows (both inflows and outflows). RepatriationActual repatriation of overseas funds can result in additional United States, federal, stateU.S. and local income tax payments. We recordtaxes, such as U.S. deferred tax liabilities for certain unremitted earnings, but when amounts earned overseas are expected to be indefinitely reinvested outside the United States, no accrual for U.S.state income taxes, is provided.local withholding taxes, and taxes on currency gains and losses.
Global economic conditions
The challengingChallenging economic environment hasconditions in recent years have not had, nor do we anticipate that it will have, a significant impact on our liquidity. Due to our operating cash flows, financial assets, access to capital markets and available lines of credit and revolving credit agreements, we continue to believe that we have the ability to meet our liquidity needs for the foreseeable future. As markets change, we continue to monitor our liquidity position. There can be no assurance that a challenging economic environment or a furtheran economic downturn would not impact our ability to obtain financing in the future.
Debt
On August 20, 2018, we issued $1.5 billion aggregate principal amount of our senior notes (2018 senior notes), with an original issue discount of $4 million.. On September 12, 2017, we issued $1.25 billion aggregate principal amount of our senior notes (2017 senior notes), with an original issue discount of $7 million. These notes are comprised of $750 million aggregate principal amount of 3.000% senior notes due 2027 and $500 million aggregate principal amount of 3.950% senior notes due 2047. Net proceeds from this offering were partially used in October 2017 to repay, prior to maturity, the principal (including a make-whole amount) of our 1.875%senior notes due 2018 in the aggregate principal amount of$750 million. The remainder of the net proceeds will be used for general corporate purposes.
On November 13, 2015, we issued $1.25 billion aggregate principal amount of our senior notes (2015 senior notes), with an original issue discount of $2 million. On January 28, 2013, we issued $3.65 billion aggregate principal amount of our senior notes (the 2013(2013 senior notes offering)notes) in a private placement, with an original issue discount of $10 million.
The 2013, 2015, 2017 and 20172018 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 leasebacklease-back 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
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default, upon the occurrence of which (if not cured or waived), the 2013, 2015, 2017 and 20172018 senior notes may be declared immediately due and payable.
Pursuant to the indenture, we are able to redeem the 2013, 2015 and 2017 senior notes and the 2018 fixed rate senior notes of any series, in whole or in part, at any time by paying a “make whole” premium, plus accrued and unpaid interest to, but excluding, the date of redemption. The 2018 floating rate senior notes are not redeemable at our option prior to their maturity date. Pursuant to our tax matters agreement with Pfizer, we will not be permitted to redeem the 2013 senior notes due 2023 pursuant to this optional redemption provision, except under limited circumstances. Upon the occurrence of a change of control of us and a downgrade of the 2013, 2015, 2017 and 20172018 senior notes below an investment grade rating by each of Moody's Investors Service, Inc. and Standard & Poor's Ratings Services, we are, in certain circumstances, required to make an offer to repurchase all of the outstanding 2013, 2015, 2017 and 20172018 senior notes at a price equal to 101% of the aggregate principal amount of the 2013, 2015, 2017 and 20172018 senior notes together with accrued and unpaid interest to, but excluding, the date of repurchase.
The components of our long-term debt including current portion of long-term debt, follow:
DescriptionPrincipal AmountInterest RateTerms
2013 Senior Note due 2018(a)
$750 million1.875%Interest due semi annually, not subject to amortization, aggregate principal due on February 1, 2018
2015 Senior NoteNotes due 2020$500 million3.450%Interest due semi annually, not subject to amortization, aggregate principal due on November 13, 2020
2018 Floating Rate Senior Notes due 2021$300 millionThree-month USD LIBOR plus 0.44%Interest due quarterly, not subject to amortization, aggregate principal due on August 20, 2021
2018 Senior Notes due 2021$300 million3.250%Interest due semi annually, not subject to amortization, aggregate principal due on August 20, 2021
2013 Senior NoteNotes due 2023$1,350 million3.250%Interest due semi annually, not subject to amortization, aggregate principal due on February 1, 2023
2015 Senior NoteNotes due 2025$750 million4.500%Interest due semi annually, not subject to amortization, aggregate principal due on November 13, 2025
2017 Senior NoteNotes due 2027$750 million3.000%Interest due semi annually, not subject to amortization, aggregate principal due on September 12, 2027
2018 Senior Notes due 2028$500 million3.900%Interest due semi annually, not subject to amortization, aggregate principal due on August 20, 2028
2013 Senior NoteNotes due 2043$1,150 million4.700%Interest due semi annually, not subject to amortization, aggregate principal due on February 1, 2043
2017 Senior NoteNotes due 2047$500 million3.950%Interest due semi annually, not subject to amortization, aggregate principal due on September 12, 2047
2018 Senior Notes due 2048$400 million4.450%Interest due semi annually, not subject to amortization, aggregate principal due on August 20, 2048
(a)In October 2017, we redeemed our 1.875% senior notes due 2018, prior to maturity, for $754 million, including a make-whole premium and accrued interest.

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Credit Ratings
Two major corporate debt-rating organizations, Moody's and S&P, assign ratings to our short-term and long-term debt. A security rating is not a recommendation to buy, sell or hold securities and the rating is subject to revision or withdrawal at any time by the rating organization. Each rating should be evaluated independently of any other rating.
The following table provides the current ratings assigned by these rating agencies to our commercial paper and senior unsecured non-credit-enhanced long-term debt:
Commercial
PaperLong-term DebtDate of
Name of Rating AgencyRatingRatingOutlookLast Action
Moody’sP-2Baa1StableAugust 2017
S&PA-2BBBStableDecember 2016
Contractual Obligations
In the first quarter of 2017, we entered into a five-year purchase agreement related to contract manufacturing. Payments due under this purchase obligation as of October 1, 2017, are set forth below:
(MILLIONS OF DOLLARS)Total20172018 - 20192020 - 2021Thereafter
Purchase obligation$65
$9
$23
$33
$—
Share Repurchase Program
In December 2016,2018, the company's Board of Directors authorized a $1.5$2.0 billion share repurchase program. As of March 31, 2020, there was approximately $1.4 billion remaining under this authorization. Purchases of Zoetis shares may be made at the discretion of management, depending on market conditions and business needs. Share repurchases may be executed through various means, including open market or privately negotiated transactions. During the first ninethree months of 2017,2020, approximately six1.8 million shares were repurchased. AsPurchases of October 1, 2017, there was approximately $1.1 billion remaining under this authorization.Zoetis shares may be made at the discretion of management, depending on market conditions and business needs. We have temporarily suspended share repurchases beginning in the second quarter of 2020.
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Off-balance sheet arrangements
In the ordinary course of business and in connection with the sale of assets and businesses, we may indemnify our counterparties against certain liabilities that may arise in connection with a transaction or that are related to activities prior to a 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 October 1, 2017,March 31, 2020, or December 31, 2016,2019, recorded amounts for the estimated fair value of these indemnifications are not significant.
New accounting standards
Recently Issued Accounting Standards Not Adopted as ofOctober 1, 2017. March 31, 2020
In August 2017, the FASBA description of recently issued an accounting standards update which amends the hedge accounting recognition and presentation requirements and allows for more hedging strategies to be eligible for hedge accounting. Recognition of periodic hedge effectiveness will no longer be required for cash flow and net investment hedges and companies may elect to perform subsequent hedge effectiveness assessments qualitatively. The update also clarifies that the changeis contained in fair value of a derivative must be recorded in the same income statement line item as the earnings effectNote 3. Accounting Standards of the hedged item and introduces additional disclosure requirements including cumulative basis adjustments for fair value hedges and the effect of hedging on individual income statement line items. The provisions of the update are effective beginning January 1, 2019 for interim and annual periods with early adoption permitted for any interim period after issuance of the update. We are currently assessing the timing of our adoption as well as the potential impact that the standard will have on our consolidated financial statements.Notes to Condensed Consolidated Financial Statements.
In March 2017, the FASB issued an accounting standards update to simplify and improve the reporting of net periodic pension benefit cost by requiring only present service cost to be presented in the same line item as other current employee compensation costs while remaining components of net periodic benefit cost would be presented within Other (income)/deductions—net outside of operations. We plan to adopt this guidance as of January 1, 2018, and do not expect that the new standard will have a significant impact on our consolidated financial statements.
In October 2016, the Financial Accounting Standards Board (FASB) issued an accounting standards update that will require the recognition of the income tax consequences of an intra-entity asset transfer, other than inventory, when the transfer occurs as opposed to when the asset is sold to an outside third party. The provisions of the new standard are effective beginning January 1, 2018, for annual and interim reporting periods. Early adoption is permitted beginning on January 1, 2017. We plan to adopt this guidance as of January 1, 2018, the required effective date, and do not expect that the new standard will have a significant impact on our consolidated financial statements.
In February 2016, the FASB issued an accounting standards update which requires lessees to recognize most leases on the balance sheet with a corresponding right of use asset. Leases will be classified as financing or operating which will drive the expense recognition pattern. For lessees, the income statement presentation and expense recognition pattern for financing and operating leases is similar to the current model for capital and operating leases, respectively. Companies may elect to exclude short-term leases. The update also requires additional disclosures that will better enable users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. We plan to adopt this guidance as of January 1, 2019, the required effective date, for annual and interim reporting periods. The new standard requires a modified retrospective adoption approach, at the beginning of the earliest comparative period presented in the financial statements. We continue to assess the potential impact that adopting this new guidance will have on our consolidated financial statements.

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In May 2014, the FASB issued an accounting standards update that outlines a new, single comprehensive model for companies to use in accounting for revenue arising from contracts with customers. This update supersedes most current revenue recognition guidance under U.S. GAAP. The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance includes a five-step model for determining how, when and how much revenue should be recognized. This update also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. We plan to adopt this guidance as of January 1, 2018, the required effective date, using the modified retrospective transition method. Under the modified retrospective method, the cumulative effect of applying the new standard will be recognized as of the date of initial application with disclosure of results under both the new and prior standards. We continue to assess the impact of the new standard on our current policies, procedures, and disclosures related to revenue recognition. Based on the work performed to date, we do not believe that the adoption will have a material impact on our consolidated financial statements. While implementation procedures are still ongoing, we have evaluated the impact on our primary revenue stream, product sales, in both the United States and our key international markets and no matters have currently been identified individually or in the aggregate that would have a material impact on the timing or amount of revenue recognition based on the provisions of the new standard.
Forward-looking statements and factors that may affect future results
This report contains “forward-looking” statements. We generally identify forward-looking statements by using words such as “anticipate,” “estimate,” “could,” “expect,” “intend,” “project,” “plan,” “predict,” “believe,” “seek,” “continue,” “outlook,” “objective”, “target”,“objective,” “target,” “may,” “might,” “will,” “should,” “can have,” “likely” or the negative version of these words or comparable words or by using future dates in connection with any discussion of future performance, actions or events.
In particular, forward-looking statements include statements relating to the potential impact of the COVID-19 pandemic, our indebtedness, our ability to make interest and principal payments on our indebtedness, our ability to satisfy the covenants contained in our indebtedness, the redemption of our senior notes, new systems infrastructure stand-up,2020 financial guidance, future actions, business plans or prospects, prospective products, product approvals or products under development, product supply disruptions, R&D costs, timing and likelihood of success, future operating or financial performance, future results of current and anticipated products and services, strategies, sales efforts, expenses, production efficiencies, production margins, anticipated timing of generic market entries, integration of acquired businesses, interest rates, tax rates, changes in tax regimes and laws, foreign exchange rates, growth in emerging markets, the outcome of contingencies, such as legal proceedings, plans related to share repurchases and dividends, our agreements with Pfizer, the expected timing and content of regulatory actions, government regulation and financial results. These statements are not guarantees of future performance, actions or events. Forward-looking statements are subject to risks and uncertainties, many of which are beyond our control, and are based on potentially inaccurate assumptions.assumptions that could prove to be inaccurate. Among the factors that could cause actual results to differ materially from past results and future plans and projected future results are the following:
emerging
•the impact of the COVID-19 pandemic on our business, suppliers, customers and workforce;
•unanticipated safety, quality or efficacy concerns about our products;
•issues with any of our top products;
•failure of our R&D, acquisition and licensing efforts to generate new products and product lifecycle innovations;
•the possible impact and timing of competing products, including generic alternatives, on our products and our ability to compete against such products;
•disruptive innovations and advances in medical practices and technologies;
•difficulties and delays in the development or commercialization of new products;
•consolidation of our customers and distributors;
•changes in the distribution channel for companion animal products;
•failure to successfully acquire businesses, license rights or products, integrate businesses, form and manage alliances or divest businesses;
•acquiring or implementing new business lines or offering new products and services;
•restrictions and bans on the use of and consumer preferences regarding antibacterials in food-producing animals;
•perceived adverse effects on human health linked to the consumption of food derived from animals that utilize our products;products or animals generally;
•adverse global economic conditions;
•increased regulation or decreased governmental support relating to the raising, processing or consumption of food-producing animals;
•fluctuations in foreign exchange rates and potential currency controls;
•changes in tax laws and regulations;
•legal factors, including product liability claims, antitrust litigation and governmental investigations, including tax disputes, environmental concerns, commercial disputes and patent disputes with branded and generic competitors, any of which could preclude commercialization of products or negatively affect the profitability of existing products;
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•failure to protect our intellectual property rights or to operate our business without infringing the intellectual property rights of others;
•product launch delays, inventory shortages, recalls or unanticipated costs caused by manufacturing problems and capacity imbalances;
•an outbreak of infectious disease carried by animals;
•adverse weather conditions and the availability of natural resources;
adverse global•the economic, conditions;political, legal and business environment of the foreign jurisdictions in which we do business;
failure•a cyber-attack, information security breach or other misappropriation of our R&D, acquisition and licensing efforts to generate new products;data;

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the possible impact of competing products, including generic alternatives, on our products and our ability to compete against such products;
•quarterly fluctuations in demand and costs;
•governmental laws and regulations affecting domestic and foreign operations, including without limitation, tax obligations and changes affecting the tax treatment by the United StatesU.S. of income earned outside the United StatesU.S. that may result from pending and possible future proposals; and
•governmental laws and regulations affecting our interactions with veterinary healthcare providers.
However, there may also be other risks that we are unable to predict at this time. These risks or uncertainties may cause actual results to differ materially from those contemplated by a forward-looking statement. Such risks and uncertainties may be amplified by the COVID-19 pandemic and its impact on the global economy and our business. You should not put undue reliance on forward-looking statements. Forward-looking statements speak only as of the date on which they are made. We undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law or by the rules and regulations of the SEC. You are advised, however, to consult any further disclosures we make on related subjects in our Form 10-Q and 8-K reports and our other filings with the SEC. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider the above to be a complete discussion of all potential risks or uncertainties.

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Item 3.Quantitative and Qualitative Disclosures About Market Risk
Item 3. Quantitative and Qualitative Disclosures About Market Risk
A significant portion of our revenue and costs are exposed to changes in foreign exchange rates. In addition, our outstanding borrowings may be subject to risk from changes in interest rates and foreign exchange rates. The overall objective of our financial risk management program is to seek to minimize the impact of foreign exchange rate movements and interest rate movements on our earnings. We manage these financial exposures through operational means and by using certain financial instruments. These practices may change as economic conditions change.
Foreign exchange risk
Our primary net foreign currency translation exposures are the Australian dollar, Brazilian real, Canadian dollar, Chinese yuan, euro, and U.K. pound. 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.
Foreign exchange risk is also managed through the use of foreign currency forward-exchange contracts. These contracts are used to offset the potential earnings effects from mostly intercompany short-term foreign currency assets and liabilities that arise from operations.
Our financial instrument holdings at October 1, 2017,March 31, 2020, were analyzed to determine their sensitivity to foreign exchange rate changes. The fair values of these instruments were determined using Level 2 inputs. The sensitivity analysis of changes in the fair value of all foreign currency forward-exchange contracts at October 1, 2017,March 31, 2020, indicates that if the U.S. dollar were to appreciate against all other currencies by 10%, the fair value of these contracts would increase by $54$8 million, and if the U.S. dollar were to weaken against all other currencies by 10%, the fair value of these contracts would decrease by $37$12 million. For additional details, see Notes to Condensed Consolidated Financial Statements— Note 8B.9C. Financial Instruments: Derivative Financial Instruments— Foreign Exchange RiskInstruments.
Interest rate risk
Our outstanding debt balances are predominantly fixed rate debt. While changes in interest rates will have no impact on the interest we pay on our fixed rate debt, interest on our $300 million aggregate principal amount of 2018 Floating Rate Senior Notes due 2021, as well as interest on our commercial paper and revolving credit facility will be exposed to interest rate fluctuations. Additionally, as of March 31, 2020, we held certain interest rate swap agreements that have the economic effect of modifying the fixed-interest obligations associated with our 3.900% 2018 senior notes due 2028, so that a portion of the fixed-rate interest payable on these senior notes effectively became variable based on LIBOR. At October 1, 2017,March 31, 2020, there waswere no commercial paper borrowings outstanding and no outstanding principal balance under our revolving credit facility.
By issuing the Floating Rate Notes and by entering into the aforementioned swap arrangements, we have assumed risks associated with variable interest rates based upon LIBOR. Changes in the overall level of interest rates affect the interest expense that we recognize in our Consolidated Statements of Income. An interest rate risk sensitivity analysis is used to measure interest rate risk by computing estimated changes in cash flows as a result of assumed changes in market interest rates. As of March 31, 2020, if LIBOR-based interest rates would have been higher by 100 basis points, the change would have increased our interest expense annually by approximately $4.5 million, as it relates to our fixed to floating interest rate swap agreements and floating-rate borrowings. See Notes to Condensed Consolidated Financial Statements— Note 8B.9. Financial Instruments: Derivative Financial Instruments— Interest Rate RiskInstruments.
Item 4.Controls and Procedures
Item 4. Controls and Procedures
Disclosure Controls and Procedures
An evaluation was carried out under the supervision and with the participation of the company's management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation as of October 1, 2017,March 31, 2020, the company's Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures are effective at a reasonable level of assurance in alerting them in a timely manner to material information required to be disclosed in our periodic reports filed with the SEC.
Changes in Internal Control over Financial Reporting
During our most recent fiscal quarter, there has not been any change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION
Item 1.Legal Proceedings
Item 1. Legal Proceedings
The information required by this Item is incorporated herein by reference to Notes to Condensed Consolidated Financial Statements—Note 15.16. Commitments and Contingencies in Part I— Item 1, of this Quarterly Report on Form 10-Q.
Item 1A.Risk Factors
Item 1A.  Risk Factors
In addition to the other information set forth in this Form 10-Q, you should carefully consider the factors discussed in the "Our Operating Environment" and "Forward-Looking Statements and Factors That May Affect Future Results" sections of the MD&A and in Part I, Item 1A. "Risk Factors," of our 20162019 Annual Report on Form 10-K, which could materially affect our business, financial condition, or future results and which are incorporated by reference herein. Set forth below are updates to certain of the risk factors disclosed in our 20162019 Annual Report on Form 10-K.
Risks related to our business and industry
RestrictionsThe COVID-19 pandemic has negatively affected the global economy, has disrupted our and bans on the useour customers', suppliers', vendors' operations and is likely to materially adversely affect our business, financial condition, results of antibacterials in food-producing animals may become more prevalent.operations and/or cash flows.
The issuenovel coronavirus (COVID-19) was identified in China in late 2019 and has spread globally. The World Health Organization has declared COVID-19 a global pandemic. The rapid spread has resulted in authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place orders and shutdowns of non-essential businesses. Even though we are currently designated as an essential business and have continued physical operations with respect to manufacturing and supply chain globally, these measures have impacted and may further impact all or portions of our workforce and operations, the operations and workforce of our customers, and those of our respective vendors and suppliers. There is no certainty that measures taken by governmental authorities will be sufficient to mitigate the risks posed by the virus, and our ability to continue to perform critical functions could be harmed.
We, and the contract manufacturing organizations (CMOs) we work with, have significant manufacturing operations throughout the world, and most, if not all, of the countries where they are located have been affected by the pandemic and have taken measures to try to contain it. There is considerable uncertainty regarding such measures and potential transfer of increased antibacterial resistance in bacteria from food-producing animals to human pathogens,future measures. In particular, we, and the causalityCMOs we work with, could be asked or ordered to perform certain activities for human health that would divert significant manufacturing and other resources away from our business. Such human health activities could also expose us to additional liability. Future restrictions on our access to or control over our manufacturing facilities or on our support operations or workforce, or similar limitations on our vendors or suppliers, and restrictions or disruptions of that transfer,transportation, such as reduced availability of air transport, port closures and increased border controls or closures, or export bans could limit our ability to meet customer demand and have a material adverse effect on our business, financial condition, results of operations and/or cash flows.
The COVID-19 pandemic also may reduce demand for our products as a result of the negative impact it has had and may continue to have on our livestock and companion animal customers. Our livestock customers have been and may continue to be challenged by voluntary or mandatory facility closures, reduced packing plant capacity, travel bans and quarantines inhibiting consumption of protein and transportation of live animals, and labor shortages negatively impacting their operations. For example, in April 2020, Smithfield Foods, Inc., JBS USA and Tyson closed significant meat processing plants after a number of their employees tested positive for COVID-19. In addition, despite recent increases in telemedicine, our companion animal customers’ businesses have been and may continue to be negatively impacted by reduced demand for their veterinary services. The resulting reduction in demand for our products, particularly if prolonged, would have a material adverse effect on our business, financial condition, results of operations and/or cash flows.
Moreover, measures imposed by governments and other authorities to try to contain the subjectCOVID-19 pandemic, such as travel bans, quarantines and restrictions on veterinary services, may impede the ability of global scientificour R&D organization to complete clinical studies required to register new products in the manner and regulatory discussion. Antibacterials referon the timeline we anticipate. If such measures continue to small molecules that can be used to treatextended, or prevent bacterial infectionsbecome increasingly restrictive in nature, current and arefuture product approvals may be delayed, which could have a sub-categorizationmaterial adverse effect on our business, financial condition, results of the products that make up our anti-infectivesoperations and/or cash flows.
The COVID-19 pandemic has also significantly increased economic and medicated feed additives portfolios. In some countries, this issuedemand uncertainty and has led to government restrictionsdisruption and bansvolatility in the global capital markets, which could increase the cost of capital and adversely impact access to capital. It is likely that the COVID-19 pandemic will cause an economic slowdown, and it is possible that it could cause a global recession or depression. In order to preserve liquidity, we may incur additional indebtedness, whether through the issuance of debt securities, drawdowns under our credit facility or otherwise. An increase in our outstanding indebtedness will result in additional interest expense. We may also seek to conserve cash by reducing or canceling future dividends or delaying capital expenditures. Risks related to negative economic conditions are described in our risk factor titled "Our business is subject to risk based on the use of specific antibacterialsglobal economic conditions" under “Risk Factors” in some food-producing animals, regardless of the route of administration (in feed or injectable). These restrictions are more prevalent in countries where animal protein is plentiful and governments are willing to take action even when there is scientific uncertainty. Our total revenue attributable to antibacterials for livestock was approximately $1.3 billionour Annual Report on Form 10-K for the year ended December 31, 2016.2019.
For example, in December 2013, the FDA announced final guidance establishing procedures for the voluntary phase-out in the United States over a three-year period of the use of medically important antibacterials in animal feed for growth promotion in food production animals (medically important antibacterials include classes that are prescribed in animal and human health). The guidance provides for continued use of antibacterials in food producing animals for treatment, control and under certain circumstances for prevention of disease, all under the supervision of a veterinarian. The FDA indicated that it took this action to help preserve the efficacy of medically important antibacterials to treat infections in humans. As part of those efforts, stricter regulations governing the administration of medically important antibiotics have recently come into effect. As of January 1, 2017, the use of medically important antibiotics in the water or feed of food production animals now requires written authorization by a licensed veterinarian under the FDA guidance and the related rule known as the Veterinary Feed Directive. As a result of the implementation by livestock producers of the FDA’s guidance and the Veterinary Feed Directive, we have seen a negative impact on revenue in the U.S. on certain medicated feed additive products for both cattle and swine in the first nine months of 2017 and expect this trend to continue for the remainder of 2017. If these regulations continue to negatively affect our U.S. cattle and swine medicated feed additive revenue, our future operating results could be negatively impacted.
In addition, in October 2014, the French Parliament passed a law that prohibits rebates and discounts on antibiotics and requires the reporting of antibiotics sold to and agreements entered into with certain animal healthcare providers (including veterinarians, veterinary schools, pharmacists and students). The Parliament indicated that the law is in response to a government initiative aimed at fighting antimicrobial resistance in animals and reducing the use of certain categories of antibiotics by 25% (compared to 2013) by December 31, 2016.
We cannot predict whether antibacterial resistance concerns will result in additional restrictions or bans, expanded regulations or public pressure to discontinue or reduce use of antibacterials in food-producing animals, any of which could materially adversely affect our operating results and financial condition.
Generic products may be viewed as more cost-effective than our products.
We face competition from products produced by other companies, including generic alternatives to our products. We depend on patents and regulatory data exclusivity periods to provide us with exclusive marketing rights for some of our products. Patents for individual products expire at different times based on the date of the patent filing (or sometimes the date of patent grant) and the legal term of patents in the countries where such patents are obtained. The extent of protection afforded by our patents varies from country to country and is limited by the scope of the claimed subject matter of our patents, the term of the patent and the availability and enforcement of legal remedies in the applicable country. As a result, we may face competition from lower-priced generic alternatives toAdditionally, many of our products. Generic competitorsworkforce are becoming more aggressive in terms of launching at risk before patent rights expire and, because of their pricing, are an increasing percentage of overall animal health sales in certain regions. For example, several companies have launched generic versions of our Rimadyl® chewable product. As a result, sales of our Rimadyl chewable product in the U.S. decreased by approximately 6% in 2016. If animal health customers increase their use of new or existing generic products, our operating results and financial condition could be materially adversely affected.
Over the next several years, several of our products' patents will expire. The active ingredient of Draxxin®, tulathromycin, is covered by both compound and formulation patents in the United States, Europe, Canada, Australia and other key markets, with terms that expire between May 2019 and January 2021 in the United States, between November 2018 and November 2020 in Europe, and between May 2018 and November 2020 in Canada and Australia. Several patents covering the ceftiofur antibiotic product line (Excede®) began expiring in the United States in 2015. However, various formulation and use patents relevant to the product line extend through to 2024. The compound patent for the

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selamectin, the active ingredient in our parasiticide Revolution®, expired in 2014. Again, we have process and formulation patents covering this product which expire in important markets in 2018 and 2019, respectively. The ceftiofur product line and our next three top selling products, Revolution, Draxxin and Apoquel®, contributed approximately 25% of our revenue in 2016. In addition, the patent for the active ingredient of Convenia® has expired, however, there are formulation patents relevant to the product line which expire between November 2022 and September 2023. The patent for the active ingredient of Cerenia® has expired in Europe and other countries but does not expire in the United States until December 2017. However, there are formulation patents relevant to the product line which expire between May 2020 and January 2027. A generic version of Cerenia has recently been registered in Europe. The patent relating to the formulation of Orbeseal® expires in December 2017. Zoetis typically enforces all of its patents.
Risks related to manufacturing
We rely on third parties to provide us with materials and services, and are subject to increased labor and material costs and potential disruptions in supply.
The materials used to manufacture our products may be subject to availability constraints and price volatility caused by changes in demand, weather conditions, supply conditions, government regulations, economic climate and other factors. In addition, labor costs may be subject to volatility caused by the supply of labor, governmental regulations, economic climate and other factors. Increases in the demand for, availability or the price of, materials used to manufacture our products and increases in labor costs could increase the costs to manufacture our products. We may not be able to pass all or a material portion of any higher material or labor costs on to our customers, which could materially adversely affect our operating results and financial condition.
In addition, certain third-party suppliers are the sole or exclusive source of certain materials and services necessary for production of our products. We may be unable to meet demand for certain of our products if any of our third-party suppliers cease or interrupt operations, fail to renew contracts with us or otherwise fail to meet their obligations to us.
Risks related to our international operations
A significant portion of our operations are conducted in foreign jurisdictions and are subject to the economic, political, legal and business environments of the countries in which we do business.
Our international operations could be limited or disrupted by any of the following:
volatility in the international financial markets;
compliance with governmental controls;
difficulties enforcing contractual and intellectual property rights;
parallel trade in our products (importation of our products from European Union countries where our products are sold at lower prices into European Union countries where the products are sold at higher prices);
compliance with a wide variety of laws and regulations, such as the FCPA and similar non-U.S. laws and regulations;
compliance with foreign labor laws;
burdens to comply with multiple and potentially conflicting foreign laws and regulations, including those relating to environmental, health and safety requirements;
changes in laws, regulations, government controls or enforcement practices with respect to our business and the businesses of our customers, including the imposition of limits on our profitability (e.g., the Venezuelan Law on Fair Pricing);
political and social instability, including crime, civil disturbance, terrorist activities and armed conflicts;
trade restrictions and restrictions on direct investments by foreign entities, including restrictions administered by the Office of Foreign Assets Control of the U.S. Department of Treasury (OFAC) and the European Union, in relation to our products or the products of farmers and other customers (e.g., restrictions on the importation of agricultural products from the European Union to Russia);
government limitations on foreign ownership;
government takeover or nationalization of business;
changes in tax laws, challenges brought against our incentive tax rulings, and tariffs;
imposition of anti-dumping and countervailing duties or other trade-related sanctions;
costs and difficulties in staffing, managing and monitoring international operations;
longer payment cycles and increased exposure to counterparty risk; and
additional limitations on transferring personal information between countries or other restrictions on the processing of personal information.
In addition, international transactions may involve increased financial and legal risks due to differing legal systems and customs. Compliance with these requirements may prohibit the import or export of certain products and technologies or may require us to obtain a license before importing or exporting certain products or technology. A failure to comply with any of these laws, regulations or requirements could result in civil or criminal legal proceedings, monetary or non-monetary penalties, or both, disruptions to our business, limitations on our ability to import and export products and services, and damage to our reputation. In addition, variations in the pricing of our products between jurisdictions may

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result in the unauthorized importation or unauthorized re-importation of our products between jurisdictions and may also result in the imposition of anti-dumping and countervailing duties or other trade-related sanctions. While the impact of these factors is difficult to predict, any of them could materially adversely affect our operating results and financial condition. Changes in any of these laws, regulations or requirements, or the political environment in a particular country, may affect our ability to engage in business transactions in certain markets, including investment, procurement and repatriation of earnings.
In June 2016, voters in the United Kingdom approved an advisory referendum to withdraw from the European Union, commonly referred to as "Brexit." This referendum has created political and economic uncertainty, particularly in the United Kingdom and the European Union, and this uncertainty may persist for years. A withdrawal could significantly disrupt the free movement of goods, services, and people between the United Kingdom and the European Union, and result in increased legal and regulatory complexities, as well as potential higher costs of conducting business in Europe. The United Kingdom's vote to exit the European Union could also result in similar referendums or votes in other European countries in which we do business. The uncertainty surrounding the terms of the United Kingdom's withdrawal and its consequences could adversely impact consumer and investor confidence, and could affect sales or regulation of our products. Any of these effects, among others, could materially and adversely affect our business, results of operations, and financial condition.
Finally, there has been recent political instability in Catalonia, which depending on the outcome could impact our R&D and manufacturing operations in Olot, Spain.
Risks related to tax matters
The Company could be subject to changes in its tax rates, the adoption of new U.S. or foreign tax legislation or exposure to additional tax liabilities.
The multinational nature of our business subjects us to taxation in the United States and numerous foreign jurisdictions. Due to economic and political conditions, tax rates in various jurisdictions may be subject to significant change. The company’s future effective tax rates could be affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, or changes in tax laws or their interpretation.
For example, the European Commission opened formal investigations to examine whether decisions by the tax authorities in certain European countries, including Belgium, comply with European Union rules on state aid. In the case of Belgium, the European Commission concluded on January 11, 2016, that the excess profits ruling violates the European Union’s state aid rules. The impact of this conclusion was a net tax charge of approximately $35 million recorded in 2016. This net charge relates to the Belgium government's recovery of benefits for the periods 2013 through 2015 offset by the revaluation of the company’s deferred tax assets and liabilities using the rates expected to be in place at the time of the reversal and without consideration of implementation of any future operational changes, and does not include any benefits associated with a successful appeal of the decision.
In addition, on June 20, 2016, the Member States of the European Union adopted the anti-tax-avoidance directive proposed on January 28, 2016, which is designed to provide uniform implementation of Base Erosion and Profits Shifting measures and other minimum taxation standards across Member States. The Member States are required to implement all components of the directive by January 1, 2020. Once enacted by the Member States, the results of the directive could have an impact on our effective tax rate. In October 2016, the European Union also introduced a proposal to impose a uniform set of rules on taxing corporate profits, known as the Common Consolidated Corporate Tax Base. This proposal is in its early stages but may have an impact to our effective tax rate.
The new administration in the United States has called for comprehensive tax reform in the U.S. which, among other things, might change certain U.S. tax rules impacting the way U.S. based multinationals are taxed on foreign income. Changes to the tax system in the United States, particularly the potential mandatory deemed repatriation tax, could have a material impact to our financial statements. As of October 2017, the cumulative amount of non-U.S. undistributed earnings was approximately $4.5 billion, which includes an allocation of non-U.S. undistributed earnings from Pfizercurrently working remotely as a result of the separationpandemic. An extended period of remote work arrangements could introduce operational risks, including, but not limited to, risks associated with information technology and systems, including service interruptions, misappropriation of data, or breaches of security, any of which could have a material adverse effect on June 24, 2013. our business. Working outside of the typical work environment may also introduce additional complexity or inefficiency into our normal processes for key areas like the preparation of financial statements or marketing and sales, which could cause negatively impact our business.

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The potentialultimate magnitude of the COVID-19 pandemic, including the extent of its impact on our financial and operational results, which is likely to be material, will be determined by the length of time that the pandemic continues, its effect on the demand for our products and services, particularly due to impacts on our downstream customers, and on our supply chain, as well as the effect of governmental regulations imposed in response to the pandemic. We cannot at this time predict the full impact of the mandatory deemed repatriation proposalCOVID-19 pandemic, but we anticipate that the COVID-19 pandemic is uncertain as the direction of comprehensive tax reform is being contemplated under the new administration in the United States. At this time, we are properly reflecting the provision for taxes on income using all current enacted global tax laws in every jurisdiction in which we operate.
On March 29, 2017, United Kingdom (UK) Prime Minister Theresa May formally notified the European Council of the UK’s intentionlikely to withdraw from the European Union, commonly referred to as “Brexit”, under Article 50 of the Treaty of Lisbon. The notice begins the two-year negotiation period to establish the withdrawal terms. If no agreement is reached after two years, the UK’s separation still becomes effective, unless the remaining European Union members unanimously agree to an extension. At this time, the impact of Brexit to our effective tax rate is uncertain.
In addition, our effective tax rate is subject to potential risks that various taxing authorities may challenge the pricing of our cross-border arrangements and subject us to additional tax, adversely impacting our effective tax rate and our tax liability. The company is also subject to the examination of its tax returns and other tax matters by the Internal Revenue Service and other tax authorities and governmental bodies. The company regularly assesses the likelihood of an adverse outcome resulting from these examinations to determine the adequacy of its provision for taxes. There can be no assurance as to the outcome of these examinations. If the company’s effective tax rates were to increase, particularly in the United States or other material foreign jurisdictions, or if the ultimate determination of the company’s taxes owed is for an amount in excess of amounts previously accrued, the company’s operating results, cash flows and financial condition could be adversely affected.

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Risks related to our indebtedness
We have substantial indebtedness.
We have a significant amountimpact on our business, financial condition, results of indebtedness,operations and/or cash flows in the second quarter of 2020, which may also continue into the third quarter and beyond. The impact of the COVID-19 pandemic may also exacerbate other risks discussed in the Risk Factors section of our Annual Report on Form 10-K for the year ended December 31, 2019, any of which could materially adversely affect our operating results, financial conditionhave a material effect on us. This situation is changing rapidly and liquidity. Asadditional impacts may arise that we are not aware of October 1, 2017, we had approximately $5.75 billion of total unsecured indebtedness outstanding. In addition, we have entered into an agreement for a five-year revolving credit facility and a commercial paper program each with a capacity of up to $1.0 billion. While we currently do not have any amounts drawn under the credit facility nor any commercial paper issued under the commercial paper program, we may incur indebtedness under these arrangements in the future.currently.
We may incur substantial additional debt from time to time to finance working capital, capital expenditures, investments or acquisitions, or for other purposes. If we do so, the risks related to our high level of debt could intensify. Specifically, our high level of debt could have important consequences, including:
making it more difficult for us to satisfy our obligations with respect to our debt;
limiting our ability to obtain additional financing to fund future working capital, capital expenditures, business development or other general corporate requirements, including dividends;
increasing our vulnerability to general adverse economic and industry conditions;
exposing us to the risk of increased interest rates as certain of our borrowings are and may in the future be at variable rates of interest;
limiting our flexibility in planning for and reacting to changes in the animal health industry;
placing us at a competitive disadvantage to other, less leveraged competitors;
impacting our effective tax rate; and
increasing our cost of borrowing.
In addition, the instruments governing our indebtedness contain restrictive covenants that will limit our ability to engage in activities that may be in our long-term best interest. For example, our credit facility contains a financial covenant requiring us to not exceed a maximum total leverage ratio and covenants that, among other things, limit or restrict our and our subsidiaries' ability, subject to certain exceptions, to incur liens, merge, consolidate or sell, transfer or lease assets, transact with affiliates and incur priority indebtedness. Our failure to comply with such covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all our debt.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information with respect to the shares of the company’s common stock repurchased during the quarter ended
October 1, 2017:March 31, 2020:
Issuer Purchases of Equity Securities
Total Number of Shares Purchased(a)
Average Price Paid Per ShareTotal Number of Shares Purchased as Part of Publicly Announced ProgramsApproximate Dollar Value of Shares that May Yet Be Purchased Under Plans or Programs
January 1 - January 31, 2020523,931$136.65509,780$1,604,777,731
February 1 - February 29, 2020781,726$140.49571,219$1,525,290,137
March 1 - March 31, 2020803,879$126.00800,269$1,424,104,390
2,109,536$134.021,881,268$1,424,104,390
(a)  The company repurchased 228,268 shares during the three-month period ended March 31, 2020, that were not part of the publicly announced share repurchase authorization. These shares were reacquired from employees to satisfy tax withholding requirements on the vesting of restricted shares from equity-based awards.
 Issuer Purchases of Equity Securities
 
Total Number of Shares Purchased(a)
Average Price Paid Per Share
Total Number of Shares Purchased as Part of Publicly Announced Programs(b)
Approximate Dollar Value of Shares that May Yet Be Purchased Under Plans or Programs
July 3 - July, 30, 2017549,823$62.67548,880$1,215,819,371
July 31 - August, 27, 2017688,449$61.35687,934$1,173,604,800
August 28 - October 1, 2017763,912$63.57761,087$1,125,202,790
 2,002,184$62.561,997,901$1,125,202,790
(a)
The company repurchased 4,283 shares during the three-month period ended October 1, 2017, that were not part of the publicly announced share repurchase authorization. These shares were reacquired from employees to satisfy tax withholding requirements on the vesting of restricted shares from equity-based awards.
(b)
In December 2016, the company's Board of Directors authorized the repurchase of up to $1.5 billion of our outstanding common stock.
Item 3.Defaults Upon Senior Securities
Item 3. Defaults Upon Senior Securities
None
Item 4.Mine Safety Disclosures
Item 4. Mine Safety Disclosures
None
Item 5.Other Information
Item 5. Other Information
None
Item 6. Exhibits
Item 6.Exhibits
Restated Certificate of Incorporation of the Registrant, effective as of May 13, 2014 (incorporated by reference to
Exhibit 3.1 to Zoetis Inc.'s Quarterly Report on Form 10-Q filed on November 10, 2014 (File No. 001-35797))Accountants' Acknowledgment
By-laws of the Registrant, amended and restated as of February 19, 2016 (incorporated by reference to Exhibit 3.2
to Zoetis Inc.'s 2015 Annual Report on Form 10-K filed on February 24, 2016 (File No. 001-35797))
Exhibit 12
Computation of Ratio of Earnings to Fixed Charges
Exhibit 15
Accountants' Acknowledgment
Exhibit 31.1
Chief Executive Officer–Certification pursuant to Sarbanes-Oxley Act of 2002 Section 302
Chief Financial Officer–Certification pursuant to Sarbanes-Oxley Act of 2002 Section 302
Chief Executive Officer–Certification pursuant to Sarbanes-Oxley Act of 2002 Section 906
Chief Financial Officer–Certification pursuant to Sarbanes-Oxley Act of 2002 Section 906
EX-101.INSInline XBRL INSTANCE DOCUMENT
Inline XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT
Inline XBRL TAXONOMY EXTENSION CALCULATION LINKBASE DOCUMENT
LABELSInline XBRL TAXONOMY EXTENSION LABEL LINKBASE DOCUMENT
Inline XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE DOCUMENT
Inline XBRL TAXONOMY EXTENSION DEFINITION LINKBASE DOCUMENT
EX-104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)


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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Zoetis Inc.
Zoetis Inc.
November 2, 2017May 6, 2020By:/S/ JUAN RAMÓN ALAIXKRISTIN C. PECK
Juan Ramón AlaixKristin C. Peck
Chief Executive Officer and Director
November 2, 2017May 6, 2020By:/S/ GLENN DAVID
Glenn David
Executive Vice President and
Chief Financial Officer



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