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•	economic differences, such as standards of living in developed markets as compared to emerging markets;

•	cultural differences, such as dietary preferences for different animal proteins, pet ownership preferences and pet care standards;

•	epidemiological differences, such as the prevalence of certain bacterial and viral strains and disease dynamics;

•	treatment differences, such as utilization of different types of medicines and vaccines, as well as the pace of adoption of new technologies;

•	environmental differences, such as seasonality, climate and the availability of arable land and fresh water; and

•	regulatory differences, such as standards for product approval and manufacturing.

•	United States with revenue of $2,877 million, or 49% of total revenue for the year ended December 31, 2018; and

•	International with revenue of $2,890 million, or 50% of total revenue for the year ended December 31, 2018.

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•	vaccines: biological preparations that help prevent diseases of the respiratory, gastrointestinal and reproductive tracts or induce a specific immune response;

•	other pharmaceutical products: allergy and dermatology, pain and sedation, antiemetic, reproductive, and oncology products;

•	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;

•	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.

•	Apoquel®, the first Janus kinase inhibitor for use in veterinary medicine, was approved for the control of pruritus associated with allergic dermatitis and the control of atopic dermatitis in dogs at least 12 months of age. Since January 2014, we launched Apoquel in key markets including the United States, Europe, Japan, Brazil, and Australia;

•	Core EQ Innovator™, the first and only vaccine for horses to contain all five core equine disease antigens - West Nile, Eastern and Western Equine encephalomyelitis, tetanus and rabies - in one combination, was approved in the United States in 2018;

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Cytopoint®, the first canine monoclonal antibody to help reduce the clinical signs of atopic dermatitis (such as itching) in dogs of any age, was licensed in the United States in 2016 (and was later granted an expanded indication to treat allergic dermatitis in 2018). Since 2016, the product has been approved in major markets including Canada, the European Union, New Zealand, Australia, Brazil and Mexico. An injection given once every four to eight weeks, Cytopoint neutralizes interleukin - 31, a protein that has been demonstrated to trigger itching in dogs;

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Fostera® PCV MH was introduced in November 2013 in the United States and approved in the European Union in 2015 and Australia in 2017. It was developed to help protect pigs from porcine circovirus-associated disease (PCVAD) and enzootic pneumonia caused by M. hyopneumoniae (M. hyo). The one-bottle formulation of Fostera PCV MH allows the convenience of a one-dose program or the flexibility of a two-dose program. The Fostera franchise also includes Fostera/Suvaxyn® PRRS, which was approved in the United States in 2015 and in Taiwan, Vietnam and European Union countries in 2017. This vaccine offers protection against both the respiratory and reproductive forms of disease caused by porcine reproductive and respiratory syndrome (PRRS) virus. In 2018, Fostera Gold PCV MH was approved in the United States and Canada. This is the only vaccine to contain two PCV2 genotypes and long-lasting M. hyo coverage;

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Simparica® (sarolaner) Chewables, a monthly chewable tablet for dogs to control fleas and ticks, was approved in the European Union and New Zealand in 2015, the United States, Canada, Australia, and Brazil (Simparic) in 2016, and Japan along with multiple additional European, Latin American and Asia Pacific markets in 2017. Building on this franchise, in 2017, Zoetis received European Commission approval for Stronghold® Plus (selamectin/sarolaner), a topical combination product that treats ticks, fleas, ear mites, lice and gastrointestinal worms and prevents heartworm disease in cats. In 2018, this product was approved in the United States, Japan and Canada (Revolution® Plus);

•	Vanguard® is a market leading vaccine line for dogs intended to help prevent a range of diseases. Since 2016, Zoetis has added new and innovative enhancements to its Vanguard line with Vanguard crLyme, Vanguard Rapid Resp Intranasal, Vanguard B Oral, and Vanguard CIV H3N2/H3N8.

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(a)	In June 2018, Zoetis acquired a manufacturing facility in Tallaght, Ireland where our teat sealant products are manufactured.

(b)	In July 2018, Zoetis completed the acquisition of Abaxis, a leading global provider of veterinary point-of-care diagnostic instruments.

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•	Establish and implement harmonized technical requirements for the registration of veterinary medicinal products in the VICH regions, which meet high quality, safety and efficacy standards and minimize the use of test animals and costs of product development.

•	Provide a basis for wider international harmonization of registration requirements through the VICH Outreach Forum.

•	Monitor and maintain existing VICH guidelines, taking particular note of the ICH work program and, where necessary, update these VICH guidelines.

•	Ensure efficient processes for maintaining and monitoring consistent interpretation of data requirements following the implementation of VICH guidelines.

•	By means of a constructive dialogue between regulatory authorities and industry, provide technical guidance enabling response to significant emerging global issues and science that impact on regulatory requirements within the VICH regions.

•	environmental-related capital expenditures - approximately $5 million; and

•	other environmental-related expenditures - approximately $15 million.

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•	the failure of us or any of our vendors or suppliers, including logistical service providers, to comply with applicable regulations and quality assurance guidelines, including any changes to Good Manufacturing Practices (GMP);

•	mislabeling;

•	construction delays;

•	equipment malfunctions;

•	shortages of materials;

•	labor problems;

•	delays in receiving any required governmental authorizations, including as a result of any prolonged shutdown of the U.S. government;

•	natural disasters;

•	power outages;

•	criminal and terrorist activities;

•	changes in manufacturing production sites and limits to manufacturing capacity due to regulatory requirements, changes in types of products produced, shipping distributions or physical limitations; and

•	the outbreak of any highly contagious diseases near our production sites.

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•	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;

•	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 and tariffs;

•	imposition of anti-dumping and countervailing duties or other trade-related sanctions;

•	costs and difficulties and compliance risks in staffing, managing and monitoring international operations, including the use of overseas third-party goods and service providers;

•	corruption risk inherent in business arrangements and regulatory contacts with foreign government entities;

•	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.

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•	pay monetary damages;

•	obtain a license in order to continue manufacturing or marketing the affected products, which may not be available on commercially reasonable terms, or at all; or

•	stop activities, including any commercial activities, relating to the affected products, which could include a recall of the affected products and/or a cessation of sales in the future.

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•	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

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•	increasing our cost of borrowing.

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•	our operating performance and the performance of our competitors;

•	our or our competitors' press releases, other public announcements and filings with the SEC regarding new products or services, enhancements, significant contracts, acquisitions or strategic investments;

•	changes in earnings estimates or recommendations by securities analysts, if any, who cover our common stock;

•	changes in our investor base;

•	failures to meet external expectations or management guidance;

•	fluctuations in our financial results or the financial results of companies perceived to be similar to us;

•	changes in our capital structure or dividend policy, future issuances of securities, sales of large blocks of common stock by our stockholders or the incurrence of additional debt;

•	reputational issues;

•	changes in general economic and market conditions in any of the regions in which we conduct our business;

•	the arrival or departure of key personnel;

•	the actions of speculators and financial arbitrageurs (such as hedge funds);

•	changes in applicable laws, rules or regulations and other dynamics; and

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•	other developments or changes affecting us, our industry or our competitors.

•	a Board of Directors that is divided into three classes with staggered terms;

•	rules regarding how our stockholders may present proposals or nominate directors for election at stockholder meetings;

•	the right of our Board of Directors to issue preferred stock without stockholder approval; and

•	limitations on the right of stockholders to remove directors.

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Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

(a)	The company repurchased 27,429 shares during the three-month period ended December 31, 2018, that were not part of the publicly announced share repurchase authorization. These shares were purchased from employees to satisfy tax withholding requirements on the vesting of restricted shares from equity-based awards.

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(a)	This section is not “soliciting material,” is not deemed “filed” with the SEC and is not to be incorporated by reference in any filing of Zoetis under the Securities Act of 1933, as amended, or the Exchange Act whether made before or after the date hereof and irrespective of any general incorporation language contained in any such filing.

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(a)	Starting in August 2018, includes the acquisition of Abaxis. Starting in February 2015, includes the acquisition of certain assets from Abbott Animal Health and starting in November 2015, includes the acquisition of Pharmaq.

(b)

Adjusted net income (a non-GAAP financial measure) is defined as reported net income attributable to Zoetis excluding purchase accounting adjustments, acquisition-related costs and certain significant items. Management uses adjusted net income, among other factors, to set performance goals and to measure the performance of the overall company, as described in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP financial measures and Adjusted net income. We believe that investors’ understanding of our performance is enhanced by disclosing this performance measure. Reconciliations of U.S. GAAP reported net income attributable to Zoetis to non-GAAP adjusted net income for the years ended December 31, 2018, 2017 and 2016 are provided in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Adjusted net income. 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.

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(a)	Adjusted net income is a non-GAAP financial measure. See the Non-GAAP financial measures and Adjusted net income sections of this MD&A for more information.

•	human population growth and increasing standards of living, particularly in many emerging markets;

•	increasing demand for improved nutrition, particularly animal protein;

•	natural resource constraints, such as scarcity of arable land, fresh water and increased competition for cultivated land, resulting in fewer resources that will be available to meet an increasing demand for animal protein;

•	increasing urbanization; and

•	increased focus on food safety and food security.

•	economic development and related increases in disposable income, particularly in many emerging markets;

•	increasing pet ownership;

•	companion animals living longer;

•	increasing medical treatment of companion animals; and

•	advances in companion animal medicines, vaccines and diagnostics.

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•	bring innovative new products and services to market — We seek to deliver more innovations across core areas of vaccines, pharmaceuticals, diagnostics and the complementary spaces we have been adding over time such as genetics, biodevices, digital and data analytics;

•	maintain a diversified, market-leading portfolio — We believe our diversity across species, geographies and therapeutic areas balances economic cycles and regulatory changes, while minimizing dependency in any one area;

•	maximize opportunities in fast-growing international markets — We seek to maximize our presence where economic development is driving increased demand for animal protein and increased demand for and spending on companion animals. We intend to capitalize on investments we have made in high-growth markets such as China and Brazil;

•	develop more data analytics and digital solutions — We believe that healthcare insights enabled by data and digital technology and complemented with our portfolio of vaccines, therapeutics, and diagnostics will be critical in enhancing care for animals and improving livestock productivity;

•	support our customers’ direct engagement with pet owners and consumers — We believe that we have an important role to play in supporting our veterinary customers’ engagement with pet owners, who are increasingly influencing care decisions for their animals, and consumers, who are demanding more transparency about where their food comes from and how it is produced; and

•	enhance our capabilities across the continuum of care — We are focused on providing greater value to our customers through the integration of our portfolio that spans from disease prediction and prevention to detection and treatment.

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for sales returns, we perform calculations in each market that incorporate the following, as appropriate: local returns policies and practices; returns as a percentage of revenue; an understanding of the reasons for past returns; estimated shelf life by product; an estimate of the amount of time between shipment and return or lag time; and any other factors that could impact the estimate of future returns, product recalls, discontinuation of products or a changing competitive environment; and

•	for revenue incentives, we use our historical experience with similar incentives programs to estimate the impact of such programs on revenue.

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•	a significant adverse change in the extent or manner in which an asset is used. For example, restrictions imposed by the regulatory authorities could affect our ability to manufacture or sell a product, and

•	a projection or forecast that demonstrates losses or reduced profits associated with an asset. This could result, for example, from the introduction of a competitor’s product that results in a significant loss of market share or the inability to achieve the previously projected revenue growth, or from the lack of acceptance of a product by customers.

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(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.

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•	price growth of approximately 3%;

•	increased volume from in-line products of approximately 3%, including 2% from our key dermatology products;

•	the acquisition of Abaxis which contributed approximately 2%; and

•	volume growth from new products of approximately 2%.

•	increased sales of our dermatology portfolio and new product launches, which contributed approximately 7%; and

•	growth of our in-line products, which contributed approximately 2%, of which volume comprised 1% and price comprised 1%,

•	product rationalizations as part of the operational efficiency initiative, which resulted in a decline of approximately 1%.

•	continued cost improvements and efficiencies in our manufacturing network,

•	the inclusion of Abaxis, including charges reflecting fair value adjustments to the inventory acquired; and

•	unfavorable foreign exchange.

•	a decrease in inventory obsolescence, scrap and other charges;

•	the nonrecurrence of charges reflecting fair value adjustments to inventory related to the acquisition of Pharmaq; and

•	favorable product mix,

•	an increase in manufacturing and supply costs; and

•	unfavorable foreign exchange.

•	the inclusion of Abaxis;

•	an increase in certain compensation-related expenses; and

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•	higher professional services and consulting charges.

•	the nonrecurrence of additional costs related to becoming an independent public company;

•	a reduction in marketing and general and administrative expense driven by our operational efficiency initiative; and

•	a reduction in consulting charges relating to our operational efficiency initiative,

•	higher advertising and promotional spending associated with new products and Apoquel®.

•	increased spending driven by project investments;

•	an increase in certain compensation-related expenses;

•	the inclusion of Abaxis; and

•	unfavorable foreign exchange.

•	the inclusion of a veterinary diagnostics business acquired in 2016 and an Irish biologic therapeutics company in 2017,

•	a reduction in spending driven by our operational efficiency initiative.

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•	transaction costs, integration costs and employee termination costs incurred as a result of the acquisition of Abaxis in July 2018; and

•	employee termination costs incurred in 2018 as a result of initiatives to better align our organizational structure in Europe.

•	employee termination costs incurred in 2017 as a result of (i) the acquisition of an Irish biologic therapeutics company in the third quarter of 2017, (ii) initiatives to better align our organizational structure in Europe, and (iii) our operational efficiency initiative and supply network strategy initiative; and

•	integration costs incurred in 2017 as a result of (i) the acquisition of an Irish biologic therapeutics company in the third quarter of 2017, and (ii) the acquisition of Pharmaq in 2015.

•	a gain of $42 million in 2018 on the divestiture of certain agribusiness products within our International segment;

•	higher interest income in 2018 due to higher cash balances; and

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•	a net gain of $18 million in 2018 related to the relocation of a manufacturing site in China.

•	a net loss of $11 million in 2017 related to sales of certain manufacturing sites and products, including the disposal of our manufacturing site in Guarulhos, Brazil, in the fourth quarter of 2017, compared with a net gain of $26 million in 2016 related to sales of certain manufacturing sites and products; and

•	lower royalty income,

•	lower foreign currency losses, primarily driven by costs related to hedging and exposures to certain emerging market currencies; and

•	income of $8 million in 2017 due to an insurance recovery related to commercial settlements in Mexico, as well as a favorable patent infringement settlement, compared with a charge of $14 million in 2016 related to a commercial settlement in Mexico.

•	the reduction of the U.S. federal corporate income tax rate, from 35% to 21%, effective January 1, 2018, pursuant to the Tax Act;

•	a $45 million net tax benefit recorded in 2018, associated with a measurement-period adjustment to the one-time mandatory deemed repatriation tax on the company’s undistributed non-U.S. earnings pursuant to the Tax Act;

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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, operating fluctuations in the normal course of business, the impact of non-deductible items, and the extent and location of other income and expense items, such as gains and losses on asset divestitures;

•	a $23 million discrete tax benefit recorded in 2018 related to the favorable impact of certain tax accounting method changes;

•	an additional $6 million discrete tax benefit related to the excess tax benefits for share-based compensation payments; and

•	a $5 million discrete tax benefit recorded in 2018 related to a remeasurement of deferred tax assets and liabilities as a result of a change in non-U.S. statutory tax rates.

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a $212 million net discrete provisional tax expense recorded in the fourth quarter of 2017, related to the impact of the Tax Act enacted on December 22, 2017, including a one-time mandatory deemed repatriation tax, partially offset by a net tax benefit related to the remeasurement of the deferred tax assets and liabilities, as of the date of enactment, due to the reduction in the U.S. federal corporate tax rate;

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•	changes in valuation allowances and resolution of other tax items; and

•	tax expense related to changes in uncertain tax positions, see Notes to Consolidated Financial Statements— Note 8D. Tax Matters: Tax Contingencies,

•	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;

•	a $15 million discrete tax benefit recorded in the fourth quarter of 2017 related to the effective settlement of certain issues with U.S. and non-U.S. tax authorities;

•	an additional $2 million discrete tax benefit related to the excess tax benefits for share-based compensation payments; and

•	a $3 million discrete tax benefit recorded in the first quarter of 2017 related to a remeasurement of deferred tax assets and liabilities as a result of a change in non-U.S. statutory tax rates.

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•	Companion animal revenue growth was driven primarily by increased sales of the key dermatology portfolio, the acquisition of Abaxis as well as new products including Simparica®. Growth was tempered by lower sales of certain in-line products due to anticipated competition.

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Livestock revenue increased primarily due to higher sales across species, with growth in poultry, swine and cattle products. For poultry, growth was driven by increased sales of alternatives to antibiotic medicated feed additive products. Swine growth was primarily due to new product launches and promotional activities. Cattle growth was mainly from our premium products, partially offset by unfavorable market conditions in dairy.

•	Companion animal revenue growth resulted primarily from increased sales across multiple international markets of the key dermatology portfolio, in addition to new products, primarily Simparica®, and the acquisition of Abaxis.

•	Livestock growth was driven primarily by increased sales of cattle, poultry, swine and fish products. Growth in cattle was due to biological and parasiticide products. Growth in poultry sales was driven by increased sales of vaccines and medicated feed additives. Swine growth was primarily due to new vaccine products. Fish growth was due to increased sales in the vaccines portfolio.

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Livestock revenue increased primarily due to cattle and poultry products, partly offset by swine products. Cattle experienced growth across our portfolio, while poultry growth was due to increased sales of medicated feed additives. Certain medicated feed additive products for both cattle and swine were negatively impacted by livestock producers’ implementation of the Veterinary Feed Directive. In addition, swine declined due to vaccine competition.

•	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 certain products into expanded distribution relationships, as well as lower sales due to competition for our pain and anti-infective products.

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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 swine was driven by new product launches primarily in Europe and Asia, as well as growth in China. Growth of fish products was driven by new products and in-line product growth across various markets. Livestock growth was partially offset by product rationalizations, primarily impacting poultry and swine product sales.

•	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 in China due to field force expansions and increasing medicalization rates.

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•	Corporate, which includes certain costs associated with business 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;

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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 business technology and finance that specifically support our global manufacturing operations; (iii) certain supply chain and global logistics costs; and (iv) certain procurement costs.

•	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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(a)

The effective tax rate on adjusted pretax income is 18.8%, 28.2% and 29.9% for full year 2018, 2017 and 2016, respectively. The lower effective tax rate in 2018 compared to 2017 is primarily due to (i) the reduction of the U.S. federal corporate income tax rate from 35% to 21%, effective January 1, 2018, pursuant to the Tax Act, (ii) changes in the jurisdictional mix of earnings, which includes the impact of the location of earnings as well as repatriation costs, (iii) a $23 million discrete tax benefit recorded in 2018 related to the favorable impact of certain tax accounting method changes, and (iv) an additional $6 million discrete tax benefit related to the excess tax benefits for share-based compensation payments. The lower effective tax rate in 2017 compared to 2016 is primarily due to changes in the jurisdictional mix of earnings, which includes the impact of the location of earnings as well as repatriation costs, a $15 million discrete tax benefit recorded in the fourth quarter of 2017 related to the effective settlement of certain issues with U.S. and non-U.S. tax authorities, and an additional $2 million discrete tax benefit related to the excess tax benefits for share-based compensation payments.

(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 deferred stock units.

(b)	EPS amounts may not add due to rounding.

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(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 Acquisition-related costs also includes:

	Income taxes in Certain significant items also includes:

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(d)	Represents employee termination costs related to the 2018 acquisition of Abaxis and the 2017 acquisition of an Irish biologic therapeutics company.

(e)	Represents adjustments to inventory reserves and accelerated depreciation, consulting fees and product transfer costs, employee termination costs and exit costs, and net (gains)/losses on sales of certain manufacturing sites and products, related to cost-reduction and productivity initiatives.

(f)	Represents employee termination costs/(reversals) in Europe as a result of initiatives to better align our organizational structure.

(g)	For 2018, represents a net gain related to the divestiture of certain agribusiness products within our International segment.

(h)	Represents certain non-recurring 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 2018, primarily represents a net gain related to the relocation of a manufacturing site in China. For 2017, primarily represents costs associated with changes to our operating model. For 2016, represents costs associated with changes to our operating model and a charge associated with a commercial settlement in Mexico.

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(a)

Accounts receivable are usually collected over a period of 45 to 75 days. For the year ended December 31, 2018, compared to the year ended December 31, 2017, 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.

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(a)	Long-term debt consists of senior notes and other notes. Our calculations of expected interest payments incorporate only current period assumptions for interest rates, foreign currency translation rates and Zoetis hedging strategies. See Notes to Consolidated Financial Statements— Note 9A. Financial Instruments: Debt.

(b)

Includes expected employee termination payments that represent contractual obligations, expected payments related to our unfunded U.S. supplemental (non-qualified) savings plans, deferred compensation and expected payments relating to our future benefit payments net of plan assets (included in the determination of the projected benefit obligation) for pension plans that are dedicated to Zoetis employees and those transferred to us from Pfizer. See Notes to Consolidated Financial Statements— Note 5. Acquisitions and Divestitures, Note 6. Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives and Note 13. Benefit Plans. Excludes approximately $94 million of noncurrent liabilities related to legal and environmental accruals, certain employee termination and exit costs, deferred income and other accruals, most of which do not represent contractual obligations. See Notes to Consolidated Financial Statements— Note 6. Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives and Note 17. Commitments and Contingencies.

(c)	Includes agreements to purchase goods and services that are enforceable and legally binding and includes amounts relating to advertising, contract manufacturing, and information technology services.

(d)	Includes the cost of service credit continuation for certain Zoetis employees in the Pfizer U.S. qualified defined benefit pension and U.S. retiree medical plans, in accordance with the employee matters agreement. See Notes to Consolidated Financial Statements— Note 13. Benefit Plans.

(e)	Except for amounts reflected in Income taxes payable, we are unable to predict the timing of tax settlements, as tax audits can involve complex issues and the resolution of those issues may span multiple years, particularly if subject to negotiation or litigation.

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•	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;

•	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;

•	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;

•	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;

•	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;

•	the economic, political, legal and business environment of the foreign jurisdictions in which we do business;

•	a cyber-attack, information security breach or other misappropriation of our data;

•	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 States of income earned outside the United States that may result from pending and possible future proposals; and

•	governmental laws and regulations affecting our interactions with veterinary healthcare providers.

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Item 7A.	Quantitative and Qualitative Disclosures About Market Risk.

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(a)	Exclusive of amortization of intangible assets, except as disclosed in Note 3. Significant Accounting Policies—Amortization of Intangible Assets, Depreciation and Certain Long-Lived Assets.

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(a)	Presented net of reclassification adjustments and tax impacts, which are not significant in any period presented. Reclassification adjustments related to benefit plans are generally reclassified, as part of net periodic pension cost, into Cost of sales, Selling, general and administrative expenses, and/or Research and development expenses, as appropriate, in the consolidated statements of income.

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(a)	As of December 31, 2018, and December 31, 2017, includes $5 million and $6 million, respectively, of restricted cash.

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(a)	As of December 31, 2018 and 2017, respectively, there were 479,562,326 and 486,130,461 outstanding shares of common stock and 22,328,917 and 15,760,782 shares or treasury stock. Treasury stock is recognized at the cost to reacquire the shares. For additional information, see Note 15. Stockholders' Equity.

(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 14. Share-Based Payments and Note 15. Stockholders' Equity.

(c)	Reflects the acquisition of treasury shares in connection with the share repurchase program. For additional information, see Note 15. 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 13. Benefit Plans.

(e)	Reflects the divestiture of our share of our Taiwan joint venture. See Note 5B. Acquisitions and Divestitures: Divestitures.

(f)	For the twelve months ended December 31, 2018 and 2017, represents the acquisition and consolidation of a European livestock monitoring company.

(g)	Represents the acquisition of the remaining 55 percent noncontrolling interest in Jilin Zoetis Guoyuan Animal Health Co., Ltd., a variable interest entity previously consolidated by Zoetis as the primary beneficiary.

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

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2.	Basis of Presentation

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for sales returns, we perform calculations in each market that incorporate the following, as appropriate: local returns policies and practices; historic returns as a percentage of revenue; estimated shelf life by product; an estimate of the amount of time between shipment and return or lag time; and any other factors that could impact the estimate of future returns, product recalls, discontinuation of products or a changing competitive environment; and

•	for revenue incentives, we use our historical experience with similar incentives programs to estimate the impact of such programs on revenue for the current period.

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•	Goodwill—goodwill represents the excess of the consideration transferred for an acquired business over the assigned values of its net assets. Goodwill is not amortized.

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Identifiable intangible assets, less accumulated amortization—these acquired assets are recorded at our cost. Identifiable intangible assets with finite lives are amortized on a straight-line basis over their estimated useful lives. Identifiable intangible assets with indefinite lives that are associated with marketed products are not amortized until a useful life can be determined. Identifiable intangible assets associated with IPR&D projects are not amortized until regulatory approval is obtained. The useful life of an amortizing asset generally is determined by identifying the period in which substantially all of the cash flows are expected to be generated.

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Property, plant and equipment, less accumulated depreciation––these assets are recorded at our cost and are increased by the cost of any significant improvements after purchase. Property, plant and equipment assets, other than land and construction-in-progress, are depreciated on a straight-line basis over the estimated useful life of the individual assets. Depreciation begins when the asset is ready for its intended use. For tax purposes, accelerated depreciation methods are used as allowed by tax laws.

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For finite-lived identifiable intangible assets, such as developed technology rights, and for other long-lived assets, such as property, plant and equipment, whenever impairment indicators are present, we calculate the undiscounted value of the projected cash flows associated with the asset, or asset group, and compare this estimated amount to the carrying amount. If the carrying amount is found to be greater, we record an impairment loss for the excess of book value over fair value. In addition, in all cases of an impairment review, we re-evaluate the remaining useful lives of the assets and modify them, as appropriate.

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For indefinite-lived identifiable intangible assets, such as brands and IPR&D assets, we test for impairment at least annually, or more frequently if impairment indicators exist, by first assessing qualitative factors to determine whether it is more likely than not that the fair value of the indefinite-lived intangible asset is less than its carrying amount. If we conclude it is more likely than not that the fair value is less than the carrying amount, a quantitative test that compares the fair value of the indefinite-lived intangible asset with its carrying value is performed. If the fair value is less than the carrying amount, an impairment loss is recognized. We record an impairment loss, if any, for the excess of book value over fair value. In addition, in all cases of an impairment review other than for IPR&D assets, we re-evaluate whether continuing to characterize the asset as indefinite-lived is appropriate.

•

For goodwill, we test for impairment on at least an annual basis, or more frequently if impairment indicators exist, either by assessing qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, or by performing a quantitative assessment. If we choose to perform a qualitative analysis and conclude it is more likely than not that the fair value of a reporting unit is less than its carrying amount, a quantitative fair value test is performed. We determine the implied fair value of goodwill by subtracting the fair value of all the identifiable net assets other than goodwill from the fair value of the reporting unit and record an impairment loss for the excess, if any, of book value of goodwill over the implied fair value. In 2018, we performed a quantitative impairment assessment as of September 30, 2018, which did not result in the impairment of goodwill associated with any of our reporting units. In 2017, we performed both qualitative and select quantitative impairment assessments as of October 1, 2017, which did not result in the impairment of goodwill associated with any of our reporting units.

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•	Income approach, which is based on the present value of a future stream of net cash flows.

•	Market approach, which is based on market prices and other information from market transactions involving identical or comparable assets or liabilities.

•	Cost approach, which is based on the cost to acquire or construct comparable assets less an allowance for functional and/or economic obsolescence.

•	Quoted prices for identical assets or liabilities in active markets (Level 1 inputs).

•	Quoted prices for similar assets or liabilities in active markets or quoted prices for identical or similar assets or liabilities in markets that are not active or are directly or indirectly observable (Level 2 inputs).

•	Unobservable inputs that reflect estimates and assumptions (Level 3 inputs).

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4.	Revenue

A.	Revenue from Product Sales

•	vaccines: biological preparations that help prevent diseases of the respiratory, gastrointestinal and reproductive tracts or induce a specific immune response;

•	other pharmaceutical products: allergy and dermatology, pain and sedation, antiemetic, reproductive, and oncology products;

•	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;

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•	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.

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B.	Other Revenue Information

A.	Acquisitions

(a)	Represents cash paid for cancellation and conversion of each outstanding share of Abaxis' common stock at the acquisition date.

(b)	Represents cash paid for cancellation and settlement of restricted stock awards that fully vested in July 2018 as a result of service or pre-existing change-in-control provisions and termination provisions. Includes certain awards that will be settled in cash during 2019, reflected in Other current liabilities within the condensed consolidated balance sheet.

(c)

Represents the fair value of replacement awards issued for Abaxis equity awards outstanding immediately before the acquisition and attributable to the service period prior to the acquisition. The previous Abaxis equity awards were converted into the Zoetis equity awards at an exchange ratio based on the closing prices of shares of Zoetis Common Stock and Abaxis Common Stock for ten full trading days before the closing of the acquisition.

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(a)	Short term investments include investments in debt securities that are classified as available-for-sale and measured at fair value.

(b)	The fair value approximates the gross contractual amount of accounts receivable. The contractual amount not expected to be collected is immaterial.

(c)

Acquired inventory is comprised of finished goods, work in process and raw materials. The preliminary estimate of fair value of finished goods was determined based on net realizable value adjusted for the costs of the selling effort, a reasonable profit allowance for the selling effort, and estimated holding costs. The preliminary estimate of fair value of work in process was determined based on net realizable value adjusted for costs to complete the manufacturing process, costs of the selling effort, a reasonable profit allowance for the remaining manufacturing and selling effort, and an estimate of holding costs. The fair value of raw materials was determined to approximate book value.

(d)

Property, plant and equipment is comprised of machinery and equipment, furniture and fixtures, computer equipment, leasehold improvements and construction in progress. The preliminary estimated fair value was primarily determined using a reproduction/replacement cost approach which measures the value of an asset by estimating the cost to acquire or construct comparable assets adjusted for age and condition of the asset.

(e)

Identifiable intangible assets primarily consist of developed technology rights, customer relationships, and trademarks and tradenames. The preliminary estimate of fair value of identifiable intangible assets is determined using the income approach, which includes a forecast of expected future cash flows. For additional information regarding identifiable intangible assets, see Note 11. Goodwill and Other Intangible Assets.

(f)

The acquisition was structured as a stock purchase and therefore we assumed the historical tax basis of Abaxis' assets and liabilities. The preliminary estimate of deferred tax effects resulting from the acquisition include the expected federal, state, and foreign tax consequences associated with temporary differences between the preliminary fair values of the assets acquired and liabilities assumed and the respective tax basis. The components of the Abaxis net deferred tax liability are included within amounts reported in Note 8. Tax Matters.

(g)

Goodwill represents the excess of consideration transferred over the preliminary estimate of fair values of the assets acquired and liabilities assumed. It is allocated to our existing reportable segments and is primarily attributable to the future potential of the technology platforms, as well as cost and revenue synergies including market share capture, elimination of cost redundancies and gain of cost efficiencies, and intangible assets such as assembled workforce which are not separately recognizable. The primary strategic purpose of the acquisition was to enhance the company’s existing product portfolio by strengthening Zoetis’ presence in veterinary diagnostics. The goodwill recorded is not deductible for tax purposes. The allocation of goodwill to the reporting units is preliminary and will be completed as the company obtains the information necessary to complete the analysis, but no later than one year from the date of the acquisition.

(a)

Included in the net loss are (i) $18 million of cost of goods sold related to the preliminary fair value adjustment for acquisition date inventory estimated to have been sold during the period ended December 31, 2018, (ii) $53 million of amortization expense related to the preliminary fair value of identifiable intangible assets recognized at the acquisition date, (iii) $1 million of depreciation expense related to the preliminary fair value adjustment of property, plant, and equipment recognized at the acquisition date, (iv) $18 million of severance costs directly related to the acquisition, and (v) the applicable tax impact of above adjustments based on the statutory tax rates in the various jurisdictions where the adjustments are expected to be incurred.

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•	Acquisition-related costs incurred by Zoetis and Abaxis of $82 million have been removed for the year ended December 31, 2018. Acquisition-related costs of $60 million are assumed to be have been incurred during the year ended December 31, 2017.

•	Additional amortization expense of $77 million for the year ended December 31, 2018, and $130 million for the year ended December 31, 2017, related to the preliminary fair value estimate of identified intangible assets acquired.

•	Additional depreciation expense of $2 million for the year ended December 31, 2018, and $3 million for the year ended December 31, 2017, related to the preliminary estimate of fair value adjustments to property, plant and equipment acquired.

•	Adjustment related to the preliminary estimate of the non-recurring fair value adjustment to acquisition date inventory estimated to have been sold, resulting in $18 million removed for the year ended December 31, 2018, and $33 million added for the year ended December 31, 2017.

•	Additional interest expense and amortization of debt issuance costs for the debt issuance to finance the acquisition, resulting in $36 million added for the year ended December 31, 2018, and $57 million added for the year ended December 31, 2017.

•	Adjustments related to the post merger share-based compensation expense of the replacement awards are $4 million for the year ended December 31, 2018, and $13 million for the year ended December 31, 2017.

•	Applicable tax impact of the above adjustments based on the statutory tax rates in the various jurisdictions where the adjustments are expected to be incurred.

B.	Divestitures

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

(a)	Integration costs represent external, incremental costs directly related to integrating acquired businesses and primarily include expenditures for consulting and the integration of systems and processes, as well as product transfer costs.

(b)	Transaction costs represent external costs directly related to acquiring businesses and primarily include expenditures for banking, legal, accounting and other similar services.

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

•	employee termination costs of $7 million in Europe as a result of initiatives to better align our organizational structure;

•	employee termination costs of $21 million related to the acquisition of Abaxis; and

•	a net reversal of employee termination costs of $3 million, and exit costs of $1 million as a result of our operational efficiency initiative and supply network strategy initiative.

	The restructuring charges for the year ended December 31, 2017, are primarily related to:

•	a net increase in employee termination costs of $2 million related to the operational efficiency initiative and supply network strategy initiative;

•	employee termination costs of $4 million related to the acquisition of an Irish biologic therapeutics company in the third quarter of 2017, and

•	employee termination costs of $4 million in Europe, as a result of initiatives to better align our organizational structure.

	The restructuring charges for the years ended December 31, 2016 primarily relate to our operational efficiency initiative and supply network strategy.

(d)	The restructuring charges are associated with the following:

•	For the year ended December 31, 2018, International of $7 million and Manufacturing/research/corporate of $19 million.

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

•	For the year ended December 31, 2016, U.S. of $1 million, International of a $13 million reversal and Manufacturing/research/corporate of $14 million.

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(a)	Includes adjustments for foreign currency translation.

(b)	At December 31, 2018 and 2017, included in Accrued Expenses ($27 million and $19 million, respectively) and Other noncurrent liabilities ($18 million and $22 million, respectively).

7.	Other (Income)/Deductions—Net

(a)	For 2017, includes an adjustment to our royalty income.

(b)

For 2018, represents a gain on the divestiture of certain agribusiness products within our International segment, and a net loss related to sales of certain manufacturing sites and products as part of our supply network strategy initiative. For 2017, primarily represents a net loss related to sales of certain manufacturing sites and products, including our manufacturing site in Guarulhos, Brazil, as part of our operational efficiency initiative and supply network strategy. For 2016, represents a 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)

In July 2014 and December 2016, we reached commercial settlements with several large poultry customers in Mexico associated with specific lots of a Zoetis poultry vaccine. Although there have been no quality or efficacy issues with the manufacturing of this vaccine, certain shipments from several lots in Mexico may have experienced an issue in storage with a third party in Mexico that could have impacted their efficacy. We issued a recall of these lots in July 2014 and the product is currently unavailable in Mexico. For 2017, includes income associated with an insurance recovery related to these commercial settlements, as well as a favorable outcome on a patent infringement settlement. For 2016, represents a charge related to the commercial settlement in Mexico for these products.

(d)	Primarily driven by costs related to hedging and exposures to certain emerging market currencies. For 2016, also includes losses related to the depreciation of the Egyptian pound in the fourth quarter of 2016.

(e)	For 2018, primarily includes a net gain related to the relocation of a manufacturing site in China.

8.	Tax Matters

A.	Taxes on Income

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One-Time Mandatory Deemed Repatriation Tax: The one-time mandatory deemed repatriation tax is imposed on previously untaxed accumulated and current earnings and profits of our foreign subsidiaries. We were able to reasonably estimate the one-time mandatory deemed repatriation tax and recorded a provisional tax obligation, with a corresponding adjustment to income tax expense for the year ended December 31, 2017. On the basis of revised computations determined during the reporting period, we recognized a measurement-period adjustment of $45 million in 2018, as a decrease to the one-time mandatory deemed repatriation tax obligation, with a corresponding adjustment to income tax benefit during the period. The effect of the measurement-period adjustment to the 2018 effective tax rate was a reduction to the rate of approximately 2.7%. In addition, we reclassified the one-time mandatory deemed repatriation tax from Noncurrent deferred tax liabilities to Income taxes payable and Other taxes payable. Our accounting for this element of the Tax Act is complete.

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Reduction of U.S. Federal Corporate Tax Rate: The Tax Act reduced the corporate tax rate to 21%, effective January 1, 2018. Consequently, we recorded a decrease related to deferred tax assets and liabilities with a corresponding net adjustment to deferred income tax benefit for the year ended December 31, 2017. We did not make any measurement-period adjustments related to this item in 2018. Our accounting for this element of the Tax Act is complete.

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Valuation Allowances: The company must assess whether its valuation allowance analyses are affected by the various aspects of the Tax Act (e.g., one-time mandatory deemed repatriation tax, global intangible low-taxed income inclusions, and new categories of foreign tax credits). We did not make any measurement-period adjustments related to this item in 2018. Our accounting for this element of the Tax Act is complete.

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Global Intangible Low-Taxed Income (GILTI) Policy Election: The GILTI provisions of the Tax Act do not apply to the company until 2019, due to the fact that the non-U.S. subsidiaries are on a fiscal year ending November 30. The FASB allows companies to adopt an accounting policy to either recognize deferred taxes for GILTI or treat such tax cost as a current-period expense when incurred. We have adopted an accounting policy to treat the taxes due on GILTI as a current-period expense.

(a)	In 2018, the Provision for taxes on income reflects the following:

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the change in the jurisdictional mix of earnings, which includes the impact of the location of earnings from operations and repatriation costs. The jurisdictional mix of earnings can vary as a result of repatriation decisions, operating fluctuations in the normal course of business, the impact of non-deductible items, and the extent and location of other income and expense items, such as gains and losses on asset divestitures;

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•	the reduction of the U.S. federal corporate income tax rate, from 35% to 21%, effective January 1, 2018, pursuant to the Tax Act;

•	a $45 million net tax benefit recorded in 2018, associated with a measurement-period adjustment to the one-time mandatory deemed repatriation tax on the company’s undistributed non-U.S. earnings pursuant to the Tax Act;

•	a $23 million discrete tax benefit recorded in 2018 related to the favorable impact of certain tax accounting method changes;

•	a $15 million discrete tax benefit recorded in 2018 related to the excess tax benefits for share-based compensation payments;

•	a $5 million discrete tax benefit recorded in 2018 related to a remeasurement of deferred tax assets and liabilities as a result of a change in non-U.S. statutory tax rates;

•	U.S. tax benefit related to U.S. Research and Development Tax Credit;

•	tax expense related to the changes in valuation allowances and the resolution of other tax items; and

•	tax expense related to changes in uncertain tax positions (see D. Tax Contingencies).

(b)	In 2017, the Provision for taxes on income reflects the following:

•

the change in the jurisdictional mix of earnings, which includes the impact of the location of earnings from (i) operations and (ii) restructuring charges related to the operational efficiency initiative and supply network strategy, as well as repatriation costs. The jurisdictional mix of earnings can vary as a result of repatriation decisions and as a result of operating fluctuations in the normal course of business, the impact of non-deductible items and the extent and location of other income and expense items, such as restructuring charges/(benefits), asset impairments and gains and losses on asset divestitures;

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a $212 million net discrete provisional tax expense recorded in the fourth quarter of 2017, related to the impact of the Tax Act enacted on December 22, 2017, including a one-time mandatory deemed repatriation tax, partially offset by a net tax benefit related to the remeasurement of the deferred tax assets and liabilities, as of the date of enactment, due to the reduction in the U.S. federal corporate tax rate;

•	U.S. tax benefit related to U.S. Research and Development Tax Credit and the U.S. Domestic Production Activities deduction;

•	a $15 million discrete tax benefit recorded in the fourth quarter of 2017 related to the effective settlement of certain issues with U.S. and non-U.S. tax authorities;

•	a $9 million discrete tax benefit recorded in 2017 related to the excess tax benefits for share-based compensation payments;

•	a $3 million discrete tax benefit recorded in the first quarter of 2017 related to a remeasurement of the company’s deferred tax assets and liabilities using the tax rates expected to be in place going forward;

•	tax expense related to the changes in valuation allowances and the resolution of other tax items; and

•	tax expense related to changes in uncertain tax positions (see D. Tax Contingencies).

(c)	In 2016, the Provision for taxes on income reflects the following:

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the change in the jurisdictional mix of earnings, which includes the impact of the location of earnings from (i) operations and (ii) restructuring charges related to the operational efficiency initiative and supply network strategy initiative, as well as repatriation costs. The jurisdictional mix of earnings can vary as a result of repatriation decisions and as a result of operating fluctuations in the normal course of business, the impact of non-deductible items and the extent and location of other income and expense items, such as restructuring charges/(benefits), asset impairments and gains and losses on asset divestitures;

•	U.S. tax benefit related to U.S. Research and Development Tax Credit and the U.S. Domestic Production Activities deduction;

•	a $15 million discrete tax benefit recorded in the fourth quarter of 2016 related to prior period tax adjustments;

•	a $10 million discrete tax benefit recorded in the first quarter of 2016 related to a remeasurement of deferred taxes as a result of a change in statutory tax rates;

•	a $7 million discrete tax benefit recorded in 2016 related to the excess tax benefits for share-based compensation payments;

•	a $2 million discrete tax benefit related to a remeasurement of the company’s deferred tax assets and liabilities using the tax rates expected to be in place going forward;

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a net tax expense of approximately $35 million mainly 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 remeasurement 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;

•	tax expense related to the changes in valuation allowances and the resolution of other tax items; and

•	tax expense related to changes in uncertain tax positions (see D. Tax Contingencies).

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(a)	For a discussion about unrecognized tax benefits and tax settlements and resolution of certain tax positions, see A. Taxes on Income and D. Tax Contingencies.

(b)

In 2018, the rate impact related to the Tax Act was a decrease to our effective tax rate. This tax benefit represents the measurement-period adjustment related to the one-time mandatory deemed repatriation tax on the company’s undistributed non-U.S. earnings. In 2017, the rate impact related to the Tax Act was an increase to our effective tax rate. The provisional net tax charge represented the amount related to the one-time mandatory deemed repatriation tax on the company’s undistributed non-U.S. earnings, partially offset by a net tax benefit related to the remeasurement of the company’s deferred tax assets and liabilities due to the reduction in the U.S. federal corporate tax rate.

(c)	In all years, the decrease in the rate was due to the benefit associated with the U.S. Research and Development Tax Credit. In 2017 and 2016, the decrease in the rate was also due to the benefit associated with the U.S. Domestic Production Activities deduction.

(d)	The rate impact of taxation of non-U.S. operations was a decrease to our effective tax rate in 2016 through 2018 due to the jurisdictional mix of earnings.

(e)	In all years, the impact to the rate due to increases in uncertain tax positions was more than offset by the jurisdictional mix of earnings and other U.S. tax implications of our foreign operations described in the above footnotes.

(f)

The rate impact related to the European Commission’s negative decision on the excess profits rulings in Belgium was an increase to our effective tax rate in 2016. This net charge represents the recovery of prior tax benefits for the periods 2013 through 2015, offset by the remeasurement 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.

B.	Tax Matters Agreement

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

•	We will be responsible for any U.S. federal, state, local or foreign income taxes and any U.S. state or local non-income taxes (and any related interest, penalties or audit adjustments) that are reportable on returns that include only us and/or any of our subsidiaries, for all tax periods whether before or after the completion of the separation from Pfizer.

•	Pfizer will be responsible for certain specified foreign taxes directly resulting from certain aspects of the separation from Pfizer.

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C.	Deferred Taxes

(a)

The increase in the total net deferred tax liability from December 31, 2017 to December 31, 2018 is primarily attributable to an increase in deferred tax liabilities related to intangibles and property, plant and equipment recorded as a result of the acquisition of Abaxis, partially offset by a decrease in deferred tax liabilities related to unremitted earnings, due to a reclass of the one-time mandatory deemed repatriation tax from Noncurrent deferred tax liabilities to Income taxes payable and Other taxes payable to reflect the liability, which became a fixed obligation in 2018, payable over eight years. In addition, the increase in the total net deferred tax liability was also attributable to a decrease in deferred tax assets related to prepaid/deferred items, inventory, net operating loss/credit carryforwards, partially offset by a decrease in valuation allowances representing the amounts determined to be unrecoverable.

(b)	In 2018, included in Noncurrent deferred tax assets ($61 million) and Noncurrent deferred tax liabilities ($474 million). In 2017, included in Noncurrent deferred tax assets ($80 million) and Noncurrent deferred tax liabilities ($380 million).

D.	Tax Contingencies

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Tax assets associated with uncertain tax positions primarily represent our estimate of the potential tax benefits in one tax jurisdiction that could result from the payment of income taxes in another tax jurisdiction. These potential benefits generally result from cooperative efforts among taxing authorities, as required by tax treaties to minimize double taxation, commonly referred to as the competent authority process. The recoverability of these assets, which we believe to be more likely than not, is dependent upon the actual payment of taxes in one tax jurisdiction and, in some cases, the successful petition for recovery in another tax jurisdiction. As of December 31, 2018, 2017 and 2016, we had approximately $3 million, $3 million and $3 million, respectively, in assets associated with uncertain tax positions recorded in Other noncurrent assets.

•

Tax liabilities associated with uncertain tax positions represent unrecognized tax benefits, which arise when the estimated benefit recorded in our financial statements differs from the amounts taken or expected to be taken in a tax return because of the uncertainties described above. These unrecognized tax benefits relate primarily to issues common among multinational corporations. Substantially all of these unrecognized tax benefits, if recognized, would impact our effective income tax rate.

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

(b)

In 2018, the increases are primarily related to the impact of the Tax Act and movements on prior year positions. In 2017, the increases are primarily related to movements on prior year positions, including movements in foreign translation adjustments on prior year positions. In 2016, the increases are primarily related to the impact of the European Commission’s negative decision on the excess profits rulings in Belgium. See A. Taxes on Income.

(c)

In 2018, the decreases are primarily related to movements on prior year positions and closure of audits with U.S. and non-U.S. tax authorities, including movements in foreign translation adjustments on prior year positions. In 2017, the decreases are primarily related to movements on prior year positions and effective settlement of certain issues with U.S. and non-U.S. tax authorities. In 2016, the decreases are primarily related to movements on prior year positions. See A. Taxes on Income.

(d)	In 2017, the increases are primarily related to the impact of the Tax Act. See A. Taxes on Income.

(e)	In 2018, the decreases are due to settlements with U.S. and non-U.S. tax authorities. In 2016, the decreases are due to cash payments related to the impact of the European Commission’s negative decision on the excess profits rulings in Belgium. See A. Taxes on Income.

(f)	In 2018, included in Noncurrent deferred tax assets ($3 million) and Other taxes payable ($182 million). In 2017, included in Noncurrent deferred tax assets ($3 million) and Other taxes payable ($161 million). In 2016, included in Noncurrent deferred tax assets ($3 million) and Other taxes payable ($65 million).

•

Interest related to our unrecognized tax benefits is recorded in accordance with the laws of each jurisdiction and is recorded in Provision for taxes on income in our consolidated statements of income. In 2018, we recorded a net interest expense of $1 million; in 2017, we recorded a net interest expense of $1 million; and in 2016, we recorded a net interest expense of $2 million. Gross accrued interest totaled $8 million, $7 million and $6 million as of December 31, 2018, 2017 and 2016, respectively, and were included in Other taxes payable. Gross accrued penalties totaled $3 million, $4 million and $4 million as of December 31, 2018, 2017 and 2016, respectively, and were included in Other taxes payable.

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9.	Financial Instruments

A.	Debt

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C.	Derivative Financial Instruments

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For foreign exchange contracts not designated as hedging instruments, we recognize the gains and losses on forward-exchange contracts that are used to offset the same foreign currency assets or liabilities immediately into earnings along with the earnings impact of the items they generally offset. These contracts essentially take the opposite currency position of that reflected in the month-end balance sheet to counterbalance the effect of any currency movement. The aggregate notional amount of foreign exchange derivative financial instruments offsetting foreign currency exposures was $1.3 billion and $1.4 billion, as of December 31, 2018, and December 31, 2017, respectively. The vast majority of the foreign exchange derivative financial instruments mature within 60 days and all mature within one year.

•

For cross-currency interest rate swaps, which are designated as a hedge against our net investment in foreign operations, changes in the fair value are deferred as a component of cumulative translation adjustment within Accumulated other comprehensive loss and reclassified into earnings when the foreign investment is sold or substantially liquidated. Gains and losses excluded from the assessment of hedge effectiveness are recognized in earnings (Interest expense—net of capitalized interest). The impact of the periodic exchange of interest payments is reflected within the operating section of our consolidated statement of cash flows. The aggregate notional amount of cross-currency interest rate swap contracts was 400 million euro as of December 31, 2018, with a term of up to seven years. We did not have any cross-currency interest rate swap contracts as of December 31, 2017.

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10.	Inventories

12.	Goodwill and Other Intangible Assets

A.	Goodwill

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

For 2017, primarily represents $9 million related to the acquisition of an Irish biologic therapeutics company in the third quarter of 2017, as well as $10 million related to 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, partially offset by a $2 million reduction to the consolidation of a European livestock monitoring company in the third quarter of 2017.

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

	For 2017, also includes $3 million related to the sale of our manufacturing site in Guarulhos, Brazil.

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B.	Other Intangible Assets

(a)	Includes intangible assets associated with the acquisitions of a European livestock monitoring company and a Norwegian fish vaccination company.

(b)	In the first quarter of 2017, certain intangible assets, acquired in 2015 as part of the Pharmaq acquisition, were placed into service.

(c)	In connection with the acquisition of Abaxis, the company recorded $895 million of intangible assets, as shown in the table below, representing the preliminary fair value at the acquisition date. See Note 5. Acquisitions and Divestitures for additional information.

(d)	Includes the acquisition of land use rights in China in the fourth quarter of 2017.

(e)	Includes the intangible assets related to the acquisition of an Irish biologic therapeutics company in the third quarter of 2017.

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C.	Amortization

D.	Impairments

A.	International Pension Plans

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(a)	Included in Other noncurrent liabilities.

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(a)	Fair values are determined based on valuation inputs categorized as Level 1, 2 or 3 (see Note 3. Significant Accounting Policies—Fair Value). Investment plan assets are valued using Level 1 or Level 2 inputs.

•	Equity commingled funds––observable market prices.

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

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B.	Postretirement Plans

C.	Defined Contribution Plans

14.	Share-Based Payments

A.	Share-Based Compensation Expense

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(a)	For the year ended December 31, 2018, includes share-based compensation expense of $7 million related to the acquisition of Abaxis, for the post-merger service period. For additional details see Note 5. Acquisitions and Divestitures.

(b)	For each of the years ended December 31, 2018, 2017 and 2016, we capitalized approximately $1 million of share-based compensation expense to inventory.

B.	Stock Options

(a)	Determined using a constant dividend yield during the expected term of the Zoetis stock option.

(b)	Determined using the interpolated yield on U.S. Treasury zero-coupon issues.

(c)	Determined using an equal weighting between historical volatility of the Zoetis stock price and implied volatility. The selection of the blended historical and implied volatility approach was based on our assessment that this calculation of expected volatility is more representative of future stock price trends.

(d)	Determined using expected exercise and post-vesting termination patterns.

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

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C.	Restricted Stock Units (RSUs)

D.	Deferred Stock Units (DSUs)

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E.	Performance-Vesting Restricted Stock Units (PSUs)

F.	Other Equity-Based or Cash-Based Awards.

15.	Stockholders' Equity

(a)	Shares may not add due to rounding.

(b)

Includes the issuance of shares of common stock and, beginning in the first quarter of 2016, 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 14. Share-Based Payments.

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(a)	Reflects the divestiture of our share of a Taiwan joint venture.

16.	Earnings per Share

17.	Commitments and Contingencies

A.	Legal Proceedings

•	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 States and in other countries.

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B.	Guarantees and Indemnifications

18.	Segment Information

A.	Segment Information

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Other business activities, includes our CSS contract manufacturing results, our human health diagnostics business, and expenses associated with our dedicated veterinary medicine research and development organization, research alliances, U.S. regulatory affairs and other operations focused on the development of our products. Other R&D-related costs associated with non-U.S. market and regulatory activities are generally included in the international commercial segment.

•	Corporate, includes platform functions such as business technology, facilities, legal, finance, human resources, business development, and communications, among others. These costs also include compensation costs and other miscellaneous operating expenses not charged to our operating segments, as well as interest income and expense.

•

Certain transactions and events such as (i) Purchase accounting adjustments, where we incur expenses associated with the amortization of fair value adjustments to inventory, intangible assets and property, plant and equipment; (ii) Acquisition-related activities, where we incur costs associated with acquiring and integrating newly acquired businesses, such as transaction costs and integration costs; and (iii) Certain significant items, which comprise substantive, unusual items that, either as a result of their nature or size, would not be expected to occur as part of our normal business on a regular basis, such as certain costs related to becoming an independent public company, restructuring charges and implementation costs associated with our cost-reduction/productivity initiatives that are not associated with an acquisition, certain asset impairment charges, certain legal and commercial settlements and the impact of divestiture-related gains and losses.

•	Other unallocated includes (i) certain overhead expenses associated with our global manufacturing operations not charged to our operating segments; (ii) certain costs associated with business technology and finance that specifically support our global manufacturing operations; (iii) certain supply chain and global logistics costs; and (iv) procurement costs.

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(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 $745 million in 2018, $660 million in 2017, and $632 million in 2016.

(c)

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

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

	For 2016, certain significant items primarily includes: (i) Zoetis stand-up costs of $23 million; (ii) charges related to our operational efficiency initiative and supply network strategy initiative of $10 million; (iii) charges related to a commercial settlement in Mexico of $14 million; and (iv) charges of $10 million associated with changes to our operating model.

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

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B.	Geographic Information

(a)	Costs and expenses in the fourth quarter reflect seasonal trends.

(b)	For the fourth quarter of 2017, includes a provisional net tax charge related to the impact of the Tax Act enacted on December 22, 2017. See Note 8. Tax Matters.

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20.	Subsequent Events

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Item 9A.	Controls and Procedures

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A.	(1)    The financial statements and notes to financial statements are filed as part of this report in Item 8. Financial Statements and Supplementary Data.

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