10-Q

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
	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

Zoetis Inc.

(Exact name of registrant as specified in its charter)

Delaware	46-0696167
(State or other jurisdiction of	(I.R.S. Employer Identification No.)
incorporation or organization)
10 Sylvan Way, Parsippany, New Jersey	07054
(Address of principal executive offices)	(Zip Code)

(973) 822-7000

(Registrant’s telephone number, including area code)

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, non-accelerated filer, 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 filer x 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 rule 12b-2 of the Exchange Act). ¨ Yes x No

At October 26, 2017, there were 487,288,245 shares of common stock outstanding.

TABLE OF CONTENTS

		Page
PART I — FINANCIAL INFORMATION		1
Item 1.	Financial Statements	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	25
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	49
Item 4.	Controls and Procedures	49
PART II — OTHER INFORMATION		50
Item 1.	Legal Proceedings	50
Item 1A.	Risk Factors	50
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	53
Item 3.	Defaults Upon Senior Securities	53
Item 4.	Mine Safety Disclosures	53
Item 5.	Other Information	53
Item 6.	Exhibits	53
SIGNATURES		54

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

ZOETIS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

	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						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

	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)

	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.

See notes to condensed consolidated financial statements.

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ZOETIS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	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

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 and vaccines, with a focus on both livestock and companion animals. We organize and operate our business in two geographic regions: the United States (U.S.) and International.

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

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 States are as of and for the three and nine-month periods ended August 27, 2017, and August 28, 2016.

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.

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 2016 Annual Report on Form 10-K.

3. Significant Accounting Policies

Recently Adopted Accounting Standards

In January 2017, the Financial Accounting Standards Board (FASB) issued an accounting standards update which clarifies the definition of a business. Under the new guidance, a set of integrated activities and assets is a business only if it has, at a minimum, an input and substantive process that together significantly contribute to 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 all 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. We adopted this guidance as of January 1, 2017. This guidance did not have a significant impact on our consolidated financial statements.

Recently Issued Accounting Standards

In August 2017, the FASB 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 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 do 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 and Divestitures

Acquisitions

During the third quarter of 2017, we completed the acquisition of an Irish biologic therapeutics company. During the first quarter of 2017, we completed the purchase of 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 announced an agreement with the Brazilian-based pharmaceutical company União Química (UQ) to sell our 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:

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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 million and recorded a net pre-tax gain of approximately $2 million within Other (income)/deductions—net. Additionally, in the second quarter of 2017, we recorded a $4 million expense within Other (income)/deductions—net related to the 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 company with an animal health business 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.

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. This may include charges related to employees, assets and activities that will not continue. All operating functions can be impacted by these actions, including sales and marketing, manufacturing and research and development (R&D), as well as functions such as business 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	)

^(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/(reversals) for the three months ended October 1, 2017, are primarily related to:

• employee termination costs of $3 million related to the operational efficiency initiative and supply network strategy;

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

• 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:

• For the three months endedOctober 1, 2017, International ($1 million reversal) and Manufacturing/research/corporate ($7 million).

• For the nine months endedOctober 1, 2017, International ($2 million reversal) and Manufacturing/research/corporate ($5 million).

• For the three months endedOctober 2, 2016, International ($1 million reversal) and Manufacturing/research/corporate ($5 million).

• For the nine months endedOctober 2, 2016, U.S. ($2 million reversal), International ($16 million reversal) and Manufacturing/research/corporate ($1 million).

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Charges related to the operational efficiency initiative and supply network strategy 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:
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 endedOctober 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 endedOctober 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 endedOctober 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 endedOctober 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 endedOctober 2, 2016, represents an impairment of finite-lived trademarks related to a canine pain management product.

^(b)  For the three and nine months endedOctober 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 endedOctober 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 endedOctober 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 endedOctober 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 endedOctober 2, 2016, primarily represents income associated with certain state business employment tax incentive credits.

7. Income Taxes

A. Taxes on Income

The effective tax rate was 28.3% for the three months ended October 1, 2017, compared with 28.8% for the three months ended October 2, 2016. The lower effective tax rate for the three months ended October 1, 2017, was primarily attributable to:

• 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.

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 million net discrete tax expense recorded in the first half of 2016, related to changes in uncertain tax positions due to the impact of the European Commission’s negative decision on the excess profits rulings in Belgium, 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;

• 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;

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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 million discrete tax benefit recorded in the first quarter of 2017 and 2016, respectively, related to a revaluation of deferred taxes as a result of a change in statutory tax rates.

B. Deferred Taxes

As of October 1, 2017, the total net deferred income tax liability of $175 million is included in Deferred tax assets ($94 million) and Deferred tax liabilities ($269 million).

As of December 31, 2016, the total net deferred income tax liability of $148 million is included in Deferred tax assets ($96 million) and Deferred tax liabilities ($244 million).

C. Tax Contingencies

As of October 1, 2017, the tax liabilities associated with uncertain tax positions of $81 million (exclusive of interest and penalties related to uncertain tax positions of $12 million) are included in Deferred tax assets ($4 million) and Other taxes payable ($77 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

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 $1.0 billion senior unsecured revolving credit facility (the credit facility), which expires in December 2021. Subject to certain conditions, we have the right to increase the credit facility to up to $1.5 billion. The credit facility contains a financial covenant requiring us to not exceed a maximum total leverage ratio (the ratio of consolidated net debt as of the end of the period to consolidated Earnings Before Interest, Income Taxes, Depreciation and Amortization (EBITDA) for such period) of 3.50:1. Upon entering into a material acquisition, the maximum total leverage ratio increases to 4.00:1, and extends until the fourth full consecutive fiscal quarter ended immediately following the consummation of a material acquisition. The credit facility also contains a clause which adds back to Adjusted Consolidated EBITDA, any operational efficiency restructuring charge (defined as charges recorded by the company during the period commencing on October 1, 2016 and ending December 31, 2019, related to operational efficiency initiatives), provided that for any twelve-month period such charges added back to Adjusted Consolidated EBITDA shall not 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. In addition, the credit facility contains other customary covenants.

We were in compliance with all financial covenants as of October 1, 2017, and December 31, 2016. There were no amounts drawn under the credit facility as of October 1, 2017, or December 31, 2016.

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, we had access to $77 million of lines of credit which expire at various times throughout 2017 and 2018 and are generally renewed annually. We did not have any borrowings outstanding related to these facilities as of October 1, 2017, and December 31, 2016.

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, and December 31, 2016, there was no 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 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 senior notes offering) 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.

The 2013, 2015 and 2017 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 and 2017 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, in whole or in part, at any time by paying a “make whole” premium, plus accrued and unpaid interest to, but excluding, the date of redemption. Pursuant to our tax matters agreement with Pfizer, we will not be permitted to redeem the 2013 senior notes due 2023 pursuant to this optional redemption provision, except under limited circumstances. Upon the occurrence of a change of control of us and a downgrade of the 2013, 2015 and 2017 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 and 2017 senior notes at a price equal to 101% of the aggregate principal amount of the 2013, 2015 and 2017 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:

	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 million and $4,565 million as of October 1, 2017, and December 31, 2016, 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, matures in the following years:

										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 million and $125 million for the three and nine months endedOctober 1, 2017, respectively, and $41 million and $125 million for the three and nine months endedOctober 2, 2016, respectively. Capitalized interest was $1 million and $3 million for the three and nine months endedOctober 1, 2017, respectively, and $1 million and $2 million for the three and nine months ended October 2, 2016, respectively.

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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 derivative financial instruments. These financial instruments serve to 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 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 has not designated the foreign currency forward-exchange contracts 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.

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 unrealized gains or losses on the forward-starting interest rate swaps are reported in Accumulated other comprehensive loss and are recognized in income 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, we entered into forward starting interest rate swaps with an aggregate notional value of $500 million. During the third quarter of 2017, we also entered in treasury lock trades with an aggregate notional value of $500 million. We designated these swaps and treasury locks (contracts) as cash flow hedges against interest rate exposure related principally to the anticipated future issuance of fixed-rate debt to be used primarily to refinance our 1.875% 2013 senior note due in 2018. Upon issuance of our 2017 senior notes (see A. Debt: Senior Notes and Other Long-Term Debt), we terminated these contracts and paid $3 million in cash to the counterparties for settlement. The settlement amount, which represents the fair value of the contracts at the time of termination, was recorded in Accumulated other comprehensive loss, and will be amortized into income over the life of the 2017 senior notes. There was $0.1 million 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 years we had entered into various forward-starting interest rate swap contracts that were designated as cash flow hedges and that were terminated upon issuance of fixed-rate notes.

Fair Value of Derivative Instruments

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

		Fair Value of Derivatives
		October 1,			December 31,
(MILLIONS OF DOLLARS)	Balance Sheet Location	2017			2016
Derivatives Not Designated as Hedging Instruments
Foreign currency forward-exchange contracts	Other 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 contracts	Other current assets	—			17
Total derivatives designated as hedging instruments		—			17
Total derivatives		$	(8	)	$	21

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 losses on derivative instruments not designated as hedging instruments, recorded in Other (income)/deductions—net, are as follows:

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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.

The amounts of unrecognized net gains/(losses) on derivative instruments designated as cash flow hedges, recorded, net of tax, in Other comprehensive income/(loss), are as follows:

	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	)

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

9. Inventories

The components of inventory are as follows:

	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

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.		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)  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 million and $2,017 million as of October 1, 2017, and December 31, 2016, respectively. Accumulated goodwill impairment losses were $536 million as of October 1, 2017, and December 31, 2016.

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B. Other Intangible Assets

The components of identifiable intangible assets are as follows:

	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

^(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 million and $75 million for the three and nine months endedOctober 1, 2017, respectively, and $24 million and $72 million for the three and nine months endedOctober 2, 2016, 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 endedOctober 1, 2017, and October 2, 2016.

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 endedOctober 1, 2017, respectively, and $1 million and $7 million for the three and nine months endedOctober 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) 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				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)  For the three months endedOctober 1, 2017, and October 2, 2016, amounts capitalized to inventory were insignificant. For the nine months endedOctober 1, 2017, and October 2, 2016, we capitalized $1 million of share-based compensation expense to inventory.

^(b)  For the three and nine months endedOctober 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 nine months endedOctober 1, 2017, the company granted 716,322 stock options with a weighted-average exercise price of $55.13 per stock option and a weighted-average fair value of $14.31 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%; expected dividend yield of 0.76%; expected stock price volatility of 23.27%; and expected term of 6.5 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 nine months endedOctober 1, 2017, the company granted 537,086 RSUs with a weighted-average grant date fair value of $55.14 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 nine months endedOctober 1, 2017, the company granted 136,964 PSUs with a weighted-average grant date fair value of $74.28 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 index at the start of the performance period (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% and 25.5%, respectively. Depending on the company’s Relative TSR performance at the end of the performance period, the recipient may earn between 0% and 200% of the target number of units. Vested units 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

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

In November 2014, the company's Board of Directors authorized a $500 million share repurchase program. This program was substantially completed as of December 31, 2016. In December 2016, the company's Board of Directors authorized an additional $1.5 billion share repurchase program. 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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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, are as follows:

				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 Ended
	October 1,			October 2,			October 1,			October 2,
(MILLIONS OF DOLLARS AND SHARES, EXCEPT PER SHARE DATA)	2017			2016			2017			2016
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
Denominator
Weighted-average common shares outstanding	489.1			495.2			490.8			496.3
Common stock equivalents: stock options, RSUs, PSUs and DSUs	3.3			2.7			3.1			2.5
Weighted-average common and potential dilutive shares outstanding	492.4			497.9			493.9			498.8
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

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 endedOctober 1, 2017, and approximately 1 million for the nine months endedOctober 1, 2017, and both the three and nine months endedOctober 2, 2016.

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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. Income Taxes.

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 States and in other countries.

Certain of these contingencies could result in losses, including damages, fines and/or civil penalties, and/or criminal charges, which could be substantial.

We believe that we have strong defenses in these types of matters, but litigation is inherently unpredictable and excessive verdicts do occur. We do not believe that any of these matters will have a material adverse effect on our financial position. However, we could incur judgments, enter into settlements or revise our expectations regarding the outcome of certain matters, and such developments could have a material adverse effect on our results of operations or cash flows in the period in which the amounts are paid.

We have accrued for losses that are both probable and reasonably estimable. Substantially all of these contingencies are subject to significant uncertainties and, therefore, determining the likelihood of a loss and/or the measurement of any loss can be complex. Consequently, we are unable to estimate the range of reasonably possible loss in excess of amounts accrued. Our assessments are based on estimates and assumptions that have been deemed reasonable by management, but the assessment process relies on estimates and assumptions that may prove to be incomplete or inaccurate, and unanticipated events and circumstances may occur that might cause us to change those estimates and assumptions.

Amounts recorded for legal and environmental contingencies can result from a complex series of judgments about future events and uncertainties and can rely on estimates and assumptions.

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

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 five other large companies alleging that waste sent to a local waste incineration facility for destruction, but that was not ultimately destroyed as the facility lost its operating permit, caused environmental impacts requiring cleanup.

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

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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 six defendants to remove and dispose of their individual waste from the incineration facility. On October 3, 2014, the Municipal prosecutor announced that the investigation remained ongoing and outlined the terms of a proposed Term of Reference (a document that establishes the minimum elements to be addressed in the preparation of an Environmental Impact Assessment), under which the companies would be liable to withdraw the waste and remediate the area. On March 5, 2015, we presented our response to the prosecutor’s proposed Term of Reference, arguing that the proposed terms were overly general in nature and expressing our interest in discussing alternatives to address the matter. The prosecutor agreed to consider our request to engage a technical consultant to conduct an environmental diagnostic of the contaminated area. On May 29, 2015, we, in conjunction with the other defendant companies, submitted a draft cooperation agreement to the prosecutor, which outlined the proposed terms and conditions for the engagement of a technical consultant to conduct the environmental diagnostic. On August 19, 2016, the parties entered into a cooperation agreement with the prosecutor, pursuant to which a third-party consultant will conduct a limited environmental assessment of the site. In 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 available in November 2017.

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 feed supply of certain turkey and hog feed mills in Michigan. 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 are that lascadoil intended to be sold for reuse as biofuel was inadvertently sold to producers of soy oil, who in turn, unknowingly sold the contaminated soy oil to fat recycling vendors, who then 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® (lasalocid sodium) and Bovatec® (lasalocid sodium) products as one 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 all 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. Under the terms of the agreement, the environmental company is expressly prohibited from reselling the lascadoil to be used as a component in food. The FDA inspected the Zoetis site where Avatec and Bovatec are manufactured, and found no evidence that Zoetis was involved in the contamination of the animal feed.

On March 10, 2015, plaintiffs Restaurant Recycling, LLC (Restaurant Recycling) and Superior Feed Ingredients, LLC (Superior), both of whom are in the fat recycling business, filed a complaint in the Seventeenth Circuit Court for the State of Michigan against Shur-Green Farms alleging negligence and breach of warranty claims arising from their purchase of soy oil allegedly contaminated with lascadoil. Plaintiffs resold the allegedly contaminated soy oil to turkey feed mills for use in feed ingredient. Plaintiffs also named Zoetis as a defendant in the complaint alleging that Zoetis failed to properly manufacture its products and breached an implied warranty that the soy oil was fit for use at turkey and hog mills. Zoetis was served with the complaint on June 3, 2015, and we filed our answer, denying all allegations, on July 15, 2015. On August 10, 2015, several of the turkey feed mills filed a joint complaint against Restaurant Recycling, Superior, Shur-Green Farms and others, alleging claims for negligence, misrepresentation, and breach of warranty, arising out of their alleged purchase and use of the contaminated soy oil. The complaint raises only one count against Zoetis for negligence. We filed an answer to the complaint on November 2, 2015, denying the allegation. On May 16, 2016, two additional turkey producers filed a complaint in the Seventeenth Circuit Court for the State of Michigan against the company, Restaurant Recycling, Superior, Shur-Green Farms and others, alleging claims for negligence and breach of warranties. We filed an answer to the complaint on June 20, 2016, denying the allegations. The Court consolidated all three cases in Michigan for purposes of discovery and disposition. On July 11, 2017, we filed a motion for summary disposition on the grounds that plaintiffs have not identified any factual issues that need to be resolved by a jury and that Zoetis is entitled to judgment as a matter of law. On October 10, 2017, the Circuit Court granted our motion for summary disposition and dismissed all of plaintiffs’ claims against us. While the plaintiffs have the right to appeal the decision of the Circuit Court, we continue to believe that we have strong arguments against all claims.

Other Matters

The European Commission 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. Alpharma LLC's involvement is solely related to its human health activities prior to Pfizer's acquisition of King/Alpharma. Under the Global Separation Agreement between Pfizer and Zoetis, Pfizer is obligated to indemnify Zoetis for any liabilities arising out of claims not related to its animal health assets. We filed an appeal of the decision on September 6, 2013, to the General Court of the European Union. On September 8, 2016, the General Court upheld the decision of the European Commission. On November 25, 2016, we filed an appeal to the Court of Justice of the European Union and are awaiting a ruling.

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, 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 two geographic operating segments: the United States 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 and other pharmaceuticals, for both livestock and companion animal customers. Our chief operating decision maker uses the revenue and earnings of the two operating segments, among other factors, for performance evaluation and resource allocation.

Other Costs and Business Activities

Certain costs are not allocated to our operating segment results, such as costs associated with the following:

• Other business activities includes our Client Supply Services (CSS) contract manufacturing results, as well as 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 for platform functions such as business technology, facilities, legal, finance, human resources, business development, 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.

• 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) 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 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

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	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 $169 million and $472 million for the three and nine months endedOctober 1, 2017, respectively, and $157 million and $469 million for the three and nine months endedOctober 2, 2016, respectively.

^(c)  For the three months endedOctober 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 endedOctober 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 endedOctober 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 endedOctober 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 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 Species

Species revenue are as follows:

	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 Shareholders and Board of Directors

Zoetis Inc.:

We have reviewed the accompanying condensed consolidated balance sheet of Zoetis Inc. and subsidiaries (the Company) as of October 1, 2017, and 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-month periods ended October 1, 2017 and October 2, 2016. These condensed consolidated financial statements are the responsibility of the Company's management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of 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), 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, 2017

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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 and vaccines, with a focus on both livestock and companion animals. For more than 60 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— Note 16. 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 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 the industry’s largest sales organization, 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 management team’s focus on improving operational and cost efficiencies increases the likelihood of achieving our core growth strategies and enhancing long-term value for our shareholders.

A summary of our 2017 performance compared with the comparable 2016 period follows:

	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)  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 2016 Annual Report on Form 10-K. Set forth below are updates to certain of the factors disclosed in our 2016 Form 10-K.

Quarterly Variability of Financial Results

Our quarterly financial results are subject to variability related to a number of factors including but not limited to: 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 outbreaks

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.

26 |

Foreign exchange 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 nine months endedOctober 1, 2017, approximately 47% 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, Brazilian real, Canadian dollar, euro, 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 nine months endedOctober 1, 2017, approximately 53% of our total revenue was in U.S. dollars. Our year-over-year revenue growth was unfavorably impacted by approximately $8 million from changes in foreign currency values relative to the U.S. dollar.

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								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, 2017vs.three months ended October 2, 2016

Total revenue increased by $106 million, or 9%, in the three months ended October 1, 2017, compared with the three months ended October 2, 2016, reflecting higher operational revenue 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 million, or 7%, in the nine months ended October 1, 2017, compared with the nine months ended October 2, 2016, reflecting higher operational revenue of $244 million, or 7%. Operational revenue growth was comprised primarily of the following:

• increased sales from our dermatology portfolio and new product launches, 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 reduced reported revenue growth by $8 million.

Costs and Expenses

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, 2017vs.three months ended October 2, 2016

Cost of sales increased by $25 million, or 6%, in the three months ended October 1, 2017, compared with the three months ended October 2, 2016, primarily as a result of:

• an increase in sales volume; and

• an increase in manufacturing and supply costs, primarily related to the increase in sales volume,

partially offset by:

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

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

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.

28 |

Three months ended October 1, 2017 vs. three months ended October 2, 2016

Selling, general & administrative (SG&A) expenses decreased by $17 million, or 5%, in the three months ended October 1, 2017, compared with the three months ended October 2, 2016, 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; and

• a reduction in the amount of additional costs related to becoming an independent public company,

partially offset by:

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

• higher distribution expenses associated with higher sales volumes.

Nine months ended October 1, 2017vs.nine months ended October 2, 2016

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, 2017 vs. three months ended October 2, 2016

R&D expenses increased by $6 million, or 7%, in the three months ended October 1, 2017, compared with the three months ended October 2, 2016, primarily as a result of:

• increased variable expenses due to project spending;

• the inclusion of the veterinary diagnostics business acquired 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.

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.

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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.

Three months ended October 1, 2017 vs. three months ended October 2, 2016

Amortization of intangible assets increased by $2 million, or 10%, in the three months ended October 1, 2017, compared with the three 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.

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.

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 our net restructuring charges generally relate to termination costs, but we have also exited a number of distributor and other contracts and performed 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. Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives.

Three months ended October 1, 2017 vs. three months ended October 2, 2016

The change in restructuring charges and certain acquisition-related costs from $4 million in the three months ended October 2, 2016, to $8 million in three 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.

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.

30 |

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.

Three months ended October 1, 2017 vs. three months ended October 2, 2016

Interest expense, net of capitalized interest, increased$2 million in the three months ended October 1, 2017, compared with the three months ended October 2, 2016, primarily due to the issuance of $1.25 billion aggregate principal amount 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 million in the three months ended October 2, 2016, to deductions of $1 million in the three months ended October 1, 2017, is primarily a result of:

• a net loss of $4 million 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 2016 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% for the three months ended October 1, 2017, compared with 28.8% for the three months ended October 2, 2016. The lower effective tax rate for the three months ended October 1, 2017, 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 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 million net discrete tax expense recorded in the first half of 2016, related to changes in uncertain tax positions due to the impact of the European Commission’s negative decision on the excess profits rulings in Belgium, 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;

• 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 $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 million discrete tax benefit recorded in the first quarter of 2017 and 2016, respectively, related to a revaluation of deferred taxes as a result of a change in 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 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.

					% 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
	Three Months Ended								Related to
	October 1,			October 2,					Foreign
(MILLIONS OF DOLLARS)	2017			2016			Total		Exchange	Operational
U.S.
Revenue	$	680		$	640		6		—	6
Cost of Sales	141			137			3		—	3
Gross Profit	539			503			7		—	7
Gross Margin	79.3		%	78.6		%
Operating Expenses	$	103		$	101		2		—	2
Other (income)/deductions	—			—			—		—	—
U.S. Earnings	436			402			8		—	8
International
Revenue	654			585			12		1	11
Cost of Sales	213			201			6		—	6
Gross Profit	441			384			15		1	14
Gross Margin	67.4		%	65.6		%
Operating Expenses	$	132		$	128		3		1	2
Other (income)/deductions	—			—			—		—	—
International Earnings	309			256			21		2	19
Total operating segments	745			658			13		—	13
Other business activities	(77		)	(71		)	8
Reconciling Items:
Corporate	(143		)	(159		)	(10	)
Purchase accounting adjustments	(23		)	(25		)	(8	)
Acquisition-related costs	(6		)	—			*
Certain significant items	(7		)	(16		)	(56	)
Other unallocated	(76		)	(54		)	41
Income before provision for taxes on income	$	413		$	333		24

* 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, 2017 vs. three months ended October 2, 2016

U.S. operating segment

U.S. segment revenue increased by $40 million, or 6%, in the three months ended October 1, 2017, compared with the three months ended October 2, 2016, reflecting declines of approximately $22 million in livestock products and growth of approximately $62 million in companion animal products.

• Livestock revenue decline 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 offset by increased sales of poultry medicated feed additive products.

• 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 million, or 8%, in the three months ended October 1, 2017, compared with the three months ended October 2, 2016, primarily due to revenue growth with improved gross margin, partially offset by higher operating expenses related to promotional activity for new products and Apoquel^®.

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International operating segment

International segment revenue increased by $69 million, or 12%, in the three months ended October 1, 2017, compared with the three months ended October 2, 2016. Operational revenue increased by $66 million, or 11%, driven by growth of approximately $38 million in livestock products and growth of approximately $28 million in companion animal products.

• Livestock growth was driven by increased sales of fish products 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%, 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%, 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%, 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 China was the primary driver of swine growth. Growth of fish products was driven by new products and in-line product growth across various markets. 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 for our vaccines portfolio in China due to field force expansions and increasing medicalization rates.

Additionally, segment revenue was unfavorably impacted by foreign exchange, which decreased revenue by approximately $8 million, or 1%, primarily driven by the depreciation of the U.K. pound, Egyptian pound, and Turkish Lira, partially offset by appreciation of the Brazilian real.

International segment earnings increased by $95 million, or 12%, in the nine months ended October 1, 2017, compared with the nine months ended October 2, 2016. Operational earnings growth was $102 million, or 13%, primarily due to higher revenue and improved gross margin, partly offset by higher operating expenses.

Other business activities

Other business activities includes our Client Supply Services (CSS) contract manufacturing results, as well as 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 regional segment.

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Three months ended October 1, 2017 vs. three months ended October 2, 2016

Other business activities net loss increased by $6 million, or 8%, in the three months ended October 1, 2017, compared with the three months ended October 2, 2016, 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, 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, partially offset by a reduction in fixed R&D spending driven by our operational efficiency initiative.

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 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;

• 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.

Three months ended October 1, 2017 vs. three months ended October 2, 2016

Corporate expenses decreased by $16 million, or 10%, in the three months ended October 1, 2017, compared with the three months ended October 2, 2016, primarilydue to 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 $22 million, or 41% in the three months ended October 1, 2017, compared with the three months ended October 2, 2016, primarilydue to higher global manufacturing and supply costs and the unfavorable impact of foreign exchange.

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. 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. 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 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 and vaccines 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 FDA and/or other regulatory authorities.

Certain significant items

Adjusted net income is calculated prior to considering 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. 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
	October 1,		October 2,		%		October 1,		October 2,		%
(MILLIONS OF DOLLARS)	2017		2016		Change		2017		2016		Change
GAAP reported net income attributable to Zoetis	$	298	$	239	25		$	783	$	667	17
Purchase accounting adjustments—net of tax	16		18		(11	)	50		45		11
Acquisition-related costs—net of tax	4		—		*		5		4		25
Certain significant items—net of tax	4		1		*		6		27		(78	)
Non-GAAP adjusted net income(a)	$	322	$	258	25		$	844	$	743	14

*Calculation not meaningful.

Certain amounts and percentages may reflect rounding adjustments.

^(a)   The effective tax rate on adjusted pretax income is 28.7% and 31.6% for the three months endedOctober 1, 2017 and October 2, 2016, respectively. The lower effective tax rate for the three months endedOctober 1, 2017, compared with the three months endedOctober 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						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

Certain amounts and percentages may reflect rounding adjustments.

^(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				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					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 amounts may reflect rounding adjustments.

^(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 endedOctober 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 endedOctober 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 endedOctober 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 endedOctober 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 endedOctober 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 endedOctober 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.

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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 endedOctober 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 endedOctober 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 endedOctober 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 endedOctober 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						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, 2017 vs. December 31, 2016

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, less allowance for doubtful accounts increased as a result of the timing of customer collections and the impact of foreign exchange.

Assets held 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.

Other current assets increased primarily as a result of the timing of U.S. income tax payments as well as other higher prepaid expenses.

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 compensation and related items decreased primarily due to payment of 2016 annual bonuses to eligible employees and 2016 employee savings plan contributions, partially offset by the pro rata accrual of similar items for 2017.

Accrued expenses and Other current liabilities decreased primarily as a result of payment of accrued expenses, including employee termination costs associated with operational efficiency initiatives. See Notes to Condensed Consolidated Financial Statements— Note 5. Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives.

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. Stockholders' Equity.

Analysis of the condensed consolidated statements of cash flows

	Nine Months Ended
	October 1,			October 2,			%
(MILLIONS OF DOLLARS)	2017			2016			Change
Net cash provided by (used in):
Operating activities	$	738		$	427		73
Investing activities	(216		)	(155		)	39
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	)	*

* Calculation not meaningful.

Certain amounts and percentages may reflect rounding adjustments.

Operating activities

Nine months endedOctober 1, 2017vs.nine months endedOctober 2, 2016

Net cash provided by operating activities was $738 million for the nine months ended October 1, 2017, compared with net cash provided by operating activities of $427 million for the nine months ended October 2, 2016. The increase in operating cash flows was primarily attributable to the 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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Investing activities

Nine months endedOctober 1, 2017vs.nine months endedOctober 2, 2016

Our net cash used in investing activities was $216 million for the nine months ended October 1, 2017, compared with net cash used in investing activities of $155 million for the nine months ended October 2, 2016. The net cash used in investing activities for 2017 was due primarily to purchases of property, plant and equipment and the acquisitions of an Irish biologic therapeutics company and a Norwegian fish vaccination company. The net cash used in investing activities for 2016 was 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 sale of certain manufacturing sites and products as part of the operational efficiency initiative.

Financing activities

Nine months endedOctober 1, 2017vs.nine months endedOctober 2, 2016

Our net cash provided by financing activities was $716 million for the nine months ended October 1, 2017, compared with net cash used in financing activities of $775 million for the nine months ended October 2, 2016. The net cash provided by financing activities for 2017 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. The net cash used in financing activities for 2016 was due primarily to the senior note payment in February 2016, the purchase of treasury shares, the payment of dividends, and the contingent consideration payment to Abbott.

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 meeting 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.

Selected measures of liquidity and capital resources

Certain relevant measures of our liquidity and capital resources follow:

	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 debt	750		—
Long-term debt	4,952		4,468
Working capital	3,148		2,273
Ratio of current assets to current liabilities	2.80:1		3.03:1

^(a)  Accounts receivable are usually collected over a period of 60 to 90 days. For the nine months endedOctober 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-year $1.0 billion senior unsecured revolving credit facility (the credit facility), which expires in December 2021. Subject to certain conditions, we have the right to increase the credit facility to up to $1.5 billion. The credit facility contains a financial covenant requiring us to not exceed a maximum total leverage ratio (the ratio of consolidated net debt as of the end of the period to consolidated Earnings Before Interest, Income Taxes, Depreciation and Amortization (EBITDA) for such period) of 3.50:1. Upon entering into a material acquisition, the maximum total leverage ratio increases to 4.00:1, and extends until the fourth full consecutive fiscal quarter ended immediately following the consummation of a material acquisition. The credit facility also contains a clause which adds back to Adjusted Consolidated EBITDA, any operational efficiency restructuring charge (defined as charges recorded by the company during the period commencing on October 1, 2016 and ending December 31, 2019, related to operational efficiency initiatives), provided that for any twelve-month period such charges added back to Adjusted Consolidated EBITDA shall not 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. In addition, the credit facility contains other customary covenants.

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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, we had access to $77 million of lines of credit which expire at various times throughout 2017 and 2018 and are generally renewed annually. We did not have any borrowings outstanding related to these facilities as of October 1, 2017 and December 31, 2016.

Domestic and international short-term funds

Many of our operations are conducted outside the United States. The amount of funds held in the United States 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). Repatriation of overseas funds can result in additional United States, federal, state and local income tax payments. We record 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. taxes is provided.

Global economic conditions

The challenging economic environment has 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 further economic downturn would not impact our ability to obtain financing in the future.

Debt

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 senior notes offering) in a private placement, with an original issue discount of $10 million.

The 2013, 2015 and 2017 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 and 2017 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 of any series, in whole or in part, at any time by paying a “make whole” premium, plus accrued and unpaid interest to, but excluding, the date of redemption. Pursuant to our tax matters agreement with Pfizer, we will not be permitted to redeem the 2013 senior notes due 2023 pursuant to this optional redemption provision, except under limited circumstances. Upon the occurrence of a change of control of us and a downgrade of the 2013, 2015 and 2017 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 and 2017 senior notes at a price equal to 101% of the aggregate principal amount of the 2013, 2015 and 2017 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:

Description	Principal Amount	Interest Rate	Terms
2013 Senior Note due 2018(a)	$750 million	1.875%	Interest due semi annually, not subject to amortization, aggregate principal due on February 1, 2018
2015 Senior Note due 2020	$500 million	3.450%	Interest due semi annually, not subject to amortization, aggregate principal due on November 13, 2020
2013 Senior Note due 2023	$1,350 million	3.250%	Interest due semi annually, not subject to amortization, aggregate principal due on February 1, 2023
2015 Senior Note due 2025	$750 million	4.500%	Interest due semi annually, not subject to amortization, aggregate principal due on November 13, 2025
2017 Senior Note due 2027	$750 million	3.000%	Interest due semi annually, not subject to amortization, aggregate principal due on September 12, 2027
2013 Senior Note due 2043	$1,150 million	4.700%	Interest due semi annually, not subject to amortization, aggregate principal due on February 1, 2043
2017 Senior Note due 2047	$500 million	3.950%	Interest due semi annually, not subject to amortization, aggregate principal due on September 12, 2047

^(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
	Paper	Long-term Debt		Date of
Name of Rating Agency	Rating	Rating	Outlook	Last Action
Moody’s	P-2	Baa1	Stable	August 2017
S&P	A-2	BBB	Stable	December 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)	Total		2017		2018 - 2019		2020 - 2021		Thereafter
Purchase obligation	$	65	$	9	$	23	$	33	$	—

Share Repurchase Program

In December 2016, the company's Board of Directors authorized a $1.5 billion share repurchase program. 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 nine months of 2017, approximately six million shares were repurchased. As of October 1, 2017, there was approximately $1.1 billion remaining under this authorization.

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, or December 31, 2016, 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.

In August 2017, the FASB 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 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 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”, “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 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, 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, 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. 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 restrictions and bans on the use of antibacterials in food-producing animals;

• perceived adverse effects on human health linked to the consumption of food derived from animals that utilize our products;

• 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;

• an outbreak of infectious disease carried by animals;

• adverse weather conditions and the availability of natural resources;

• adverse global economic conditions;

• failure of our R&D, acquisition and licensing efforts to generate new products;

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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 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.

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. 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

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, 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, 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, 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 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 million. For additional details, see Notes to Condensed Consolidated Financial Statements— Note 8B. Financial Instruments: Derivative Financial Instruments— Foreign Exchange Risk.

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 commercial paper and revolving credit facility will be exposed to interest rate fluctuations. At October 1, 2017, there was no commercial paper borrowings outstanding and no outstanding principal balance under our revolving credit facility. See Notes to Condensed Consolidated Financial Statements— Note 8B. Financial Instruments: Derivative Financial Instruments— Interest Rate Risk.

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, 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

The information required by this Item is incorporated herein by reference to Notes to Condensed Consolidated Financial Statements—Note 15. Commitments and Contingencies in Part I— Item 1, of this Quarterly Report on Form 10-Q.

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 2016 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 2016 Annual Report on Form 10-K.

Risks related to our business and industry

Restrictions and bans on the use of antibacterials in food-producing animals may become more prevalent.

The issue of the potential transfer of increased antibacterial resistance in bacteria from food-producing animals to human pathogens, and the causality of that transfer, continue to be the subject of global scientific and regulatory discussion. Antibacterials refer to small molecules that can be used to treat or prevent bacterial infections and are a sub-categorization of the products that make up our anti-infectives and medicated feed additives portfolios. In some countries, this issue has led to government restrictions and bans on the use of specific antibacterials 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 billion for the year ended December 31, 2016.

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 to many of our products. Generic competitors 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

51 |

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 Pfizer as a result of the separation on June 24, 2013. The potential impact of the mandatory deemed repatriation proposal 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 intention 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.

52 |

Risks related to our indebtedness

We have substantial indebtedness.

We have a significant amount of indebtedness, which could materially adversely affect our operating results, financial condition and liquidity. As 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.

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

The following table provides information with respect to the shares of the company’s common stock repurchased during the quarter ended

October 1, 2017:

	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, 2017	549,823	$62.67	548,880	$1,215,819,371
July 31 - August, 27, 2017	688,449	$61.35	687,934	$1,173,604,800
August 28 - October 1, 2017	763,912	$63.57	761,087	$1,125,202,790
	2,002,184	$62.56	1,997,901	$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

None

Item 4. Mine Safety Disclosures

None

Item 5. Other Information

None

Item 6. Exhibits

Exhibit 3.1	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))
Exhibit 3.2	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
Exhibit 31.2	Chief Financial Officer–Certification pursuant to Sarbanes-Oxley Act of 2002 Section 302
Exhibit 32.1	Chief Executive Officer–Certification pursuant to Sarbanes-Oxley Act of 2002 Section 906
Exhibit 32.2	Chief Financial Officer–Certification pursuant to Sarbanes-Oxley Act of 2002 Section 906
EX-101.INS	INSTANCE DOCUMENT
EX-101.SCH	SCHEMA DOCUMENT
EX-101.CAL	CALCULATION LINKBASE DOCUMENT
EX-101.LAB	LABELS LINKBASE DOCUMENT
EX-101.PRE	PRESENTATION LINKBASE DOCUMENT
EX-101.DEF	DEFINITION LINKBASE DOCUMENT

53 |

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.
November 2, 2017	By:	/S/ JUAN RAMÓN ALAIX
		Juan Ramón Alaix
		Chief Executive Officer and Director
November 2, 2017	By:	/S/ GLENN DAVID
		Glenn David
		Executive Vice President and
		Chief Financial Officer

54 |

EX-12

Exhibit 12

ZOETIS INC. AND SUBSIDIARIES

COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES^(a) 

	Nine months ended
	October 1,			Year Ended December 31,
(IN MILLIONS, EXCEPT RATIOS)	2017			2016			2015		2014		2013			2012
Determination of earnings:
Income before provision for taxes on income
and noncontrolling interests	$	1,095		$	1,228		$	545	$	820	$	690		$	710
Less: Net income/(loss) attributable to noncontrolling interests	(1		)	(2		)	—		4		(1		)	—
Income attributable to Zoetis Inc.	1,096			1,230			545		816		691			710
Add: fixed charges	135			177			137		131		127			37
Total earnings as defined	$	1,231		$	1,407		$	682	$	947	$	818		$	747
Fixed charges:
Interest expense, net of capitalized interest(a)	$	125		$	166		$	124	$	117	$	113		$	31
Capitalized interest	3			3			4		4		3			—
Interest portion of rent expense(b)	7			8			9		10		11			6
Fixed charges	$	135		$	177		$	137	$	131	$	127		$	37
Ratio of earning to fixed charges	9.1			7.9			5.0		7.2		6.4			20.2

^(a)  Interest expense includes amortization of debt discount and fees. Interest expense does not include interest related to uncertain tax positions.

^(b)  One-third of all rental expense is deemed to be interest, which we believe to be a conservative estimate of an interest factor in our leases.

EX-15

Exhibit 15

ACCOUNTANTS’ ACKNOWLEDGEMENT

To the Shareholders and Board of Directors

Zoetis Inc.:

We hereby acknowledge our awareness of the use therein of our report dated November 2, 2017, included within the Quarterly Report on Form 10-Q of Zoetis Inc. for the quarter ended October 1, 2017, in the following Registration Statements:

• Form S-8, dated February 1, 2013, (File No. 333-186367),

• Form S-8, dated June 25, 2013, (File No. 333-189573),

• Form S-8, dated November 10, 2014, (File No. 333-200073), and

• Form S-3, dated July 21, 2015, (File No. 333-205777).

Pursuant to Rule 436 under the Securities Act of 1933 (the Act), such report is not considered a part of a registration statement prepared or certified by an independent registered public accounting firm, or a report prepared or certified by an independent registered public accounting firm within the meaning of Sections 7 and 11 of the Act.

/s/ KPMG LLP

Short Hills, New Jersey

November 2, 2017

EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TOSECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Juan Ramón Alaix, certify that:

1. I have reviewed this Quarterly Report of Zoetis Inc. on Form 10-Q for the period ending October 1, 2017 as filed with the Securities and Exchange Commission on the date hereof;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

November 2, 2017	By:	/s/ JUAN RAMÓN ALAIX
		Juan Ramón Alaix
		Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TOSECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Glenn David, certify that:

1. I have reviewed this Quarterly Report of Zoetis Inc. on Form 10-Q for the period ending October 1, 2017 as filed with the Securities and Exchange Commission on the date hereof;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

November 2, 2017	By:	/s/ GLENN DAVID
		Glenn David
		Executive Vice President and
		Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICERPURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to 18 U.S.C. §1350, I, Juan Ramón Alaix, Chief Executive Officer, hereby certify that, to the best of my knowledge, the Quarterly Report on Form 10-Q of Zoetis Inc. for the period ended October 1, 2017 (the "Report") (1) fully complies with Section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Zoetis Inc.

November 2, 2017	By:	/s/ JUAN RAMÓN ALAIX
		Juan Ramón Alaix
		Chief Executive Officer

EX-32.2

Exhibit 32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to 18 U.S.C. §1350, I, Glenn David, Executive Vice President and Chief Financial Officer, hereby certify that, to the best of my knowledge, the Quarterly Report on Form 10-Q of Zoetis Inc. for the period ended October 1, 2017 (the “Report”) (1) fully complies with Section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Zoetis Inc.

November 2, 2017	By:	/s/ GLENN DAVID
		Glenn David
		Executive Vice President and
		Chief Financial Officer

XML

Document and Entity Information - shares	9 Months Ended
	Oct. 01, 2017	Oct. 26, 2017
Document and Entity Information [Abstract]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Oct. 01, 2017
Document Fiscal Year Focus	2017
Document Fiscal Period Focus	Q3
Trading Symbol	ZTS
Entity Registrant Name	Zoetis Inc.
Entity Central Index Key	0001555280
Current Fiscal Year End Date	--12-31
Entity Filer Category	Large Accelerated Filer
Entity common Stock, Shares Outstanding		487,288,245

XML

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) - USD ($) shares in Millions, $ in Millions		3 Months Ended		9 Months Ended
		Oct. 01, 2017	Oct. 02, 2016	Oct. 01, 2017	Oct. 02, 2016
Income Statement [Abstract]
Revenue		$ 1,347	$ 1,241	$ 3,847	$ 3,611
Costs and expenses:
Cost of Sales	[1]	435	410	1,318	1,198
Selling, general and administrative expenses	[1]	328	345	973	1,003
Research and development expenses	[1]	96	90	272	268
Amortization of intangible assets	[1]	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	[2]	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 (in dollars per share)		$ 0.61	$ 0.48	$ 1.60	$ 1.34
Diluted (in dollars per share)		$ 0.61	$ 0.48	$ 1.59	$ 1.34
Weighted-average common shares outstanding:
Basic (in shares)		489.1	495.2	490.8	496.3
Diluted (in shares)		492.4	497.9	493.9	498.8
Dividends paid per common share (in dollars per share)		$ 0	$ 0	$ 0.210	$ 0.190

[1] 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.

[2] Defined as income before provision for taxes on income.

XML

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) - USD ($) $ in Millions		3 Months Ended		9 Months Ended
		Oct. 01, 2017	Oct. 02, 2016	Oct. 01, 2017	Oct. 02, 2016
Statement of Comprehensive Income [Abstract]
Net income before allocation to noncontrolling interests		$ 296	$ 237	$ 782	$ 665
Other comprehensive income/(loss), net of taxes and reclassification adjustments:
Unrealized losses on derivatives, net	[1]	(10)	1	(11)	(2)
Foreign currency translation adjustments, net		98	49	154	114
Benefit plans: Actuarial (losses)/gains, net	[1]	0	(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	0	0
Comprehensive income attributable to Zoetis Inc.		$ 385	$ 285	$ 926	$ 779

[1] 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.

XML

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) - USD ($) $ in Millions		Oct. 01, 2017	Dec. 31, 2016
Assets
Cash and cash equivalents	[1]	$ 1,981	$ 727
Restricted cash		7
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	0
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	0
Accounts payable		213	265
Dividends payable		0	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	0
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		0	0
Stockholders' equity:
Preferred stock, $0.01 par value: 1,000,000,000 authorized, none issued		0	0
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

[1] As of October 1, 2017, includes $7 million of restricted cash.

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CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (PARENTHETICAL) - USD ($) $ in Millions		Oct. 01, 2017	Dec. 31, 2016
Statement of Financial Position [Abstract]
Allowance for doubtful accounts		$ 29	$ 30
Accumulated depreciation		$ 1,447	$ 1,358
Preferred stock, par value (in dollars per share)		$ 0.01	$ 0.01
Preferred stock, shares authorized		1,000,000,000	1,000,000,000
Preferred stock, shares issued		0	0
Common stock, par value (in dollars per share)		$ 0.01	$ 0.01
Common stock, shares authorized		6,000,000,000	6,000,000,000
Common stock issued, shares	[1]	501,891,243	501,891,243
Common stock, shares outstanding		487,832,003	492,855,297
Treasury stock, shares	[1]	14,059,240	9,035,946

[1] Shares may not add due to rounding.

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CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED) - USD ($) $ in Millions		Total	Common Stock	[1]	Treasury Stock	[1]	Additional Paid-in Capital	Retained Earnings	Accumulated Other Comprehensive Loss	Equity Attributable to Noncontrolling Interests
Beginning balance at Dec. 31, 2015		$ 1,091	$ 5		$ (203)		$ 1,012	$ 876	$ (622)	$ 23
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net income		665						667		(2)
Other comprehensive income		114							114
Share-based compensation awards	[2]	51			77			(26)
Treasury stock acquired	[3]	(225)			(225)
Employee benefit plan contribution from Pfizer Inc.	[4]	2					2
Divestitures	[5]	(6)							2	(8)
Dividends declared		(94)						(94)
Ending balance at Oct. 02, 2016		1,598	5		(351)		1,014	1,423	(506)	13
Beginning balance at Dec. 31, 2016		1,499	5		(421)		1,024	1,477	(598)	12
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net income		782						783		(1)
Other comprehensive income		144							143	1
Consolidation of a noncontrolling interest	[6]	18								18
Share-based compensation awards	[2]	52			63		6	(17)
Treasury stock acquired	[3]	(375)			(375)
Employee benefit plan contribution from Pfizer Inc.	[4]	2					2
Dividends declared		(103)						(103)
Ending balance at Oct. 01, 2017		$ 2,019	$ 5		$ (733)		$ 1,032	$ 2,140	$ (455)	$ 30

[1] 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.

[2] 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.

[3] Reflects the acquisition of treasury shares in connection with the share repurchase program. For additional information, see Note 13. Stockholders' Equity.

[4] 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.

[5] Reflects the divestiture of our share of our Taiwan joint venture. See Note 4. Acquisitions and Divestitures: Divestitures.

[6] Represents the consolidation of a European livestock monitoring company, a variable interest entity of which Zoetis is the primary beneficiary.

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CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED) (PARENTHETICAL) - shares		Oct. 01, 2017	Dec. 31, 2016	Oct. 02, 2016	Dec. 31, 2015
Statement of Stockholders' Equity [Abstract]
Common stock, shares outstanding		487,832,003	492,855,297	494,240,780
Treasury stock, shares	[1]	14,059,240	9,035,946	7,650,463	4,410,000

[1] Shares may not add due to rounding.

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - USD ($) $ in Millions		9 Months Ended
		Oct. 01, 2017		Oct. 02, 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	[1],[2]	179		177
Share-based compensation expense		33		28
Restructuring		7		(15)
Asset Impairment Charges		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		0		(5)
Proceeds from Issuance of Debt		1,231
Principal payments on long-term debt		0		(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	[3]	(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		0
Net increase/(decrease) in cash and cash equivalents		1,254		(503)
Cash and cash equivalents at beginning of period		727	[4]	1,154
Cash and cash equivalents at end of period		1,981	[4]	651
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	[5]	$ 0		$ 29

[1] 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.

[2] Defined as income before provision for taxes on income.

[3] Reflects the acquisition of treasury shares in connection with the share repurchase programs. For additional information, see Note 13. Stockholders' Equity.

[4] As of October 1, 2017, includes $7 million of restricted cash.

[5] For 2016, relates primarily to the non-cash portion of the acquisition of a livestock business in South America.

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Organization

9 Months Ended

Oct. 01, 2017

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Organization

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 and vaccines, with a focus on both livestock and companion animals. We organize and operate our business in two geographic regions: the United States (U.S.) and International.

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

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Basis of Presentation

9 Months Ended

Oct. 01, 2017

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Basis of Presentation

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 States are as of and for the three and nine-month periods ended August 27, 2017, and August 28, 2016.

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.

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 2016 Annual Report on Form 10-K.

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Significant Accounting Policies

9 Months Ended

Oct. 01, 2017

Accounting Policies [Abstract]

Significant Accounting Policies

Significant Accounting Policies

Recently Adopted Accounting Standards

In January 2017, the Financial Accounting Standards Board (FASB) issued an accounting standards update which clarifies the definition of a business. Under the new guidance, a set of integrated activities and assets is a business only if it has, at a minimum, an input and substantive process that together significantly contribute to 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 all 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. We adopted this guidance as of January 1, 2017. This guidance did not have a significant impact on our consolidated financial statements.

Recently Issued Accounting Standards

In August 2017, the FASB 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 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 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 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.

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Acquisitions and Divestitures

9 Months Ended

Oct. 01, 2017

Business Combinations [Abstract]

Acquisitions and Divestitures

Acquisitions and Divestitures

Acquisitions

During the third quarter of 2017, we completed the acquisition of an Irish biologic therapeutics company. During the first quarter of 2017, we completed the purchase of 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 announced an agreement with the Brazilian-based pharmaceutical company União Química (UQ) to sell our 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:

	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 million and recorded a net pre-tax gain of approximately $2 million within Other (income)/deductions—net. Additionally, in the second quarter of 2017, we recorded a $4 million expense within Other (income)/deductions—net related to the 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 company with an animal health business 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.

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.

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

9 Months Ended

Oct. 01, 2017

Restructuring and Related Activities [Abstract]

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

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. This may include charges related to employees, assets and activities that will not continue. All operating functions can be impacted by these actions, including sales and marketing, manufacturing and research and development (R&D), as well as functions such as business 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 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	)

^(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/(reversals) for the three months ended October 1, 2017, are primarily related to:

• employee termination costs of $3 million related to the operational efficiency initiative and supply network strategy;

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

• 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:

• For the three months endedOctober 1, 2017, International ($1 million reversal) and Manufacturing/research/corporate ($7 million).

• For the nine months endedOctober 1, 2017, International ($2 million reversal) and Manufacturing/research/corporate ($5 million).

• For the three months endedOctober 2, 2016, International ($1 million reversal) and Manufacturing/research/corporate ($5 million).

• For the nine months endedOctober 2, 2016, U.S. ($2 million reversal), International ($16 million reversal) and Manufacturing/research/corporate ($1 million).

Charges related to the operational efficiency initiative and supply network strategy 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:
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 endedOctober 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 endedOctober 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 endedOctober 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 endedOctober 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.

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.

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Other (Income)/Deductions - Net

9 Months Ended

Oct. 01, 2017

Other Income and Expenses [Abstract]

Other (Income)/Deductions - Net

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 endedOctober 2, 2016, represents an impairment of finite-lived trademarks related to a canine pain management product.

^(b)  For the three and nine months endedOctober 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 endedOctober 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 endedOctober 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 endedOctober 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 endedOctober 2, 2016, primarily represents income associated with certain state business employment tax incentive credits.

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Income Taxes

9 Months Ended

Oct. 01, 2017

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

A. Taxes on Income

The effective tax rate was 28.3% for the three months ended October 1, 2017, compared with 28.8% for the three months ended October 2, 2016. The lower effective tax rate for the three months ended October 1, 2017, was primarily attributable to:

• 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.

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 million net discrete tax expense recorded in the first half of 2016, related to changes in uncertain tax positions due to the impact of the European Commission’s negative decision on the excess profits rulings in Belgium, 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;

• 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 $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 million discrete tax benefit recorded in the first quarter of 2017 and 2016, respectively, related to a revaluation of deferred taxes as a result of a change in statutory tax rates.

B. Deferred Taxes

As of October 1, 2017, the total net deferred income tax liability of $175 million is included in Deferred tax assets ($94 million) and Deferred tax liabilities ($269 million).

As of December 31, 2016, the total net deferred income tax liability of $148 million is included in Deferred tax assets ($96 million) and Deferred tax liabilities ($244 million).

C. Tax Contingencies

As of October 1, 2017, the tax liabilities associated with uncertain tax positions of $81 million (exclusive of interest and penalties related to uncertain tax positions of $12 million) are included in Deferred tax assets ($4 million) and Other taxes payable ($77 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.

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Financial Instruments

9 Months Ended

Oct. 01, 2017

Financial Instruments [Abstract]

Financial Instruments

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 $1.0 billion senior unsecured revolving credit facility (the credit facility), which expires in December 2021. Subject to certain conditions, we have the right to increase the credit facility to up to $1.5 billion. The credit facility contains a financial covenant requiring us to not exceed a maximum total leverage ratio (the ratio of consolidated net debt as of the end of the period to consolidated Earnings Before Interest, Income Taxes, Depreciation and Amortization (EBITDA) for such period) of 3.50:1. Upon entering into a material acquisition, the maximum total leverage ratio increases to 4.00:1, and extends until the fourth full consecutive fiscal quarter ended immediately following the consummation of a material acquisition. The credit facility also contains a clause which adds back to Adjusted Consolidated EBITDA, any operational efficiency restructuring charge (defined as charges recorded by the company during the period commencing on October 1, 2016 and ending December 31, 2019, related to operational efficiency initiatives), provided that for any twelve-month period such charges added back to Adjusted Consolidated EBITDA shall not 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. In addition, the credit facility contains other customary covenants.

We were in compliance with all financial covenants as of October 1, 2017, and December 31, 2016. There were no amounts drawn under the credit facility as of October 1, 2017, or December 31, 2016.

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, we had access to $77 million of lines of credit which expire at various times throughout 2017 and 2018 and are generally renewed annually. We did not have any borrowings outstanding related to these facilities as of October 1, 2017, and December 31, 2016.

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, and December 31, 2016, there was no 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.

Senior Notes and Other Long-Term Debt

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 senior notes offering) 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.

The 2013, 2015 and 2017 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 and 2017 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, in whole or in part, at any time by paying a “make whole” premium, plus accrued and unpaid interest to, but excluding, the date of redemption. Pursuant to our tax matters agreement with Pfizer, we will not be permitted to redeem the 2013 senior notes due 2023 pursuant to this optional redemption provision, except under limited circumstances. Upon the occurrence of a change of control of us and a downgrade of the 2013, 2015 and 2017 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 and 2017 senior notes at a price equal to 101% of the aggregate principal amount of the 2013, 2015 and 2017 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:

	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 million and $4,565 million as of October 1, 2017, and December 31, 2016, 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, matures in the following years:

										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 million and $125 million for the three and nine months endedOctober 1, 2017, respectively, and $41 million and $125 million for the three and nine months endedOctober 2, 2016, respectively. Capitalized interest was $1 million and $3 million for the three and nine months endedOctober 1, 2017, respectively, and $1 million and $2 million for the three and nine months ended October 2, 2016, respectively.

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 derivative financial instruments. These financial instruments serve to 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 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 has not designated the foreign currency forward-exchange contracts 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.

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 unrealized gains or losses on the forward-starting interest rate swaps are reported in Accumulated other comprehensive loss and are recognized in income 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, we entered into forward starting interest rate swaps with an aggregate notional value of $500 million. During the third quarter of 2017, we also entered in treasury lock trades with an aggregate notional value of $500 million. We designated these swaps and treasury locks (contracts) as cash flow hedges against interest rate exposure related principally to the anticipated future issuance of fixed-rate debt to be used primarily to refinance our 1.875% 2013 senior note due in 2018. Upon issuance of our 2017 senior notes (see A. Debt: Senior Notes and Other Long-Term Debt), we terminated these contracts and paid $3 million in cash to the counterparties for settlement. The settlement amount, which represents the fair value of the contracts at the time of termination, was recorded in Accumulated other comprehensive loss, and will be amortized into income over the life of the 2017 senior notes. There was $0.1 million 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 years we had entered into various forward-starting interest rate swap contracts that were designated as cash flow hedges and that were terminated upon issuance of fixed-rate notes.

Fair Value of Derivative Instruments

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

		Fair Value of Derivatives
		October 1,			December 31,
(MILLIONS OF DOLLARS)	Balance Sheet Location	2017			2016
Derivatives Not Designated as Hedging Instruments
Foreign currency forward-exchange contracts	Other 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 contracts	Other current assets	—			17
Total derivatives designated as hedging instruments		—			17
Total derivatives		$	(8	)	$	21

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 losses on derivative instruments not designated as hedging instruments, recorded in 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
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.

The amounts of unrecognized net gains/(losses) on derivative instruments designated as cash flow hedges, recorded, net of tax, in Other comprehensive income/(loss), are as follows:

	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	)

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

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Inventories

9 Months Ended

Oct. 01, 2017

Inventory Disclosure [Abstract]

Inventories

Inventories

The components of inventory are as follows:

	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

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Goodwill and Other Intangible Assets

9 Months Ended

Oct. 01, 2017

Goodwill and Intangible Assets Disclosure [Abstract]

Goodwill and Other Intangible Assets

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.		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)  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 million and $2,017 million as of October 1, 2017, and December 31, 2016, respectively. Accumulated goodwill impairment losses were $536 million as of October 1, 2017, and December 31, 2016.

B. Other Intangible Assets

The components of identifiable intangible assets are as follows:

	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

^(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 million and $75 million for the three and nine months endedOctober 1, 2017, respectively, and $24 million and $72 million for the three and nine months endedOctober 2, 2016, respectively.

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Benefit Plans

9 Months Ended

Oct. 01, 2017

Retirement Benefits [Abstract]

Benefit Plans

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 endedOctober 1, 2017, and October 2, 2016.

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 endedOctober 1, 2017, respectively, and $1 million and $7 million for the three and nine months endedOctober 2, 2016, respectively. We expect to contribute a total of approximately $7 million to these plans in 2017.

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Share-Based Payments

9 Months Ended

Oct. 01, 2017

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Share-Based Payments

Share-Based Payments

The company may grant a variety of share-based payments under the Zoetis 2013 Equity and Incentive Plan (the Equity Plan) 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				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)  For the three months endedOctober 1, 2017, and October 2, 2016, amounts capitalized to inventory were insignificant. For the nine months endedOctober 1, 2017, and October 2, 2016, we capitalized $1 million of share-based compensation expense to inventory.

^(b)  For the three and nine months endedOctober 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 nine months endedOctober 1, 2017, the company granted 716,322 stock options with a weighted-average exercise price of $55.13 per stock option and a weighted-average fair value of $14.31 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%; expected dividend yield of 0.76%; expected stock price volatility of 23.27%; and expected term of 6.5 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 nine months endedOctober 1, 2017, the company granted 537,086 RSUs with a weighted-average grant date fair value of $55.14 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 nine months endedOctober 1, 2017, the company granted 136,964 PSUs with a weighted-average grant date fair value of $74.28 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 index at the start of the performance period (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% and 25.5%, respectively. Depending on the company’s Relative TSR performance at the end of the performance period, the recipient may earn between 0% and 200% of the target number of units. Vested units 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.

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Stockholders' Equity

9 Months Ended

Oct. 01, 2017

Equity [Abstract]

Stockholders' Equity

Stockholders' Equity

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

In November 2014, the company's Board of Directors authorized a $500 million share repurchase program. This program was substantially completed as of December 31, 2016. In December 2016, the company's Board of Directors authorized an additional $1.5 billion share repurchase program. 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.

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, are as follows:

				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.

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Earnings per Share

9 Months Ended

Oct. 01, 2017

Earnings Per Share [Abstract]

Earnings per Share

Earnings per Share

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

	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
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
Denominator
Weighted-average common shares outstanding	489.1			495.2			490.8			496.3
Common stock equivalents: stock options, RSUs, PSUs and DSUs	3.3			2.7			3.1			2.5
Weighted-average common and potential dilutive shares outstanding	492.4			497.9			493.9			498.8
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

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 endedOctober 1, 2017, and approximately 1 million for the nine months endedOctober 1, 2017, and both the three and nine months endedOctober 2, 2016.

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Commitments and Contingencies

9 Months Ended

Oct. 01, 2017

Commitments and Contingencies Disclosure [Abstract]

Commitments and Contingencies

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. Income Taxes.

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 States and in other countries.

Certain of these contingencies could result in losses, including damages, fines and/or civil penalties, and/or criminal charges, which could be substantial.

We believe that we have strong defenses in these types of matters, but litigation is inherently unpredictable and excessive verdicts do occur. We do not believe that any of these matters will have a material adverse effect on our financial position. However, we could incur judgments, enter into settlements or revise our expectations regarding the outcome of certain matters, and such developments could have a material adverse effect on our results of operations or cash flows in the period in which the amounts are paid.

We have accrued for losses that are both probable and reasonably estimable. Substantially all of these contingencies are subject to significant uncertainties and, therefore, determining the likelihood of a loss and/or the measurement of any loss can be complex. Consequently, we are unable to estimate the range of reasonably possible loss in excess of amounts accrued. Our assessments are based on estimates and assumptions that have been deemed reasonable by management, but the assessment process relies on estimates and assumptions that may prove to be incomplete or inaccurate, and unanticipated events and circumstances may occur that might cause us to change those estimates and assumptions.

Amounts recorded for legal and environmental contingencies can result from a complex series of judgments about future events and uncertainties and can rely on estimates and assumptions.

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

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 five other large companies alleging that waste sent to a local waste incineration facility for destruction, but that was not ultimately destroyed as the facility lost its operating permit, caused environmental impacts requiring cleanup.

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

At the request of the Municipal prosecutor, in April 2012, the lawsuit was suspended for one year. Since that time, the prosecutor has initiated investigations into the Municipality's actions in the matter as well as the efforts undertaken by the six defendants to remove and dispose of their individual waste from the incineration facility. On October 3, 2014, the Municipal prosecutor announced that the investigation remained ongoing and outlined the terms of a proposed Term of Reference (a document that establishes the minimum elements to be addressed in the preparation of an Environmental Impact Assessment), under which the companies would be liable to withdraw the waste and remediate the area. On March 5, 2015, we presented our response to the prosecutor’s proposed Term of Reference, arguing that the proposed terms were overly general in nature and expressing our interest in discussing alternatives to address the matter. The prosecutor agreed to consider our request to engage a technical consultant to conduct an environmental diagnostic of the contaminated area. On May 29, 2015, we, in conjunction with the other defendant companies, submitted a draft cooperation agreement to the prosecutor, which outlined the proposed terms and conditions for the engagement of a technical consultant to conduct the environmental diagnostic. On August 19, 2016, the parties entered into a cooperation agreement with the prosecutor, pursuant to which a third-party consultant will conduct a limited environmental assessment of the site. In 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 available in November 2017.

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 feed supply of certain turkey and hog feed mills in Michigan. 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 are that lascadoil intended to be sold for reuse as biofuel was inadvertently sold to producers of soy oil, who in turn, unknowingly sold the contaminated soy oil to fat recycling vendors, who then 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® (lasalocid sodium) and Bovatec® (lasalocid sodium) products as one 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 all 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. Under the terms of the agreement, the environmental company is expressly prohibited from reselling the lascadoil to be used as a component in food. The FDA inspected the Zoetis site where Avatec and Bovatec are manufactured, and found no evidence that Zoetis was involved in the contamination of the animal feed.

On March 10, 2015, plaintiffs Restaurant Recycling, LLC (Restaurant Recycling) and Superior Feed Ingredients, LLC (Superior), both of whom are in the fat recycling business, filed a complaint in the Seventeenth Circuit Court for the State of Michigan against Shur-Green Farms alleging negligence and breach of warranty claims arising from their purchase of soy oil allegedly contaminated with lascadoil. Plaintiffs resold the allegedly contaminated soy oil to turkey feed mills for use in feed ingredient. Plaintiffs also named Zoetis as a defendant in the complaint alleging that Zoetis failed to properly manufacture its products and breached an implied warranty that the soy oil was fit for use at turkey and hog mills. Zoetis was served with the complaint on June 3, 2015, and we filed our answer, denying all allegations, on July 15, 2015. On August 10, 2015, several of the turkey feed mills filed a joint complaint against Restaurant Recycling, Superior, Shur-Green Farms and others, alleging claims for negligence, misrepresentation, and breach of warranty, arising out of their alleged purchase and use of the contaminated soy oil. The complaint raises only one count against Zoetis for negligence. We filed an answer to the complaint on November 2, 2015, denying the allegation. On May 16, 2016, two additional turkey producers filed a complaint in the Seventeenth Circuit Court for the State of Michigan against the company, Restaurant Recycling, Superior, Shur-Green Farms and others, alleging claims for negligence and breach of warranties. We filed an answer to the complaint on June 20, 2016, denying the allegations. The Court consolidated all three cases in Michigan for purposes of discovery and disposition. On July 11, 2017, we filed a motion for summary disposition on the grounds that plaintiffs have not identified any factual issues that need to be resolved by a jury and that Zoetis is entitled to judgment as a matter of law. On October 10, 2017, the Circuit Court granted our motion for summary disposition and dismissed all of plaintiffs’ claims against us. While the plaintiffs have the right to appeal the decision of the Circuit Court, we continue to believe that we have strong arguments against all claims.

Other Matters

The European Commission 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. Alpharma LLC's involvement is solely related to its human health activities prior to Pfizer's acquisition of King/Alpharma. Under the Global Separation Agreement between Pfizer and Zoetis, Pfizer is obligated to indemnify Zoetis for any liabilities arising out of claims not related to its animal health assets. We filed an appeal of the decision on September 6, 2013, to the General Court of the European Union. On September 8, 2016, the General Court upheld the decision of the European Commission. On November 25, 2016, we filed an appeal to the Court of Justice of the European Union and are awaiting a ruling.

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

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Segment and Other Revenue Information

9 Months Ended

Oct. 01, 2017

Segment Reporting [Abstract]

Segment and Other Revenue Information

Segment and Other Revenue Information

A. Segment Information

Operating Segments

We manage our operations through two geographic operating segments: the United States 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 and other pharmaceuticals, for both livestock and companion animal customers. Our chief operating decision maker uses the revenue and earnings of the two operating segments, among other factors, for performance evaluation and resource allocation.

Other Costs and Business Activities

Certain costs are not allocated to our operating segment results, such as costs associated with the following:

• Other business activities includes our Client Supply Services (CSS) contract manufacturing results, as well as 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 for platform functions such as business technology, facilities, legal, finance, human resources, business development, 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.

• 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) 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.

Selected Statement of Income Information

	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

	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 $169 million and $472 million for the three and nine months endedOctober 1, 2017, respectively, and $157 million and $469 million for the three and nine months endedOctober 2, 2016, respectively.

^(c)  For the three months endedOctober 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 endedOctober 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 endedOctober 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 endedOctober 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, and consulting fees of $14 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 Species

Species revenue are as follows:

	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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Significant Accounting Policies (Policies)

9 Months Ended

Oct. 01, 2017

Accounting Policies [Abstract]

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 States are as of and for the three and nine-month periods ended August 27, 2017, and August 28, 2016.

Recently Adopted Accounting Standards and Recently Issued Accounting Standards

Recently Adopted Accounting Standards

In January 2017, the Financial Accounting Standards Board (FASB) issued an accounting standards update which clarifies the definition of a business. Under the new guidance, a set of integrated activities and assets is a business only if it has, at a minimum, an input and substantive process that together significantly contribute to 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 all 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. We adopted this guidance as of January 1, 2017. This guidance did not have a significant impact on our consolidated financial statements.

Recently Issued Accounting Standards

In August 2017, the FASB 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 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 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 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.

Tax Contingencies

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.

Foreign Exchange and Interest Rate 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 derivative financial instruments. These financial instruments serve to 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 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 has not designated the foreign currency forward-exchange contracts 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.

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 unrealized gains or losses on the forward-starting interest rate swaps are reported in Accumulated other comprehensive loss and are recognized in income 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, we entered into forward starting interest rate swaps with an aggregate notional value of $500 million. During the third quarter of 2017, we also entered in treasury lock trades with an aggregate notional value of $500 million. We designated these swaps and treasury locks (contracts) as cash flow hedges against interest rate exposure related principally to the anticipated future issuance of fixed-rate debt to be used primarily to refinance our 1.875% 2013 senior note due in 2018. Upon issuance of our 2017 senior notes (see A. Debt: Senior Notes and Other Long-Term Debt), we terminated these contracts and paid $3 million in cash to the counterparties for settlement. The settlement amount, which represents the fair value of the contracts at the time of termination, was recorded in Accumulated other comprehensive loss, and will be amortized into income over the life of the 2017 senior notes. There was $0.1 million 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 years we had entered into various forward-starting interest rate swap contracts that were designated as cash flow hedges and that were terminated upon issuance of fixed-rate notes.

Fair Value of Derivative Instruments

The classificati

Legal Proceedings

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 States and in other countries.

Certain of these contingencies could result in losses, including damages, fines and/or civil penalties, and/or criminal charges, which could be substantial.

We believe that we have strong defenses in these types of matters, but litigation is inherently unpredictable and excessive verdicts do occur. We do not believe that any of these matters will have a material adverse effect on our financial position. However, we could incur judgments, enter into settlements or revise our expectations regarding the outcome of certain matters, and such developments could have a material adverse effect on our results of operations or cash flows in the period in which the amounts are paid.

We have accrued for losses that are both probable and reasonably estimable. Substantially all of these contingencies are subject to significant uncertainties and, therefore, determining the likelihood of a loss and/or the measurement of any loss can be complex. Consequently, we are unable to estimate the range of reasonably possible loss in excess of amounts accrued. Our assessments are based on estimates and assumptions that have been deemed reasonable by management, but the assessment process relies on estimates and assumptions that may prove to be incomplete or inaccurate, and unanticipated events and circumstances may occur that might cause us to change those estimates and assumptions.

Amounts recorded for legal and environmental contingencies can result from a complex series of judgments about future events and uncertainties and can rely on estimates and assumptions.

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

Guarantees and Indemnifications

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

Segment Information

Segment Information

Operating Segments

We manage our operations through two geographic operating segments: the United States 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 and other pharmaceuticals, for both livestock and companion animal customers. Our chief operating decision maker uses the revenue and earnings of the two operating segments, among other factors, for performance evaluation and resource allocation.

Other Costs and Business Activities

Certain costs are not allocated to our operating segment results, such as costs associated with the following:

• Other business activities includes our Client Supply Services (CSS) contract manufacturing results, as well as 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 for platform functions such as business technology, facilities, legal, finance, human resources, business development, 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.

• 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) 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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Acquisitions and Divestitures (Tables)

9 Months Ended

Oct. 01, 2017

Business Combinations [Abstract]

Schedule of Assets and Liabilities Held for Sale

As of October 1, 2017, recorded assets and liabilities held for sale are summarized below:

	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

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Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives (Tables)

9 Months Ended

Oct. 01, 2017

Restructuring and Related Activities [Abstract]

Restructuring and Related Costs

Charges related to the operational efficiency initiative and supply network strategy 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:
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 endedOctober 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 endedOctober 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 endedOctober 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 endedOctober 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.

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.

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	)

^(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/(reversals) for the three months ended October 1, 2017, are primarily related to:

• employee termination costs of $3 million related to the operational efficiency initiative and supply network strategy;

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

• 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:

• For the three months endedOctober 1, 2017, International ($1 million reversal) and Manufacturing/research/corporate ($7 million).

• For the nine months endedOctober 1, 2017, International ($2 million reversal) and Manufacturing/research/corporate ($5 million).

• For the three months endedOctober 2, 2016, International ($1 million reversal) and Manufacturing/research/corporate ($5 million).

• For the nine months endedOctober 2, 2016, U.S. ($2 million reversal), International ($16 million reversal) and Manufacturing/research/corporate ($1 million).

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Other (Income)/Deductions - Net (Tables)

9 Months Ended

Oct. 01, 2017

Other Income and Expenses [Abstract]

Components of 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 endedOctober 2, 2016, represents an impairment of finite-lived trademarks related to a canine pain management product.

^(b)  For the three and nine months endedOctober 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 endedOctober 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 endedOctober 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 endedOctober 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 endedOctober 2, 2016, primarily represents income associated with certain state business employment tax incentive credits.

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Financial Instruments (Tables)

9 Months Ended

Oct. 01, 2017

Financial Instruments [Abstract]

Schedule of Long-term Debt Instruments

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

	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

Schedule of Maturities of Long-term Debt

The principal amount of long-term debt outstanding, as of October 1, 2017, matures in the following years:

										After
(MILLIONS OF DOLLARS)	2018			2019		2020		2021		2021		Total
Maturities	$	750	(a)	$	—	$	500	$	—	$	4,500	$	5,750

Schedule of Derivative Instruments in Statement of Financial Position, Fair Value

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

		Fair Value of Derivatives
		October 1,			December 31,
(MILLIONS OF DOLLARS)	Balance Sheet Location	2017			2016
Derivatives Not Designated as Hedging Instruments
Foreign currency forward-exchange contracts	Other 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 contracts	Other current assets	—			17
Total derivatives designated as hedging instruments		—			17
Total derivatives		$	(8	)	$	21

Schedule of Other Derivatives Not Designated as Hedging Instruments, Statements of Financial Performance and Financial Position, Location

The amounts of net losses on derivative instruments not designated as hedging instruments, recorded in 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
Foreign currency forward-exchange contracts	$	(17	)	$	(25	)	$	(39	)	$	(29	)

Schedule of Cash Flow Hedges Included in Accumulated Other Comprehensive Income (Loss)

The amounts of unrecognized net gains/(losses) on derivative instruments designated as cash flow hedges, recorded, net of tax, in Other comprehensive income/(loss), are as follows:

	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	)

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Inventories (Tables)

9 Months Ended

Oct. 01, 2017

Inventory Disclosure [Abstract]

Components of Inventory

The components of inventory are as follows:

	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

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Goodwill and Other Intangible Assets (Tables)

9 Months Ended

Oct. 01, 2017

Goodwill and Intangible Assets Disclosure [Abstract]

Changes in the Carrying Amount of Goodwill

The components of, and changes in, the carrying amount of goodwill are as follows:

(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)  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.

Components of Identifiable Intangible Assets

The components of identifiable intangible assets are as follows:

	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

^(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.

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Benefit Plans (Tables)

9 Months Ended

Oct. 01, 2017

Retirement Benefits [Abstract]

Schedule of Net Benefit Costs

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

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Share-Based Payments (Tables)

9 Months Ended

Oct. 01, 2017

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Components of Share-based Compensation Expense

The components of share-based compensation expense are as follows:

	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)  For the three months endedOctober 1, 2017, and October 2, 2016, amounts capitalized to inventory were insignificant. For the nine months endedOctober 1, 2017, and October 2, 2016, we capitalized $1 million of share-based compensation expense to inventory.

^(b)  For the three and nine months endedOctober 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.

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Stockholders' Equity (Tables)

9 Months Ended

Oct. 01, 2017

Equity [Abstract]

Changes in Common Shares and Treasury Stock

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

Changes, net of tax, in accumulated other comprehensive loss, excluding noncontrolling interest, are as follows:

				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.

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Earnings per Share (Tables)

9 Months Ended

Oct. 01, 2017

Earnings Per Share [Abstract]

Basic and Diluted Earnings Per Share

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

	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
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
Denominator
Weighted-average common shares outstanding	489.1			495.2			490.8			496.3
Common stock equivalents: stock options, RSUs, PSUs and DSUs	3.3			2.7			3.1			2.5
Weighted-average common and potential dilutive shares outstanding	492.4			497.9			493.9			498.8
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

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Segment and Other Revenue Information (Tables)

9 Months Ended

Oct. 01, 2017

Segment Reporting [Abstract]

Schedule of Selected Income Statement Information by Segment

	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

	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 $169 million and $472 million for the three and nine months endedOctober 1, 2017, respectively, and $157 million and $469 million for the three and nine months endedOctober 2, 2016, respectively.

^(c)  For the three months endedOctober 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 endedOctober 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 endedOctober 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 endedOctober 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, and consulting fees of $14 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.

Schedule of Significant Product Revenues

Revenue by Species

Species revenue are as follows:

	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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Organization (Details) product in Thousands	Oct. 01, 2017 species country region category	May 05, 2015 product
Product Information [Line Items]
Number of regional segments | region	2
Number of countries in which entity markets products	45
Number of core animal species | species	8
Number of major product categories	5	5
Product
Product Information [Line Items]
Number of countries in which entity markets products	100

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Acquisitions and Divestitures (Details) $ in Millions				3 Months Ended				9 Months Ended
		May 11, 2017 USD ($)	Apr. 28, 2016 USD ($)	Oct. 01, 2017 USD ($)	Jul. 02, 2017 USD ($)	Jul. 03, 2016 USD ($)	Apr. 03, 2016 USD ($)	Oct. 01, 2017 USD ($)	Oct. 02, 2016 USD ($)	Feb. 12, 2016 site
Disposal Group, Held-for-sale, Not Discontinued Operations | Guarulhos, Brazil [Member]
Business Acquisition [Line Items]
Disposal Group Including Discontinued Operation Other Deductions and Charges				$ 3				$ 3
Other Deductions and Charges				2
Disposal Group, Including Discontinued Operation, Accounts, Notes and Loans Receivable, Net				1				1
Inventories				9				9
Property, plant and equipment				28				28
Deferred tax assets				5				5
Goodwill				3				3
Other noncurrent assets				14				14
Disposal Group, Including Discontinued Operation, Other Assets	[1]			(3)				(3)
Total				57				57
Accounts payable				3				3
Accrued expenses				3				3
Total				6				6
Disposal Group, Disposed of by Sale, Not Discontinued Operations
Business Acquisition [Line Items]
Total cash proceeds									$ 88
Net gain on sale of assets						$ 6	$ 33
Disposal Group, Disposed of by Sale, Not Discontinued Operations | Shenzhou, China
Business Acquisition [Line Items]
Total cash proceeds		$ 3
Net gain on sale of assets		$ 2
UNITED STATES | Disposal Group, Disposed of by Sale, Not Discontinued Operations | Laurinburg, North Carolina and Longmont, Colorado Manufacturing Sites
Business Acquisition [Line Items]
Net gain on sale of assets					$ 4
Number of manufacturing sites sold | site										2
TAIWAN, PROVINCE OF CHINA | Disposal Group, Disposed of by Sale, Not Discontinued Operations | Taiwan Joint Venture
Business Acquisition [Line Items]
Total cash proceeds			$ 13
Ownership percentage share in Taiwan join venture			55.00%
Supply Network Strategy
Business Acquisition [Line Items]
Net gain on sale of assets	[2]			$ 5				$ 5
Supply Network Strategy | Guarulhos, Brazil [Member]
Business Acquisition [Line Items]
Term of manufacturing and supply agreement								5 years

[1] (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.

[2] 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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Restructuring Charges and Other Costs Associated with Acquisitions and Cost-Reduction/Productivity Initiatives (Details) product in Thousands, $ in Millions		3 Months Ended		9 Months Ended
		Oct. 01, 2017 USD ($) site category	Oct. 02, 2016 USD ($)	Oct. 01, 2017 USD ($) employees site category	Oct. 02, 2016 USD ($)	Dec. 31, 2016 USD ($)	Apr. 28, 2016	May 05, 2015 product
Restructuring Cost and Reserve [Line Items]
Provision for losses on inventory				$ 46	$ 65
Exit costs	[1],[2]	$ (1)	$ 1	0	3
Total Restructuring charges/(reversals) and certain acquisition-related costs		$ 8	4	7	(15)
Restructuring charges (reversals)	[3]			$ 3
Number of major product categories		5		5				5
Number sites planning to sell or exit | site				10
Number of sites divested or exited | site		3		3
Number of international manufacturing sites sold | site		3		3
Number of positions eliminated | employees				2,200
Consulting fees		$ 0	4	$ 1	11
Total charges associated with the operational efficiency initiative and supply network strategy		7	11	11	(23)
Restructuring Reserve [Roll Forward]
Restructuring accrual balance	[3],[4]			90
Provision	[3]			3
Utilization and other	[3],[5]			(48)
Restructuring accrual balance	[3],[4]	45		45
Other current liabilities
Restructuring Reserve [Roll Forward]
Accrued expenses		22		22		$ 61
Other Noncurrent Liabilities
Restructuring Reserve [Roll Forward]
Other noncurrent liabilities		23		23		$ 29
Employee Termination Costs
Restructuring Cost and Reserve [Line Items]
Employee termination costs	[1],[2]	7	3	3	(20)
Operational efficiency initiative and supply network strategy [Member] | Employee Termination Costs
Restructuring Cost and Reserve [Line Items]
Employee termination costs		3		1
Operational Efficiency
Restructuring Cost and Reserve [Line Items]
Provision for losses on inventory		0	1	0	1
Exit costs		(1)	1	0	4
Restructuring charges (reversals)		0	4	2	(22)
Accelerated depreciation		0		0	1
Net loss/(gain) on sale of assets	[6]	(1)		1	(27)
Other cost reduction and cost productivity charges		(1)	5	2	(14)
Restructuring Reserve [Roll Forward]
Provision		0	4	2	(22)
Operational Efficiency | Employee Termination Costs
Restructuring Cost and Reserve [Line Items]
Employee termination costs	[7]	(1)	(3)	(2)	26
Supply Network Strategy
Restructuring Cost and Reserve [Line Items]
Employee termination costs		(2)		3	(6)
Restructuring charges (reversals)		2	0	(3)	6
Accelerated depreciation		0	2	2	4
Net loss/(gain) on sale of assets	[8]	5		5
Other cost reduction and cost productivity charges		6	2	10	7
Consulting fees		2		4	3
Other Restructuring Costs	[9]	(1)		(1)
Restructuring Reserve [Roll Forward]
Provision		2	0	(3)	6
Zoetis Initiatives
Restructuring Cost and Reserve [Line Items]
Restructuring charges (reversals)		2	4	(1)	(16)
Restructuring Reserve [Roll Forward]
Provision		2	4	$ (1)	(16)
Minimum
Restructuring Cost and Reserve [Line Items]
Number of positions terminated | employees				2,000
Restructuring, new range of expected number of positions eliminated | employees				2,300
Maximum
Restructuring Cost and Reserve [Line Items]
Number of positions terminated | employees				2,500
Restructuring, new range of expected number of positions eliminated | employees				2,800
Taiwan Joint Venture
Restructuring Cost and Reserve [Line Items]
Ownership percentage share in Taiwan join venture							55.00%
UNITED STATES
Restructuring Cost and Reserve [Line Items]
Restructuring charges (reversals)					(2)
Restructuring Reserve [Roll Forward]
Provision					(2)
International
Restructuring Cost and Reserve [Line Items]
Restructuring charges (reversals)		(1)	(1)	$ (2)	(16)
Restructuring Reserve [Roll Forward]
Provision		(1)	(1)	(2)	(16)
Manufacturing, Research, Corporate
Restructuring Cost and Reserve [Line Items]
Restructuring charges (reversals)		7	5	5	1
Restructuring Reserve [Roll Forward]
Provision		7	5	5	1
Direct Cost
Restructuring Cost and Reserve [Line Items]
Integration costs	[10]	2	$ 0	$ 4	$ 2
Guarulhos, Brazil [Member]
Restructuring Cost and Reserve [Line Items]
Number of positions terminated | employees				300
Irish biologic therapeutics company [Member] | Employee Termination Costs
Restructuring Cost and Reserve [Line Items]
Employee termination costs	[1],[2]	$ 4		$ 4

[1] The restructuring charges/(reversals) are associated with the following:•For the three months ended October 1, 2017, International ($1 million reversal) and Manufacturing/research/corporate ($7 million). •For the nine months ended October 1, 2017, International ($2 million reversal) 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).

[2] The restructuring charges/(reversals) for the three months ended October 1, 2017, are primarily related to:•employee termination costs of $3 million related to the operational efficiency initiative and supply network strategy;•employee termination costs of $4 million related to the acquisition of an Irish biologic therapeutics company in the third quarter of 2017; and•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

[3] Changes in our restructuring accruals represent employee termination costs.

[4] 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).

[5] Includes adjustments for foreign currency translation.

[6] 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.

[7] 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.

[8] 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.

[9] 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.

[10] 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.

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Other (Income)/Deductions - Net (Details) - USD ($) $ in Millions		3 Months Ended		9 Months Ended
		Oct. 01, 2017	Oct. 02, 2016	Oct. 01, 2017	Oct. 02, 2016
Income Statement, Balance Sheet and Additional Disclosures by Disposal Groups, Including Discontinued Operations [Line Items]
Royalty-related income		$ (7)	$ (8)	$ (19)	$ (20)
Impairment of Intangible Assets (Excluding Goodwill)	[1]		1		1
Certain legal and other matters, net	[2]			(4)
Foreign currency loss	[3]	7	5	17	22
Other, net	[4]	(3)	(1)	(11)	(5)
Other (income)/deductions—net		1	(3)	(11)	(29)
Reconciling Items
Income Statement, Balance Sheet and Additional Disclosures by Disposal Groups, Including Discontinued Operations [Line Items]
Impairment of Intangible Assets (Excluding Goodwill)			$ 1		1
Certain legal and other matters, net		4
Reconciling Items | Zoetis Initiatives
Income Statement, Balance Sheet and Additional Disclosures by Disposal Groups, Including Discontinued Operations [Line Items]
Net gain on sale of assets	[5]	$ 4		$ 6	$ (27)

[1] For the three and nine months ended October 2, 2016, represents an impairment of finite-lived trademarks related to a canine pain management product.

[2] 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.

[3] Primarily driven by costs related to hedging and exposures to certain emerging market currencies.

[4] 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.

[5] 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.

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Income Taxes - Taxes on Income (Details) - USD ($) $ in Millions	3 Months Ended		9 Months Ended
	Oct. 01, 2017	Oct. 02, 2016	Oct. 01, 2017	Oct. 02, 2016
Income Tax Contingency [Line Items]
Effective tax rate for income from continuing operations	28.30%	28.80%	28.60%	33.30%
Discrete tax benefit related to change in statutory tax rates	$ 3	$ 10	$ 8	$ 7
Belgium
Income Tax Contingency [Line Items]
Discrete tax benefit			$ 38

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Income Taxes - Deferred Taxes (Details) - USD ($) $ in Millions	Oct. 01, 2017	Dec. 31, 2016
Income Tax Disclosure [Abstract]
Net deferred income tax liability	$ 175	$ 148
Deferred tax assets	94	96
Noncurrent deferred tax liabilities	$ 269	$ 244

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Income Taxes - Tax Contingencies (Details) - USD ($) $ in Millions	Oct. 01, 2017	Dec. 31, 2016
Income Tax Contingency [Line Items]
Liabilities associated with uncertain tax positions	$ 81	$ 68
Unrecognized tax benefits, income tax penalties and interest accrued	12	10
Noncurrent Deferred Tax Assets
Income Tax Contingency [Line Items]
Liabilities associated with uncertain tax positions	4	3
Other Taxes Payable
Income Tax Contingency [Line Items]
Liabilities associated with uncertain tax positions	$ 77	$ 65

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Financial Instruments - Credit Facilities (Details)	1 Months Ended
	Dec. 31, 2016 USD ($)	Oct. 01, 2017 USD ($)
Line of Credit Facility [Line Items]
Line of credit facility, maximum borrowing capacity		$ 77,000,000
Revolving credit facility, minimum interest coverage ratio		3.50
Line of credit facility	$ 0	$ 0
Operational Efficiency
Line of Credit Facility [Line Items]
Aggregate amount of all charges	$ 100,000,000
Revolving Credit Facility
Line of Credit Facility [Line Items]
Revolving credit facility, term	5 years
Revolving credit facility, current borrowing capacity	$ 1,000,000,000.0
Line of credit facility, maximum borrowing capacity	$ 1,500,000,000.0
Revolving credit facility, covenant compliance ratio		3.50
Maximum total leverage ratio		4.00

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Financial Instruments - Commercial Paper Program (Details) - USD ($)	Dec. 31, 2016	Feb. 28, 2013
Short-term Debt [Line Items]
Commercial paper	$ 0
Commercial Paper
Short-term Debt [Line Items]
Capacity of commercial paper program		$ 1,000,000,000.0

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Financial Instruments - Senior Notes Offering and Other Long-Term Debt (Details) - USD ($) $ in Millions		Oct. 01, 2017	Sep. 12, 2017	Dec. 31, 2016	Nov. 13, 2015	Jan. 28, 2013
Debt Instrument [Line Items]
Debt, principal amount		$ 5,750		$ 4,500
Long-term debt current portion		750		0
Senior Notes
Debt Instrument [Line Items]
Debt, principal amount			$ 1,250		$ 1,250	$ 3,650
Debt, unamortized discount			7		$ 2	$ 10
Debt, purchase price percent due to downgrade of investment grade						101.00%
Senior Notes | 3.000% 2017 senior notes due 2027
Debt Instrument [Line Items]
Debt, principal amount			$ 750
Interest rate percentage			3.00%
Senior Notes | 3.950% 2017 senior notes due 2047
Debt Instrument [Line Items]
Debt, principal amount			$ 500
Interest rate percentage			3.95%
Senior Notes | 1.875% 2013 senior notes due 2018(a)
Debt Instrument [Line Items]
Debt, principal amount	[1]	$ 750		$ 750
Derivatives Designated as Hedging Instruments: | Senior Notes | 1.875% 2013 senior notes due 2018(a) | Interest rate swaps
Debt Instrument [Line Items]
Interest rate percentage						1.875%

[1] 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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Financial Instruments - Schedule of Long-term Debt (Details) - USD ($) $ in Millions		1 Months Ended	3 Months Ended		9 Months Ended
		Oct. 31, 2017	Oct. 01, 2017	Oct. 02, 2016	Oct. 01, 2017	Oct. 02, 2016	Sep. 12, 2017	Dec. 31, 2016	Nov. 13, 2015	Jan. 28, 2013
Debt Instrument [Line Items]
Capitalized interest			$ 1	$ 1	$ 3	$ 2
Total long-term debt			5,750		5,750			$ 4,500
Unamortized debt discount / debt issuance costs			(48)		(48)			(32)
Less current portion of long-term debt			(750)		(750)			0
Long-term debt, net of discount and issuance costs			4,952		4,952			4,468
Senior Notes
Debt Instrument [Line Items]
Total long-term debt							$ 1,250		$ 1,250	$ 3,650
Senior Notes | 1.875% 2013 senior notes due 2018(a)
Debt Instrument [Line Items]
Total long-term debt	[1]		750		750			750
Senior Notes | 3.450% 2015 senior notes due 2020
Debt Instrument [Line Items]
Interest rate percentage									3.45%
Total long-term debt			500		500			500
Senior Notes | 3.250% 2013 senior notes due 2023
Debt Instrument [Line Items]
Interest rate percentage										3.25%
Total long-term debt			1,350		1,350			1,350
Senior Notes | 4.500% 2015 senior notes due 2025
Debt Instrument [Line Items]
Interest rate percentage									4.50%
Total long-term debt			750		750			750
Senior Notes | 3.000% 2017 senior notes due 2027
Debt Instrument [Line Items]
Interest rate percentage							3.00%
Total long-term debt							$ 750
Senior Notes | 4.700% 2013 senior notes due 2043
Debt Instrument [Line Items]
Interest rate percentage										4.70%
Total long-term debt			$ 1,150		$ 1,150			$ 1,150
Senior Notes | 3.950% 2017 senior notes due 2047
Debt Instrument [Line Items]
Interest rate percentage							3.95%
Total long-term debt							$ 500
Derivatives Designated as Hedging Instruments: | Interest rate swaps | Senior Notes | 1.875% 2013 senior notes due 2018(a)
Debt Instrument [Line Items]
Interest rate percentage										1.875%
Subsequent Event [Member] | Senior Notes | 1.875% 2013 senior notes due 2018(a)
Debt Instrument [Line Items]
Debt Instrument, Redemption, Description		$ 754

[1] 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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Financial Instruments - Fair Value of Debt (Details) - USD ($) $ in Millions	Oct. 01, 2017	Dec. 31, 2016
Senior Notes | Fair Value, Inputs, Level 2
Debt Instrument [Line Items]
Fair value, debt instrument	$ 6,024	$ 4,565

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Financial Instruments - Long-term Debt Maturity (Details) - USD ($) $ in Millions	3 Months Ended		9 Months Ended
	Oct. 01, 2017	Oct. 02, 2016	Oct. 01, 2017	Oct. 02, 2016	Dec. 31, 2016
Debt Instrument [Line Items]
2018	$ 750		$ 750
2019	0		0
2020	500		500
2021	0		0
After 2021	4,500		4,500
Total long-term debt	5,750		5,750		$ 4,500
Interest expense, net of capitalized interest	43	$ 41	125	$ 125
Capitalized interest	$ 1	$ 1	$ 3	$ 2

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Financial Instruments - Foreign Exchange Risk (Details) - USD ($) $ in Millions	9 Months Ended	12 Months Ended
	Oct. 01, 2017	Dec. 31, 2016	Jan. 28, 2013
Derivatives Not Designated as Hedging Instruments | Foreign Exchange Contract
Derivative [Line Items]
Derivative notional amount	$ 1,300	$ 1,200
Maturity period	60 days
Derivatives Not Designated as Hedging Instruments | Maximum | Foreign Exchange Contract
Derivative [Line Items]
Maturity period	180 days
Derivatives Designated as Hedging Instruments: | Interest rate swaps
Derivative [Line Items]
Derivative notional amount	$ 500
Maturity period	10 years	10 years
Derivatives Designated as Hedging Instruments: | Interest rate swaps | Senior Notes | 1.875% 2013 senior notes due 2018(a)
Derivative [Line Items]
Interest rate percentage			1.875%
Derivatives Designated as Hedging Instruments: | Treasury Lock [Member]
Derivative [Line Items]
Derivative notional amount		$ 500

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Financial Instruments - Fair Value of Derivative Instruments (Details) - USD ($) $ in Millions	Oct. 01, 2017	Dec. 31, 2016
Derivatives, Fair Value [Line Items]
Total derivatives	$ (8)	$ 21
Foreign Exchange Forward | Derivatives Not Designated as Hedging Instruments
Derivatives, Fair Value [Line Items]
Total derivatives	(8)	4
Foreign Exchange Forward | Derivatives Not Designated as Hedging Instruments | Other current assets
Derivatives, Fair Value [Line Items]
Derivative assets	4	12
Foreign Exchange Forward | Derivatives Not Designated as Hedging Instruments | Other current liabilities
Derivatives, Fair Value [Line Items]
Derivative liabilities	(12)	(8)
Interest rate swaps | Derivatives Designated as Hedging Instruments:
Derivatives, Fair Value [Line Items]
Total derivatives	0	17
Interest rate swaps | Derivatives Designated as Hedging Instruments: | Other current assets
Derivatives, Fair Value [Line Items]
Derivative assets	$ 0	$ 17

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Financial Instruments - Interest Rate Risk (Details) - USD ($) $ in Millions	3 Months Ended		9 Months Ended
	Oct. 01, 2017	Oct. 02, 2016	Oct. 01, 2017	Oct. 02, 2016
Derivatives Not Designated as Hedging Instruments | Foreign Exchange Forward
Derivative Instruments and Hedging Activities Disclosures [Line Items]
Foreign currency forward-exchange contracts	$ (17.0)	$ (25.0)	$ (39.0)	$ (29.0)
Derivatives Designated as Hedging Instruments: | Interest rate swaps
Derivative Instruments and Hedging Activities Disclosures [Line Items]
Loss on Contract Termination	3.0
Loss on Cash Flow Hedge Ineffectiveness	$ 0.1

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Financial Instruments - Amounts of net losses on derivative instruments designated as cash flow hedges (Details) - USD ($) $ in Millions	3 Months Ended		9 Months Ended
	Oct. 01, 2017	Oct. 02, 2016	Oct. 01, 2017	Oct. 02, 2016
Derivatives Designated as Hedging Instruments: | Interest rate swaps
Derivative [Line Items]
Interest rate swaps	$ (10)	$ 1	$ (11)	$ (2)

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Inventories (Details) - USD ($) $ in Millions	Oct. 01, 2017	Dec. 31, 2016
Inventory Disclosure [Abstract]
Finished goods	$ 794	$ 799
Work-in-process	522	499
Raw materials and supplies	174	204
Inventories	$ 1,490	$ 1,502

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Goodwill and Other Intangible Assets - Goodwill (Details) $ in Millions	9 Months Ended
	Oct. 01, 2017 USD ($)
Goodwill [Roll Forward]
Beginning Balance	$ 1,481
Additions	17	[1]
Other	32	[2]
Ending Balance	1,530
Guarulhos, Brazil [Member] | Disposal Group, Held-for-sale, Not Discontinued Operations
Goodwill [Roll Forward]
Ending Balance	3
United States (U.S.)
Goodwill [Roll Forward]
Beginning Balance	661
Additions	10	[1]
Other	0	[2]
Ending Balance	671
International
Goodwill [Roll Forward]
Beginning Balance	820
Additions	7	[1]
Other	32	[2]
Ending Balance	$ 859

[1] 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.

[2] 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.

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Goodwill and Other Intangible Assets - Narrative (Details) - USD ($) $ in Millions	3 Months Ended		9 Months Ended
	Oct. 01, 2017	Oct. 02, 2016	Oct. 01, 2017	Oct. 02, 2016	Dec. 31, 2016
Goodwill and Intangible Assets Disclosure [Abstract]
Gross goodwill	$ 2,066		$ 2,066		$ 2,017
Accumulated goodwill impairment losses	536		536		$ 536
Amortization of intangible assets	$ 26	$ 24	$ 75	$ 72

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Goodwill and Other Intangible Assets - Other Intangible Assets (Details) - USD ($) $ in Millions		3 Months Ended		9 Months Ended
		Oct. 01, 2017	Oct. 02, 2016	Oct. 01, 2017	Oct. 02, 2016	Dec. 31, 2016
Finite Lived and Indefinite Lived Intangible Assets [Line Items]
Finite-lived intangible assets, gross carrying amount		$ 1,716		$ 1,716		$ 1,561
Finite-lived intangible assets, accumulated amortization		(740)		(740)		(648)
Finite-lived intangible assets, identifiable intangible assets, less accumulated amortization		976		976		913
Total indefinite-lived intangible assets		342		342		315
Intangible Assets, gross carrying amount		2,058		2,058		1,876
Identifiable intangible assets, less accumulated amortization		1,318		1,318		1,228
Amortization of intangible assets		26	$ 24	75	$ 72
Brands
Finite Lived and Indefinite Lived Intangible Assets [Line Items]
Total indefinite-lived intangible assets		37		37		37
Trademarks and Trade Names
Finite Lived and Indefinite Lived Intangible Assets [Line Items]
Total indefinite-lived intangible assets		67		67		66
In Process Research and Development
Finite Lived and Indefinite Lived Intangible Assets [Line Items]
Total indefinite-lived intangible assets	[1],[2]	230		230		204
Product Rights
Finite Lived and Indefinite Lived Intangible Assets [Line Items]
Total indefinite-lived intangible assets		8		8		8
Developed Technology Rights
Finite Lived and Indefinite Lived Intangible Assets [Line Items]
Finite-lived intangible assets, gross carrying amount	[1],[3]	1,212		1,212		1,064
Finite-lived intangible assets, accumulated amortization	[1],[3]	(413)		(413)		(342)
Finite-lived intangible assets, identifiable intangible assets, less accumulated amortization	[1],[3]	799		799		722
Brands
Finite Lived and Indefinite Lived Intangible Assets [Line Items]
Finite-lived intangible assets, gross carrying amount		213		213		213
Finite-lived intangible assets, accumulated amortization		(141)		(141)		(132)
Finite-lived intangible assets, identifiable intangible assets, less accumulated amortization		72		72		81
Trademarks and Trade Names
Finite Lived and Indefinite Lived Intangible Assets [Line Items]
Finite-lived intangible assets, gross carrying amount		62		62		62
Finite-lived intangible assets, accumulated amortization		(47)		(47)		(44)
Finite-lived intangible assets, identifiable intangible assets, less accumulated amortization		15		15		18
Other Intangible Assets
Finite Lived and Indefinite Lived Intangible Assets [Line Items]
Finite-lived intangible assets, gross carrying amount		229		229		222
Finite-lived intangible assets, accumulated amortization		(139)		(139)		(130)
Finite-lived intangible assets, identifiable intangible assets, less accumulated amortization		$ 90		$ 90		$ 92

[1] In the first quarter of 2017, certain intangible assets, acquired in 2015 as part of the Pharmaq acquisition, were placed into service.

[2] Includes the intangible assets related to the acquisition of an Irish biologic therapeutics company in the third quarter of 2017.

[3] 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.

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Benefit Plans (Details) - USD ($) $ in Millions	3 Months Ended		9 Months Ended
	Oct. 01, 2017	Oct. 02, 2016	Oct. 01, 2017	Oct. 02, 2016
Defined Benefit Plan, Net Periodic Benefit Cost (Credit) [Abstract]
Service cost	$ 2	$ 3	$ 5	$ 7
Interest cost	1	0	2	2
Expected return on plan assets	(1)	(1)	(2)	(2)
Amortization of net actuarial loss	0	1	1	1
Curtailment and settlement (gain)/loss	0	0	1	(1)
Net periodic benefit cost	2	3	7	7
Domestic Plan
Defined Benefit Plan Disclosure [Line Items]
Pension and postretirement benefit expense	2	1	5	3
Foreign Plan
Defined Benefit Plan, Net Periodic Benefit Cost (Credit) [Abstract]
Contributions to benefit plans	1	$ 1	5	$ 7
Expected future contributions to benefit plans	$ 7		$ 7

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Share-Based Payments - Components of Share-Based Compensation Expense (Details) - USD ($) $ in Millions		3 Months Ended		9 Months Ended
		Oct. 01, 2017	Oct. 02, 2016	Oct. 01, 2017	Oct. 02, 2016
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based compensation expense—direct	[1],[2]	$ 11	$ 9	$ 33	$ 28
Additional share-based compensation expense					1
Share-based compensation expense capitalized				1	1
Stock options / stock appreciation rights
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based compensation expense—direct		2	3	7	8
RSUs / DSUs
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based compensation expense—direct		7	5	20	17
PSUs
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based compensation expense—direct		$ 2	$ 1	$ 6	$ 3

[1] 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.

[2] 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.

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Share-Based Payments - Narrative (Details)	9 Months Ended
	Oct. 01, 2017 $ / shares shares
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based compensation, options granted, shares | shares	716,322
Share-based compensation, weighted average exercise price (in dollars per share)	$ 55.13
Share-based compensation, Options, weighted average grant date fair value (in dollars per share)	$ 14.31
Share-based compensation, risk free interest rate	2.30%
Share-based compensation, expected dividend rate	0.76%
Share-based compensation, expected volatility rate	23.27%
Share-based compensation, expected term	6 years 6 months
Stock options
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based compensation, award vesting period	3 years
Restricted Stock Units (RSUs)
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based compensation, award vesting period	3 years
Share-based compensation, granted, shares | shares	537,086
Share-based compensation, weighted average grant date fair value (in dollars per share)	$ 55.14
Performance Shares
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based compensation, expected volatility rate	23.10%
Share-based compensation, award vesting period	3 years
Share-based compensation, granted, shares | shares	136,964
Share-based compensation, weighted average grant date fair value (in dollars per share)	$ 74.28
Performance Shares | PeerCompanies
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based compensation, expected volatility rate	25.50%
Performance Shares | Minimum
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based compensation, target number of units percentage	0.00%
Performance Shares | Maximum
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based compensation, target number of units percentage	200.00%

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Stockholders' Equity - Changes in Common Shares and Treasury Stock (Details) - USD ($)		9 Months Ended
		Oct. 01, 2017	Oct. 02, 2016	Dec. 31, 2016	Nov. 30, 2014
Class of Stock [Line Items]
Common stock, shares authorized		6,000,000,000		6,000,000,000
Preferred stock, shares authorized		1,000,000,000		1,000,000,000
Stock repurchase program, remaining authorized repurchase amount		$ 1,100,000,000
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Common stock issued, shares	[1]	501,891,243	501,810,000
Treasury stock, shares	[1]	9,035,946	4,410,000
Stock issued, employee stock purchase plans, shares	[1],[2]	0	80,000
Stock issued, employee benefit plan, shares	[1]	0	0
Common stock issued, shares	[1]	501,891,243	501,890,000
Treasury stock, shares	[1]	14,059,240	7,650,463
Stock Compensation Plan
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Treasury stock acquired, shares	[1],[2]	(1,420,000)	(1,620,000)
Share Repurchase Program
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Treasury stock acquired, shares	[1]	(6,450,000)	(4,860,000)
November 2014 Share Repurchase Program
Class of Stock [Line Items]
Stock repurchase program, authorized amount					$ 500,000,000
December 2016 Share Repurchase Program
Class of Stock [Line Items]
Stock repurchase program, authorized amount				$ 1,500,000,000.0

[1] Shares may not add due to rounding.

[2] 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.

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Stockholders' Equity - Changes in Accumulated Other Comprehensive Loss (Details) - USD ($) $ in Millions		3 Months Ended		9 Months Ended
		Oct. 01, 2017	Oct. 02, 2016	Oct. 01, 2017	Oct. 02, 2016
Accumulated Other Comprehensive Income (Loss) [Roll Forward]
Beginning balance				$ 1,499	$ 1,091
Other comprehensive income, net of tax		$ 88	$ 49	144	114
Ending balance		2,019	1,598	2,019	1,598
Accumulated Other Comprehensive Loss
Accumulated Other Comprehensive Income (Loss) [Roll Forward]
Beginning balance				(598)	(622)
Other comprehensive income, net of tax				143	114
Divestiture of noncontrolling interest	[1]				2
Ending balance		(455)	(506)	(455)	(506)
Derivatives Net Unrealized Gains/ (Losses)
Accumulated Other Comprehensive Income (Loss) [Roll Forward]
Beginning balance				8	(2)
Other comprehensive income, net of tax				(11)	(2)
Ending balance		(3)	(4)	(3)	(4)
Currency Translation Adjustment Net Unrealized Gain/(Losses)
Accumulated Other Comprehensive Income (Loss) [Roll Forward]
Beginning balance				(583)	(604)
Other comprehensive income, net of tax				153	114
Divestiture of noncontrolling interest	[1]				2
Ending balance		(430)	(488)	(430)	(488)
Benefit Plans Actuarial Gains/(Losses)
Accumulated Other Comprehensive Income (Loss) [Roll Forward]
Beginning balance				(23)	(16)
Other comprehensive income, net of tax				1	2
Ending balance		$ (22)	$ (14)	$ (22)	$ (14)

[1] Reflects the divestiture of our share of our Taiwan joint venture. See Note 4. Acquisitions and Divestitures: Divestitures.

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Earnings per Share (Details) - USD ($) $ / shares in Units, shares in Millions, $ in Millions	3 Months Ended		9 Months Ended
	Oct. 01, 2017	Oct. 02, 2016	Oct. 01, 2017	Oct. 02, 2016
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
Denominator
Weighted-average common shares outstanding	489.1	495.2	490.8	496.3
Common stock equivalents: stock options, RSUs, PSUs and DSUs	3.3	2.7	3.1	2.5
Weighted-average common and potential dilutive shares outstanding	492.4	497.9	493.9	498.8
Earnings per share attributable to Zoetis stockholders—basic (in dollars per share)	$ 0.61	$ 0.48	$ 1.60	$ 1.34
Earnings per share attributable to Zoetis stockholders—diluted (in dollars per share)	$ 0.61	$ 0.48	$ 1.59	$ 1.34
Stock options
Denominator
Antidilutive securities excluded from computation of earnings per share, amount		1.0	1.0	1.0

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Commitments and Contingencies (Details)			1 Months Ended		9 Months Ended
	May 16, 2016 producer	Jun. 03, 2015 count	Aug. 31, 2014 animal	Apr. 30, 2012	Oct. 01, 2017 customer claims	Feb. 29, 2012 defendant
PregSure
Loss Contingencies [Line Items]
Number of claims seeking damages | claims					266
Number of claims settled | claims					168
Ulianopolis, Brazil
Loss Contingencies [Line Items]
Number of claims seeking damages | defendant						6
Number of additional defendants | defendant						5
Duration of suspension of lawsuit				1 year
Lasadoil
Loss Contingencies [Line Items]
Number of deaths from contamination of animal feed | animal			50,000
Number of contaminated animal from contamination of animal feed | animal			20,000
Number of complaints	2	1			3

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Segment and Other Revenue Information - Segment Information (Details)	9 Months Ended
	Oct. 01, 2017 segment
Segment Reporting [Abstract]
Number of operating segments	2

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Segment and Other Revenue Information - Segment Assets (Details) - USD ($) $ in Millions	Oct. 01, 2017	Dec. 31, 2016
Segment Reporting [Abstract]
Assets	$ 9,288	$ 7,649

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Segment and Other Revenue Information - Statement of Income (Details) - USD ($) $ in Millions		3 Months Ended		9 Months Ended
		Oct. 01, 2017	Oct. 02, 2016	Oct. 01, 2017	Oct. 02, 2016
Segment Reporting Information [Line Items]
Revenue		$ 1,347	$ 1,241	$ 3,847	$ 3,611
Cost of Sales	[1]	435	410	1,318	1,198
Other (income)/deductions—net		1	(3)	(11)	(29)
Income before provision for taxes on income	[2]	413	333	1,095	997
Depreciation and amortization	[2],[3]	58	60	179	177
Other business activities
Segment Reporting Information [Line Items]
Income before provision for taxes on income		(77)	(71)	(224)	(219)
Depreciation and amortization	[3]	5	7	17	19
Operating Segments
Segment Reporting Information [Line Items]
Income before provision for taxes on income		745	658	2,071	1,913
Depreciation and amortization	[3]	17	18	53	53
Operating Segments | U.S.
Segment Reporting Information [Line Items]
Revenue		680	640	1,908	1,816
Cost of Sales		141	137	412	402
Gross Profit		$ 539	$ 503	$ 1,496	$ 1,414
Gross margin, percentage		79.30%	78.60%	78.40%	77.90%
Operating Expenses		$ 103	$ 101	$ 312	$ 293
Other (income)/deductions—net		0	0	0	0
Income before provision for taxes on income		436	402	1,184	1,121
Depreciation and amortization	[3]	7	7	21	20
Operating Segments | International
Segment Reporting Information [Line Items]
Revenue	[4]	654	585	1,903	1,754
Cost of Sales		213	201	645	598
Gross Profit		$ 441	$ 384	$ 1,258	$ 1,156
Gross margin, percentage		67.40%	65.60%	66.10%	65.90%
Operating Expenses		$ 132	$ 128	$ 372	$ 361
Other (income)/deductions—net		0	0	(1)	3
Income before provision for taxes on income		309	256	887	792
Depreciation and amortization	[3]	10	11	32	33
Corporate
Segment Reporting Information [Line Items]
Income before provision for taxes on income		(143)	(159)	(437)	(499)
Depreciation and amortization	[3]	13	11	38	33
Reconciling Items
Segment Reporting Information [Line Items]
Purchase accounting adjustments, Earnings		(23)	(25)	(66)	(79)
Purchase accounting adjustments, Depreciation and Amortization	[3]	22	21	65	64
Acquisition-related costs		(6)	0	(8)	(3)
Certain significant items, Earnings	[5]	(7)	(16)	(10)	1
Certain significant items, Depreciation and Amortization	[3],[5]	(1)	2	1	5
Other unallocated, Earnings		(76)	(54)	(231)	(117)
Other Unallocated, Depreciation and Amortization	[3]	$ 2	$ 1	$ 5	$ 3

[1] 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.

[2] Defined as income before provision for taxes on income.

[3] 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.

[4] Revenue denominated in euros was $169 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.

[5] 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, and consulting fees of $14 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.

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Segment and Other Revenue Information - Segment Income Narrative (Details) - USD ($) $ in Millions		3 Months Ended				9 Months Ended
		Oct. 01, 2017		Oct. 02, 2016		Oct. 01, 2017	Oct. 02, 2016
Segment Reporting Information [Line Items]
Revenue		$ 1,347		$ 1,241		$ 3,847	$ 3,611
Provision	[1]					3
Exit costs	[2],[3]	(1)		1		0	3
Provision for losses on inventory						46	65
Impairment of Intangible Assets (Excluding Goodwill)	[4]			1			1
Certain legal and other matters, net	[5]					(4)
Zoetis Initiatives
Segment Reporting Information [Line Items]
Provision		2		4		(1)	(16)
Reconciling Items
Segment Reporting Information [Line Items]
Impairment of Intangible Assets (Excluding Goodwill)				1			1
Charges with changes in operating model				3		3	4
Certain legal and other matters, net		4
Stand-up costs				1			18
Adjustment to Depreciation of Assets Classified as Held for Sale		1				1
Reconciling Items | Zoetis Initiatives
Segment Reporting Information [Line Items]
Exit costs		1		1			3
Accelerated depreciation				2		2	5
Provision for losses on inventory				1			1
Consulting fees		2	[4]	4	[4]	5	14	[4]
Net gain on sale of assets	[6]	4				6	(27)
Reconciling Items | Employee Termination Costs | Zoetis Initiatives
Segment Reporting Information [Line Items]
Provision		3		3		1	(20)
International | Operating Segments
Segment Reporting Information [Line Items]
Revenue	[7]	654		585		1,903	1,754
International | Operating Segments | Euro Member Countries, Euro
Segment Reporting Information [Line Items]
Revenue		$ 169		$ 157		$ 472	$ 469

[1] Changes in our restructuring accruals represent employee termination costs.

[2] The restructuring charges/(reversals) are associated with the following:•For the three months ended October 1, 2017, International ($1 million reversal) and Manufacturing/research/corporate ($7 million). •For the nine months ended October 1, 2017, International ($2 million reversal) 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).

[3] The restructuring charges/(reversals) for the three months ended October 1, 2017, are primarily related to:•employee termination costs of $3 million related to the operational efficiency initiative and supply network strategy;•employee termination costs of $4 million related to the acquisition of an Irish biologic therapeutics company in the third quarter of 2017; and•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

[4] For the three and nine months ended October 2, 2016, represents an impairment of finite-lived trademarks related to a canine pain management product.

[5] 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.

[6] 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.

[7] Revenue denominated in euros was $169 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.

XML

Segment and Other Revenue Information - Revenue by Species (Details) - USD ($) $ in Millions	3 Months Ended		9 Months Ended
	Oct. 01, 2017	Oct. 02, 2016	Oct. 01, 2017	Oct. 02, 2016
Revenue from External Customer [Line Items]
Revenue	$ 1,347	$ 1,241	$ 3,847	$ 3,611
Livestock:
Revenue from External Customer [Line Items]
Revenue	754	735	2,146	2,091
Cattle
Revenue from External Customer [Line Items]
Revenue	424	432	1,192	1,175
Swine
Revenue from External Customer [Line Items]
Revenue	147	145	455	441
Poultry
Revenue from External Customer [Line Items]
Revenue	119	111	357	351
Fish
Revenue from External Customer [Line Items]
Revenue	39	25	79	64
Other
Revenue from External Customer [Line Items]
Revenue	25	22	63	60
Companion Animal:
Revenue from External Customer [Line Items]
Revenue	580	490	1,665	1,479
Horses
Revenue from External Customer [Line Items]
Revenue	34	33	104	108
Dogs and Cats
Revenue from External Customer [Line Items]
Revenue	546	457	1,561	1,371
Contract Manufacturing
Revenue from External Customer [Line Items]
Revenue	$ 13	$ 16	$ 36	$ 41

XML

Segment and Other Revenue Information - Revenue by Major Product Category (Details) - USD ($) $ in Millions	3 Months Ended		9 Months Ended
	Oct. 01, 2017	Oct. 02, 2016	Oct. 01, 2017	Oct. 02, 2016
Revenue from External Customer [Line Items]
Revenue	$ 1,347	$ 1,241	$ 3,847	$ 3,611
Anti-infectives
Revenue from External Customer [Line Items]
Revenue	324	350	870	913
Vaccines
Revenue from External Customer [Line Items]
Revenue	363	324	1,006	935
Parasiticides
Revenue from External Customer [Line Items]
Revenue	191	158	581	492
Medicated feed additives
Revenue from External Customer [Line Items]
Revenue	107	99	351	365
Other pharmaceuticals
Revenue from External Customer [Line Items]
Revenue	304	255	858	724
Other non-pharmaceuticals
Revenue from External Customer [Line Items]
Revenue	45	39	145	141
Contract manufacturing
Revenue from External Customer [Line Items]
Revenue	$ 13	$ 16	$ 36	$ 41