Segment and Other Revenue Information

3 Months Ended

Apr. 02, 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 $7.6 billion at both April 2, 2017, and December 31, 2016.

	Earnings						Depreciation and Amortization(a)
	April 2,			April 3,			April 2,		April 3,
(MILLIONS OF DOLLARS)	2017			2016			2017		2016
Three months ended
U.S.
Revenue	$	605		$	582
Cost of sales	137			131
Gross profit	468			451
Gross margin	77.4		%	77.5		%
Operating expenses	96			92
Other (income)/deductions	—			—
U.S. Earnings	372			359			$	7	$	6
International
Revenue(b)	615			567
Cost of sales	213			196
Gross profit	402			371
Gross margin	65.4		%	65.4		%
Operating expenses	114			109
Other (income)/deductions	(3		)	2
International Earnings	291			260			11		11
Total operating segments	663			619			18		17
Other business activities	(74		)	(74		)	6		6
Reconciling Items:
Corporate	(143		)	(169		)	12		10
Purchase accounting adjustments	(22		)	(26		)	22		22
Acquisition-related costs	—			(1		)	—		—
Certain significant items(c)	(4		)	13			2		1
Other unallocated	(83		)	(30		)	2		1
Total Earnings(d)	$	337		$	332		$	62	$	57

^(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 $148 million and $154 million for the three months endedApril 2, 2017, and April 3, 2016, respectively.

^(c)  For the three months ended April 2, 2017, Certain significant items primarily includes: (i) a $1 million reversal of previously accrued employee termination costs, accelerated depreciation charges of $1 million, and consulting fees of $2 million, related to our operational efficiency initiative and supply network strategy, and (ii) charges of $2 million associated with changes to our operating model.

For the three months endedApril 3, 2016, Certain significant items primarily includes: (i) Zoetis stand-up costs of $12 million; (ii) a net gain of $33 million related to the sale of certain manufacturing sites and products as a result of our operational efficiency initiative, and (iii) employee termination costs of $1 million, exit costs of $1 million, accelerated depreciation charges of $1 million, and consulting fees of $5 million, related to our operational efficiency initiative and supply network strategy. 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.

^(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
	April 2,		April 3,
(MILLIONS OF DOLLARS)	2017		2016
Livestock:
Cattle	$	386	$	377
Swine	160		146
Poultry	116		122
Fish	21		17
Other	20		21
	703		683
Companion Animal:
Horses	35		39
Dogs and Cats	482		427
	517		466
Contract Manufacturing	11		13
Total revenue	$	1,231	$	1,162

Revenue by Major Product Category

Revenue by major product category are as follows:

	Three Months Ended
	April 2,		April 3,
(MILLIONS OF DOLLARS)	2017		2016
Anti-infectives	$	268	$	291
Vaccines	319		301
Parasiticides	184		145
Medicated feed additives	123		138
Other pharmaceuticals	272		221
Other non-pharmaceuticals	54		53
Contract manufacturing	11		13
Total revenue	$	1,231	$	1,162