Revenue


A.	Revenue from Product Sales

We offer a diversified portfolio of products which allows us to capitalize on local and regional customer needs. Generally, our products are promoted to veterinarians and livestock producers by our sales organization which includes sales representatives and technical and veterinary operations specialists, and then sold directly by us or through distributors. The depth of our product portfolio enables us to address the varying needs of customers in different species and geographies. Many of our top selling product lines are distributed across both of our operating segments, leveraging our R&D operations and manufacturing and supply chain network.

Over the course of our history, we have focused on developing a diverse portfolio of animal health products, including medicines and vaccines, complemented by biodevices, diagnostics, and genetics. We refer to a single product in all brands, or its dosage forms for all species, as a product line. We have approximately 300 comprehensive product lines, including products for both livestock and companion animals across each of our major product categories.

Our major product categories are:


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


•	anti-infectives: products that prevent, kill or slow the growth of bacteria, fungi or protozoa;


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


•	parasiticides: products that prevent or eliminate external and internal parasites such as fleas, ticks and worms; and


•	medicated feed additives: products added to animal feed that provide medicines to livestock.

Our livestock products primarily help prevent or treat diseases and conditions to enable the cost-effective production of safe, high-quality animal protein. Human population growth and increasing standards of living are important long-term growth drivers for our livestock products in three major ways. First, population growth and increasing standards of living drive increased demand for improved nutrition, particularly animal protein. Second, population growth leads to increased natural resource constraints driving a need for enhanced productivity. Finally, as standards of living improve, there is increased focus on food quality and safety.

Our companion animal products help extend and improve the quality of life for pets; increase convenience and compliance for pet owners; and help veterinarians improve the quality of their care and the efficiency of their businesses. Growth in the companion animal medicines and vaccines sector is driven by economic development, related increases in disposable income and increases in pet ownership and spending on pet care. Companion animals are also living longer, receiving increased medical treatment and benefiting from advances in animal health medicines and vaccines.

The following tables present our revenue disaggregated by geographic area, species, and major product category.

Revenue by geographic area



	Three Months Ended
	March 31,		April 2,
(MILLIONS OF DOLLARS)	2018		2017
United States	$	634	$	605
Australia	48		40
Brazil	70		66
Canada	40		34
China	64		52
France	33		29
Germany	38		28
Italy	27		22
Japan	41		34
Mexico	24		18
Spain	25		20
United Kingdom	52		43
Other developed markets	79		68
Other emerging markets	185		161
	1,360		1,220

Contract Manufacturing	6		11

Total Revenue	$	1,366	$	1,231

Revenue by major species



	Three Months Ended
	March 31,		April 2,
(MILLIONS OF DOLLARS)	2018		2017
U.S.
Livestock	$	292	$	282
Companion Animal	342		323
	634		605
International
Livestock	478		421
Companion Animal	248		194
	726		615

Contract Manufacturing	6		11

Total Revenue	$	1,366	$	1,231

Revenue by species



	Three Months Ended
	March 31,		April 2,
(MILLIONS OF DOLLARS)	2018		2017
Livestock:
Cattle	$	416	$	386
Swine	175		160
Poultry	136		116
Fish	22		21
Other	21		20
	770		703
Companion Animal:
Dogs and Cats	549		482
Horses	41		35
	590		517

Contract Manufacturing	6		11

Total Revenue	$	1,366	$	1,231

Revenue by major product category



	Three Months Ended
	March 31,		April 2,
(MILLIONS OF DOLLARS)	2018		2017
Vaccines	$	356	$	319
Anti-infectives	297		268
Other pharmaceuticals	319		272
Parasiticides	191		184
Medicated feed additives	137		123
Other non-pharmaceuticals	60		54
	1,360		1,220

Contract Manufacturing	6		11

Total Revenue	$	1,366	$	1,231

B. Revenue Accounting Policy

Below are the significant accounting policies updated as of January 1, 2018 as a result of the adoption of the new revenue recognition guidance. For additional information, see Note 3. Accounting Standards.

We recognize revenue from product sales when control of the goods has transferred to the customer, which is typically once the goods have shipped and the customer has assumed title. Revenue reflects the total consideration to which we expect to be entitled (i.e. the transaction price), in exchange for products sold, after considering various types of variable consideration including rebates, sales allowances, product returns and discounts.

Variable consideration is estimated and recorded at the time that related revenue is recognized. Our estimates reflect the amount by which we expect variable consideration to impact revenue recognized and are generally based on contractual terms or historical experience, adjusted as necessary to reflect our expectations about the future. Our customer payment terms generally range from 60 to 90 days.

Estimates of variable consideration utilize a complex series of judgments and assumptions to determine the amount by which we expect revenue to be reduced, for example;

•

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


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

Although the amounts recorded for these revenue deductions are dependent on estimates and assumptions, historically our adjustments to actual results have not been material. The sensitivity of our estimates can vary by program, type of customer and geographic location.

A deferral of revenue may be required in the event that we have not satisfied all customer obligations for which we have been compensated. The transaction price is allocated to the individual performance obligations on the basis of relative stand-alone selling price, which is typically based on actual sales prices. Revenue associated with unsatisfied performance obligations are contract liabilities, is recorded within Other current liabilities, and is recognized once control of the underlying products has transferred to the customer. Contract liabilities reflected within Other current liabilities as of the adoption date and subsequently recognized as revenue during the first quarter of 2018 were approximately $2 million. Contract liabilities as of March 31, 2018 were approximately $4 million.

We do not disclose the transaction price allocated to unsatisfied performance obligations related to contracts with an original expected duration of one year or less, or for contracts for which we recognize revenue in line with our right to invoice the customer. Estimated future revenue expected to be generated from long-term contracts with unsatisfied performance obligations as of March 31, 2018 are not material.

Taxes collected from customers relating to product sales and remitted to governmental authorities are excluded from Revenue. Shipping and handling costs incurred after control of the purchased product has transferred to the customer are accounted for as a fulfillment cost, within Selling, general and administrative expenses.