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.

In the first quarter of 2018, the company realigned certain management responsibilities. These changes did not impact the determination of our operating segments, however they resulted in the reallocation of certain costs between segments. These changes primarily include the following: i) R&D costs related to our aquaculture business which were previously reported in Other business activities are now reported in the international commercial segment results, and ii) certain other miscellaneous costs which were previously reported in Corporate are now reported in the international commercial segment results.

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 our aquaculture business and 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.

Selected Statement of Income Information



	Earnings						Depreciation and Amortization^(a)
	Three Months Ended						Three Months Ended
	March 31,			April 2,			March 31,		April 2,
(MILLIONS OF DOLLARS)	2018			2017			2018		2017
U.S.
Revenue	$	634		$	605
Cost of sales	140			137
Gross profit	494			468
Gross margin	77.9		%	77.4		%
Operating expenses	96			96
Other (income)/deductions	—			—
U.S. Earnings	398			372			$	8	$	7

International
Revenue^(b)	726			615
Cost of sales	234			213
Gross profit	492			402
Gross margin	67.8		%	65.4		%
Operating expenses	133			114
Other (income)/deductions	1			(3		)
International Earnings	358			291			11		11

Total operating segments	756			663			19		18

Other business activities	(81		)	(74		)	5		6
Reconciling Items:
Corporate	(153		)	(143		)	13		12
Purchase accounting adjustments	(23		)	(22		)	23		22
Acquisition-related costs	(1		)	—			—		—
Certain significant items^(c)	(3		)	(4		)	—		2
Other unallocated	(78		)	(83		)	—		2
Total Earnings^(d)	$	417		$	337		$	60	$	62


^(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 $184 million and $148 million for the three months ended March 31, 2018, and April 2, 2017, respectively.


^(c)	For the three months ended March 31, 2018, Certain significant items primarily includes: (i) employee termination costs of $1 million, and consulting fees of $1 million, related to our supply network strategy, and (ii) a charge of $1 million related to the implementation of new accounting guidance as a result of the enactment of the Tax Act.

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.


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