Segment Information

9 Months Ended

Sep. 30, 2020

16. Segment Information

Operating Segments

We manage our operations through two geographic operating segments: the U.S. 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, anti-infectives, parasiticides, dermatology, medicated feed additives, animal health diagnostics 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 2020, 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 our international commercial segment, are now reported in Other business activities; (ii) certain other miscellaneous costs, which were previously reported in international commercial segment results, are now reported in Corporate; and (iii) certain diagnostic and other miscellaneous costs, which were previously reported in our U.S. results, are now reported in Corporate.

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

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

•Certain transactions and events such as (i) Purchase accounting adjustments, where we incur expenses associated with the amortization of fair value adjustments to inventory, intangible assets and property, plant and equipment; (ii) Acquisition-related activities, where we incur costs associated with acquiring and integrating newly acquired businesses, such as transaction costs and integration costs; and (iii) Certain significant items, which comprise substantive, unusual items that, either as a result of their nature or size, would not be expected to occur as part of our normal business on a regular basis, such as 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 information technology and finance that specifically support our global manufacturing operations; (iii) certain supply chain and global logistics costs; and (iv) 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
	September 30,						September 30,
(MILLIONS OF DOLLARS)	2020			2019			2020		2019
U.S.
Revenue	$	996		$	844
Cost of sales	194			163
Gross profit	802			681
Gross margin	80.5		%	80.7		%
Operating expenses	157			130
Other (income)/deductions-net	—			—
U.S. Earnings	645			551			$	15	$	12

International
Revenue(b)	767			721
Cost of sales	245			234
Gross profit	522			487
Gross margin	68.1		%	67.5		%
Operating expenses	122			134
Other (income)/deductions-net	—			—
International Earnings	400			353			15		13

Total operating segments	1,045			904			30		25

Other business activities	(87)			(87)			6		7
Reconciling Items:
Corporate	(207)			(172)			27		19
Purchase accounting adjustments	(48)			(55)			48		55
Acquisition-related costs	(1)			(6)			—		—
Certain significant items(c)	(9)			17			—		—
Other unallocated	(96)			(73)			—		1
Total Earnings(d)	$	597		$	528		$	111	$	107

(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 $186 million and $176 million for the three months ended September 30, 2020 and September 30, 2019, respectively.

For the three months ended September 30, 2019, primarily includes income of $20 million resulting from a contingent payment received pursuant to an agreement related to the 2016 sale of certain manufacturing sites.

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


	Earnings						Depreciation and Amortization(a)
	Nine Months Ended						Nine Months Ended
	September 30,						September 30,
(MILLIONS OF DOLLARS)	2020			2019			2020		2019
U.S.
Revenue	$	2,605		$	2,342
Cost of sales	515			468
Gross profit	2,090			1,874
Gross margin	80.2		%	80.0		%
Operating expenses	418			367
Other (income)/deductions-net	4			—
U.S. Earnings	1,668			1,507			$	40	$	31

International
Revenue(b)	2,203			2,181
Cost of sales	697			662
Gross profit	1,506			1,519
Gross margin	68.4		%	69.6		%
Operating expenses	364			412
Other (income)/deductions-net	1			—
International Earnings	1,141			1,107			41		38

Total operating segments	2,809			2,614			81		69

Other business activities	(264)			(246)			19		18
Reconciling Items:
Corporate	(559)			(512)			75		49
Purchase accounting adjustments	(155)			(179)			155		165
Acquisition-related costs	(15)			(33)			—		—
Certain significant items(c)	(4)			(56)			—		—
Other unallocated	(236)			(224)			2		2
Total Earnings(d)	$	1,576		$	1,364		$	332	$	303

(b) Revenue denominated in euros was $517 million and $541 million for the nine months ended September 30, 2020 and September 30, 2019, respectively.

(c) For the nine months ended September 30, 2020, primarily represents a net gain resulting from net cash proceeds received pursuant to an agreement related to the 2016 sale of certain U.S. manufacturing sites of $18 million, partially offset by CEO transition-related costs of $14 million.

For the nine months ended September 30, 2019, primarily represents (i) a change in estimate related to inventory costing of $68 million, (ii) income of $20 million resulting from a contingent payment received pursuant to an agreement related to the 2016 sale of certain manufacturing sites, and (iii) product transfer costs and consulting fees of $7 million related to our supply network strategy.

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