Segment and Other Revenue Information


A.	Segment Information

We manage our operations through two geographic regions. 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.

Operating Segments

Our operating segments are the United States and International. 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 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) 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 $7.5 billion at July 3, 2016, and $7.9 billion at December 31, 2015.

Selected Statement of Income Information



	Earnings						Depreciation and Amortization^(a)
	July 3,			June 28,			July 3,		June 28,
(MILLIONS OF DOLLARS)	2016			2015			2016		2015
Three months ended
U.S.
Revenue	$	594		$	539
Cost of Sales	134			127
Gross Profit	460			412
Gross Margin	77.4		%	76.4		%
Operating Expenses	100			93
Other (income)/deductions	—			—
U.S. Earnings	360			319			$	7	$	7

International
Revenue^(b)	602			622
Cost of Sales	201			225
Gross Profit	401			397
Gross Margin	66.6		%	63.8		%
Operating Expenses	124			151
Other (income)/deductions	1			4
International Earnings	276			242			11		13

Total operating segments	636			561			18		20

Other business activities	(74		)	(67		)	6		6
Reconciling Items:
Corporate	(171		)	(123		)	12		10
Purchase accounting adjustments	(28		)	(15		)	21		12
Acquisition-related costs	(2		)	(4		)	—		—
Certain significant items^(c)	4			(319		)	2		1
Other unallocated	(33		)	(60		)	1		1
Total Earnings/(Loss)^(d)	$	332		$	(27	)	$	60	$	50



	Earnings						Depreciation and Amortization^(a)
	July 3,			June 28,			July 3,		June 28,
(MILLIONS OF DOLLARS)	2016			2015			2016		2015
Six months ended
U.S.
Revenue	$	1,176		$	1,060
Cost of Sales	265			252
Gross Profit	911			808
Gross Margin	77.5		%	76.2		%
Operating Expenses	192			174
Other (income)/deductions	—			—
U.S. Earnings	719			634			$	13	$	13

International
Revenue^(b)	1,169			1,193
Cost of Sales	397			429
Gross Profit	772			764
Gross Margin	66.0		%	64.0		%
Operating Expenses	233			286
Other (income)/deductions	3			6
International Earnings	536			472			22		24

Total operating segments	1,255			1,106			35		37

Other business activities	(148		)	(135		)	12		13
Reconciling Items:
Corporate	(340		)	(254		)	22		19
Purchase accounting adjustments	(54		)	(28		)	43		25
Acquisition-related costs	(3		)	(5		)	—		—
Certain significant items^(c)	17			(360		)	3		2
Other unallocated	(63		)	(121		)	2		2
Total Earnings^(d)	$	664		$	203		$	117	$	98


^(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 $158 million and $312 million for the three and six months ended July 3, 2016, respectively, and $151 million and $286 million for the three and six months ended June 28, 2015, respectively.

^(c)

For the three months ended July 3, 2016, Certain significant items primarily includes: (i) Zoetis stand-up costs of $5 million; (ii) a net loss of $6 million related to divestitures as a result of our operational efficiency initiative; (iii) a $24 million net reduction in certain employee termination accruals, partially offset by exit costs of $1 million, accelerated depreciation of $2 million, and consulting fees of $5 million related to our operational efficiency initiative, supply network strategy, and other restructuring activities, and (iv) charges of $1 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 six months ended July 3, 2016, Certain significant items primarily includes: (i) Zoetis stand-up costs of $17 million; (ii) a net gain of $27 million related to divestitures as a result of our operational efficiency initiative; (iii) a $23 million net reduction in certain employee termination accruals, partially offset by exit costs of $2 million, accelerated depreciation of $3 million and consulting fees of $10 million related to our operational efficiency initiative, supply network strategy and other restructuring activities, and (iv) charges of $1 million associated with changes to our operating model.

For the three months ended June 28, 2015, Certain significant items primarily includes: (i) Zoetis stand-up costs of $39 million; (ii) charges related to our operational efficiency initiative and supply network strategy of $278 million; and (iii) an impairment of IPR&D assets of $2 million related to the termination of a canine oncology project.

For the six months ended June 28, 2015, Certain significant items primarily includes: (i) Zoetis stand-up costs of $62 million; (ii) charges related to our operational efficiency initiative and supply network strategy of $293 million; (iii) an impairment of IPR&D assets of $2 million related to the termination of a canine oncology project; and (iv) charges due to unusual investor-related activities of $3 million.


^(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				Six Months Ended
	July 3,		June 28,		July 3,		June 28,
(MILLIONS OF DOLLARS)	2016		2015		2016		2015
Livestock:
Cattle	$	366	$	372	$	743	$	769
Swine	150		162		296		332
Poultry	118		138		240		267
Fish	22		—		39		—
Other	17		18		38		37
	673		690		1,356		1,405
Companion Animal:
Horses	36		42		75		82
Dogs and Cats	487		429		914		766
	523		471		989		848

Contract Manufacturing	12		14		25		24

Total revenue	$	1,208	$	1,175	$	2,370	$	2,277

Revenue by Major Product Category

Revenue by major product category are as follows:



	Three Months Ended				Six Months Ended
	July 3,		June 28,		July 3,		June 28,
(MILLIONS OF DOLLARS)	2016		2015		2016		2015
Anti-infectives	$	272	$	278	$	563	$	590
Vaccines	310		286		611		557
Parasiticides	189		193		334		346
Medicated feed additives	128		119		266		240
Other pharmaceuticals	248		237		469		424
Other non-pharmaceuticals	49		48		102		96
Contract manufacturing	12		14		25		24
Total revenue	$	1,208	$	1,175	$	2,370	$	2,277