EX-99.1 2 exhibit9912-31x18q4.htm EXHIBIT 99.1 Exhibit


EXHIBIT 99.1


zoetisca18.jpg


Zoetis Reports Fourth Quarter and Full Year 2018 Results

•
For Fourth Quarter 2018, Zoetis Reports Revenue of $1.6 Billion, Growing 7%, and Net Income of $345 Million, or $0.71 per Diluted Share, on a Reported Basis
◦
Reports Adjusted Net Income of $382 Million, or Adjusted Diluted EPS of $0.79, for Fourth Quarter 2018
◦
Delivers 11% Operational Growth in Revenue and 21% Operational Growth in Adjusted Net Income for Fourth Quarter 2018

•
For Full Year 2018, Zoetis Reports Revenue of $5.8 Billion, Growing 10%, and Net Income of $1.4 Billion, or $2.93 per Diluted Share, on a Reported Basis
◦
Reports Adjusted Net Income of $1.5 Billion, or Adjusted Diluted EPS of $3.13, for Full Year 2018
◦
Delivers 10% Operational Growth in Revenue and 31% Operational Growth in Adjusted Net Income for Full Year 2018

•
Provides Full Year 2019 Revenue Guidance of $6.175 - $6.300 Billion, with Diluted EPS of $2.83 - $2.99 on a Reported Basis, or $3.42 - $3.52 on an Adjusted Basis


PARSIPPANY, N.J. - Feb. 14, 2019 - Zoetis Inc. (NYSE: ZTS) today reported its financial results for the fourth quarter and full year 2018 and provided full year guidance for 2019. Financial results for the quarter and year include the impact of the acquisition of Abaxis.

The company reported revenue of $1.6 billion for the fourth quarter of 2018, which was an increase of 7% compared with the fourth quarter of 2017. Net income for the fourth quarter of 2018 was $345 million, or $0.71 per diluted share, compared with $81 million, or $0.16 per diluted share, in the fourth quarter of 2017.

Adjusted net income1 for the fourth quarter of 2018 was $382 million, or $0.79 per diluted share, an increase of 12% and 14%, respectively. Adjusted net income for the fourth quarter of 2018 excludes the net impact of $37 million for purchase accounting adjustments, acquisition-related costs and certain significant items.

On an operational2 basis, revenue for the fourth quarter of 2018, excluding the impact of foreign exchange, increased 11% compared with the fourth quarter of 2017. Adjusted net income for the fourth quarter of 2018 increased 21% operationally, excluding the impact of foreign exchange.

1 |


For full year 2018, the company reported revenue of $5.8 billion, an increase of 10% compared with full year 2017. Net income for full year 2018 was $1.4 billion, or $2.93 per diluted share, an increase of 65% and 67%, respectively.

Adjusted net income for full year 2018 was $1.5 billion, or $3.13 per diluted share, an increase of 29% and 30%, respectively. Adjusted net income for full year 2018 excludes the net impact of $97 million for purchase accounting adjustments, acquisition-related costs and certain significant items.

On an operational basis, revenue for full year 2018 increased 10%, excluding the impact of foreign exchange. Adjusted net income for full year 2018 increased 31% operationally, excluding the impact of foreign exchange.

EXECUTIVE COMMENTARY
“Zoetis delivered another year of strong performance in 2018 and executed on investment plans that continue to strengthen our product portfolio across the continuum of care,” said Juan Ramón Alaix, Chief Executive Officer of Zoetis. “We achieved operational revenue growth for the year of 10%, growing revenue across all of our core species, major markets and therapeutic areas. We also grew our adjusted net income faster than sales, at 31% operationally, as we continue to deliver on our long-term value proposition.”

“Looking ahead, we will continue to build on our strategic investment plans to support the growth of our core business, and in evolving spaces such as diagnostics, devices, digital and data analytics. For full year 2019, we expect operational growth of 7.5% to 9.5% in revenue and 8% to 11% in adjusted net income. We remain committed to funding investments that will help us maintain our leadership and growth, while returning excess capital to shareholders.” 

QUARTERLY HIGHLIGHTS
Zoetis organizes and manages its commercial operations across two regional segments: the United States (U.S.) and International. Within these segments, the company delivers a diverse portfolio of products for livestock and companion animals tailored to local trends and customer needs. In the fourth quarter of 2018:

•
Revenue in the U.S. segment was $809 million, an increase of 14% compared with the fourth quarter of 2017. Sales of companion animal products grew 26% driven primarily by the acquisition of Abaxis, our key dermatology portfolio, and new products, including Simparica®. Growth in our companion animal business was partially offset by lower sales of certain in-line products due to anticipated competition. Sales of livestock products grew 3% in the quarter with all species contributing to growth. Growth in our cattle business was primarily due to higher sales of premium products, as well as competitor supply constraints. Poultry business

2 |

growth was largely due to increased sales of alternatives to antibiotic medicated feed additives, while our swine business growth was the result of promotional efforts that drove increased demand across our therapeutic portfolio.

•
Revenue in the International segment was $727 million, a decrease of 2% on a reported basis and an increase of 5% operationally compared with the fourth quarter of 2017. Sales of companion animal products grew 7% on a reported basis and 14% on an operational basis. Growth resulted primarily from the acquisition of Abaxis, parasiticides (Simparica for dogs and Stronghold® Plus for cats), and increased sales across our key dermatology portfolio. Sales of livestock products declined 6% on a reported basis and grew 2% operationally; poultry, swine and fish all exhibited growth, while cattle was relatively flat in the quarter. Increased revenue in poultry products was the result of solid performance in other emerging markets, including Egypt and Indonesia. Growth in our swine business was largely driven by the recently launched Suvaxyn® PCV combo and PRRS vaccines in Europe, as well as strong demand for our products in other emerging markets. Our fish business grew due to market share gains of our PD vaccines in both the UK and Norway, as well as the continued growth of our LiVac® SRS vaccine in Chile.

Zoetis continues to drive demand and strengthen its diverse portfolio through product lifecycle innovations, as well as expansion of key products into new geographies. Since our last quarterly earnings announcement:

•
Zoetis received approval in the U.S. and Canada for Revolution® Plus (selamectin and sarolaner topical solution), a new combination topical product for cats and kittens that provides parasite protection against fleas, ticks, ear mites, roundworms, hookworms and heartworms. Revolution Plus combines the proven broad-spectrum protection of selamectin with the advanced flea- and tick-killing power of sarolaner. This first-of-its-kind product exemplifies Zoetis’ dedication to innovation in parasiticides and builds on the 20-year trusted legacy of feline Revolution.

•
The company also continued to bring its newest leading canine products to additional markets. Cytopoint® (lokivetmab), a monoclonal antibody that is part of Zoetis’ canine dermatology portfolio, and Simparica, an oral flea and tick medication for dogs, both received additional approvals in countries in Asia and the Middle East.


FINANCIAL GUIDANCE
Zoetis is providing full year 2019 guidance, which includes:
•
Revenue between $6.175 billion to $6.300 billion
•
Reported diluted EPS between $2.83 to $2.99
•
Adjusted diluted EPS between $3.42 to $3.52

This guidance reflects foreign exchange rates as of late January. Additional details on guidance are included in the financial tables and will be discussed on the company's conference call this morning.

WEBCAST & CONFERENCE CALL DETAILS
Zoetis will host a webcast and conference call at 8:30 a.m. (ET) today, during which company executives will review fourth quarter and full year 2018 results, discuss financial guidance and respond

3 |

to questions from financial analysts. Investors and the public may access the live webcast by visiting the Zoetis website at http://investor.zoetis.com/events-presentations. A replay of the webcast will be archived and made available on Feb. 14, 2019.

About Zoetis
Zoetis is the leading animal health company, dedicated to supporting its customers and their businesses. Building on more than 65 years of experience in animal health, Zoetis discovers, develops, manufactures and commercializes medicines, vaccines and diagnostic products, which are complemented by biodevices, genetic tests and a range of services. Zoetis serves veterinarians, livestock producers and people who raise and care for farm and companion animals with sales of its products in more than 100 countries. In 2018, the company generated annual revenue of $5.8 billion with approximately 10,000 employees. For more information, visit www.zoetis.com.

1 Adjusted net income and its components and adjusted diluted earnings per share (non-GAAP financial measures) are defined as reported net income attributable to Zoetis and reported diluted earnings per share, excluding purchase accounting adjustments, acquisition-related costs and certain significant items.

2 Operational revenue growth (a non-GAAP financial measure) is defined as growth excluding the impact of foreign exchange.


DISCLOSURE NOTICES

Forward-Looking Statements: This press release contains forward-looking statements, which reflect the current views of Zoetis with respect to business plans or prospects, future operating or financial performance, future guidance, future operating models, expectations regarding products, expectations regarding the performance of acquired companies and our ability to integrate new businesses, expectations regarding the financial impact of acquisitions, future use of cash and dividend payments, tax rate and tax regimes, changes in the tax regimes and laws in other jurisdictions, and other future events. These statements are not guarantees of future performance or actions. Forward-looking statements are subject to risks and uncertainties. If one or more of these risks or uncertainties materialize, or if management's underlying assumptions prove to be incorrect, actual results may differ materially from those contemplated by a forward-looking statement. Forward-looking statements speak only as of the date on which they are made. Zoetis expressly disclaims any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. A further list and description of risks, uncertainties and other matters can be found in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, including in the sections thereof captioned “Forward-Looking Statements and Factors That May Affect Future Results” and “Item 1A. Risk Factors,” in our Quarterly Reports on Form 10-Q and in our Current Reports on Form 8-K. These filings and subsequent filings are available online at www.sec.gov, www.zoetis.com, or on request from Zoetis. 


4 |

Use of Non-GAAP Financial Measures: We use non-GAAP financial measures, such as adjusted net income, adjusted diluted earnings per share and operational results (which exclude the impact of foreign exchange), to assess and analyze our results and trends and to make financial and operational decisions. We believe these non-GAAP financial measures are also useful to investors because they provide greater transparency regarding our operating performance. The non-GAAP financial measures included in this press release should not be considered alternatives to measurements required by GAAP, such as net income, operating income, and earnings per share, and should not be considered measures of liquidity. These non-GAAP financial measures are unlikely to be comparable with non-GAAP information provided by other companies. Reconciliation of non-GAAP financial measures and GAAP financial measures are included in the tables accompanying this press release and are posted on our website at www.zoetis.com.

Internet Posting of Information: We routinely post information that may be important to investors in the 'Investors' section of our website at www.zoetis.com, on our Facebook page at http://www.facebook.com/zoetis and on Twitter @zoetis. We encourage investors and potential investors to consult our website regularly and to follow us on Facebook and Twitter for important information about us.


Media Contacts:
 
Investor Contact:
Elinore White
 
Steve Frank
1-973-443-2835 (o)
 
1-973-822-7141 (o)
elinore.y.white@zoetis.com
 
steve.frank@zoetis.com
 
 
 
Kristen Seely
 
Marissa Patel
1-973-443-2777 (o)
 
1-973-443-2996 (o)
kristen.seely@zoetis.com
 
marissa.patel@zoetis.com

5 |

ZOETIS INC.
CONSOLIDATED STATEMENTS OF INCOME(a) 
(UNAUDITED)
(millions of dollars, except per share data)
 
 
 
 
 
 
 
 
Fourth Quarter
 
 
Full Year
 
2018

 
2017

 
% Change
 
2018

 
2017

 
% Change
Revenue
$
1,564

 
$
1,460

 
7
 
$
5,825

 
$
5,307

 
10
Costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
Cost of sales(b)
544

 
457

 
19
 
1,911

 
1,775

 
8
Selling, general and administrative expenses(b)
420

 
361

 
16
 
1,484

 
1,334

 
11
Research and development expenses(b)
125

 
110

 
14
 
432

 
382

 
13
Amortization of intangible assets(c)
39

 
23

 
70
 
117

 
91

 
29
Restructuring charges and certain acquisition-related costs
14

 
12

 
17
 
68

 
19

 
*
Interest expense
59

 
50

 
18
 
206

 
175

 
18
Other (income)/deductions–net
(55
)
 
17

 
*
 
(83
)
 
6

 
*
Income before provision for taxes on income
418

 
430

 
(3)
 
1,690

 
1,525

 
11
Provision for taxes on income
73

 
350

 
(79)
 
266

 
663

 
(60)
Net income before allocation to noncontrolling interests
345

 
80

 
*
 
1,424

 
862

 
65
Less: Net (loss)/income attributable to noncontrolling interests
—

 
(1
)
 
(100)
 
(4
)
 
(2
)
 
100
Net income attributable to Zoetis
$
345

 
$
81

 
*
 
$
1,428

 
$
864

 
65
 
 
 
 
 
 
 
 
 
 
 
 
Earnings per share—basic
$
0.72

 
$
0.17

 
*
 
$
2.96

 
$
1.76

 
68
 
 
 
 
 
 
 
 
 
 
 
 
Earnings per share—diluted
$
0.71

 
$
0.16

 
*
 
$
2.93

 
$
1.75

 
67
 
 
 
 
 
 
 
 
 
 
 
 
Weighted-average shares used to calculate earnings per share (in thousands)
 
 
 
 
 
 
 
 
 
 
 
Basic
480,603

 
487,323

 
 
 
483,063

 
489,918

 
 
Diluted
484,479

 
491,022

 
 
 
486,898

 
493,161

 
 
 
 
 
 
 
 
 
 
 
 
 
 
* Calculation not meaningful.
Certain amounts and percentages may reflect rounding adjustments.
(a)
The consolidated statements of income present the three and twelve months ended December 31, 2018 and 2017. Subsidiaries operating outside the United States are included for the three and twelve months ended November 30, 2018 and 2017.
(b)
Exclusive of amortization of intangible assets, except as discussed in footnote (c) below.
(c)
Amortization expense related to finite-lived acquired intangible assets that contribute to our ability to sell, manufacture, research, market and distribute products, compounds and intellectual property is included in Amortization of intangible assets as these intangible assets benefit multiple business functions. Amortization expense related to finite-lived acquired intangible assets that are associated with a single function is included in Cost of sales, Selling, general and administrative expenses or Research and development expenses, as appropriate.


6 |

ZOETIS INC.
RECONCILIATION OF GAAP REPORTED TO NON-GAAP ADJUSTED INFORMATION
CERTAIN LINE ITEMS
(UNAUDITED)
(millions of dollars, except per share data)
 
Quarter Ended December 31, 2018
 
GAAP Reported(a)
 
Purchase Accounting Adjustments(1)
 
Acquisition- Related Costs(2)
 
Certain Significant Items(3)
 
Non-GAAP Adjusted(b)
Cost of sales(c)
$
544

 
$
(14
)
 
$
—

 
$
(4
)
 
$
526

Gross profit
1,020

 
14

 
—

 
4

 
1,038

Selling, general and administrative expenses(c)
420

 
(18
)
 
—

 
(1
)
 
401

Research and development expenses(c)
125

 
(1
)
 
—

 
—

 
124

Amortization of intangible assets(d)
39

 
(34
)
 
—

 
—

 
5

Restructuring charges and certain acquisition-related costs
14

 
—

 
(22
)
 
8

 
—

Other (income)/deductions–net
(55
)
 
—

 
—

 
42

 
(13
)
Income before provision for taxes on income
418

 
67

 
22

 
(45
)
 
462

Provision for taxes on income
73

 
16

 
4

 
(13
)
 
80

Net income attributable to Zoetis
345

 
51

 
18

 
(32
)
 
382

Earnings per common share attributable to Zoetis–diluted
0.71

 
0.11

 
0.04

 
(0.07
)
 
0.79

 
 
 
 
 
 
 
 
 
 
 
Quarter Ended December 31, 2017
 
GAAP Reported(a)
 
Purchase Accounting Adjustments(1)
 
Acquisition- Related Costs(2)
 
Certain Significant Items(3)
 
Non-GAAP Adjusted(b)
Cost of sales(c)
$
457

 
$
(2
)
 
$
—

 
$
(1
)
 
$
454

Gross profit
1,003

 
2

 
—

 
1

 
1,006

Selling, general and administrative expenses(c)
361

 
(1
)
 
—

 
(1
)
 
359

Research and development expenses(c)
110

 
—

 
—

 
—

 
110

Amortization of intangible assets(d)
23

 
(19
)
 
—

 
—

 
4

Restructuring charges and certain acquisition-related costs
12

 
—

 
(2
)
 
(10
)
 
—

Other (income)/deductions–net
17

 
—

 
—

 
(3
)
 
14

Income before provision for taxes on income
430

 
22

 
2

 
15

 
469

Provision for taxes on income
350

 
21

 
—

 
(242
)
 
129

Net income attributable to Zoetis
81

 
1

 
2

 
257

 
341

Earnings per common share attributable to Zoetis–diluted
0.16

 
—

 
—

 
0.53

 
0.69

Certain amounts may reflect rounding adjustments.


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ZOETIS INC.
RECONCILIATION OF GAAP REPORTED TO NON-GAAP ADJUSTED INFORMATION
CERTAIN LINE ITEMS
(UNAUDITED)
(millions of dollars, except per share data)
 
Twelve Months Ended December 31, 2018
 
GAAP Reported(a)
 
Purchase Accounting Adjustments(1)
 
Acquisition- Related Costs(2)
 
Certain Significant Items(3)
 
Non-GAAP Adjusted(b)
Cost of sales(c)
$
1,911

 
$
(27
)
 
$
—

 
$
(8
)
 
$
1,876

Gross profit
3,914

 
27

 
—

 
8

 
3,949

Selling, general and administrative expenses(c)
1,484

 
(32
)
 
—

 
(2
)
 
1,450

Research and development expenses(c)
432

 
(2
)
 
—

 
—

 
430

Amortization of intangible assets(d)
117

 
(101
)
 
—

 
—

 
16

Restructuring charges and certain acquisition-related costs
68

 
—

 
(63
)
 
(5
)
 
—

Other (income)/deductions–net
(83
)
 
—

 
—

 
58

 
(25
)
Income before provision for taxes on income
1,690

 
162

 
63

 
(43
)
 
1,872

Provision for taxes on income
266

 
43

 
13

 
29

 
351

Net income attributable to Zoetis
1,428

 
119

 
50

 
(72
)
 
1,525

Earnings per common share attributable to Zoetis–diluted
2.93

 
0.24

 
0.10

 
(0.14
)
 
3.13

 
 
 
 
 
 
 
 
 
 
 
Twelve Months Ended December 31, 2017
 
GAAP Reported(a)
 
Purchase Accounting Adjustments(1)
 
Acquisition- Related Costs(2)
 
Certain Significant Items(3)
 
Non-GAAP Adjusted(b)
Cost of sales(c)
$
1,775

 
$
(7
)
 
$
—

 
$
(7
)
 
$
1,761

Gross profit
3,532

 
7

 
—

 
7

 
3,546

Selling, general and administrative expenses(c)
1,334

 
(5
)
 
—

 
(4
)
 
1,325

Research and development expenses(c)
382

 
(2
)
 
—

 
—

 
380

Amortization of intangible assets(d)
91

 
(74
)
 
—

 
—

 
17

Restructuring charges and certain acquisition-related costs
19

 
—

 
(10
)
 
(9
)
 
—

Other (income)/deductions–net
6

 
—

 
—

 
(5
)
 
1

Income before provision for taxes on income
1,525

 
88

 
10

 
25

 
1,648

Provision for taxes on income
663

 
37

 
3

 
(238
)
 
465

Net income attributable to Zoetis
864

 
51

 
7

 
263

 
1,185

Earnings per common share attributable to Zoetis–diluted
1.75

 
0.10

 
0.01

 
0.54

 
2.40

Certain amounts may reflect rounding adjustments.
(a)
The consolidated statements of income present the three and twelve months ended December 31, 2018 and 2017. Subsidiaries operating outside the United States are included for the three and twelve months ended November 30, 2018 and 2017.
(b)
Non-GAAP adjusted net income and its components and non-GAAP adjusted diluted EPS are not, and should not be viewed as, substitutes for U.S. GAAP net income and its components and diluted EPS. Despite the importance of these measures to management in goal setting and performance measurement, non-GAAP adjusted net income and its components and non-GAAP adjusted diluted EPS are non-GAAP financial measures that have no standardized meaning prescribed by U.S. GAAP and, therefore, have limits in their usefulness to investors. Because of the non-standardized definitions, non-GAAP adjusted net income and its components and non-GAAP adjusted diluted EPS (unlike U.S. GAAP net income and its components and diluted EPS) may not be comparable to the calculation of similar measures of other companies. Non-GAAP adjusted net income and its components and non-GAAP adjusted diluted EPS are presented solely to permit investors to more fully understand how management assesses performance.
(c)
Exclusive of amortization of intangible assets, except as discussed in footnote (d) below.
(d)
Amortization expense related to finite-lived acquired intangible assets that contribute to our ability to sell, manufacture, research, market and distribute products, compounds and intellectual property is included in Amortization of intangible assets as these intangible assets benefit multiple business functions. Amortization expense related to acquired intangible assets that are associated with a single function is included in Cost of sales, Selling, general and administrative expenses or Research and development expenses, as appropriate.
See Notes to Reconciliation of GAAP Reported to Non-GAAP Adjusted Information for notes (1), (2) and (3).


8 |

ZOETIS INC.
NOTES TO RECONCILIATION OF GAAP REPORTED TO NON-GAAP ADJUSTED INFORMATION
CERTAIN LINE ITEMS
(UNAUDITED)
(millions of dollars)

(1)
Income taxes in Purchase accounting adjustments for 2017 includes a provisional tax benefit of $17 million related to the remeasurement of the company’s deferred taxes due to the reduction in the U.S. federal corporate tax rate as provided by the U.S. Tax Cuts and Jobs Act enacted on December 22, 2017.
(2)
Acquisition-related costs include the following:
 
Fourth Quarter
 
Full Year
 
2018

 
2017

 
2018

 
2017

Transaction costs(a)
$
—

 
$
—

 
$
21

 
$
—

Integration costs(b)
11

 
2

 
21

 
6

Restructuring charges(c)
11

 
—

 
21

 
4

Total acquisition-related costs—pre-tax
22

 
2

 
63

 
10

Income taxes(d)
4

 
—

 
13

 
3

Total acquisition-related costs—net of tax
$
18

 
$
2

 
$
50

 
$
7

Certain amounts may reflect rounding adjustments.
(a)
Represents external costs directly related to acquiring businesses and primarily includes expenditures for banking, legal, accounting and other similar services. Included in Restructuring charges and certain acquisition-related costs.
(b)
Represents external, incremental costs directly related to integrating acquired businesses and primarily includes expenditures for consulting and the integration of systems and processes. Included in Restructuring charges and certain acquisition-related costs.
(c)
Represents employee termination costs related to the 2018 acquisition of Abaxis and the 2017 acquisition of an Irish biologic therapeutics company. Included in Restructuring charges and certain acquisition-related costs.
(d)
Included in Provision for taxes on income. Represents the tax effect of the associated pre-tax acquisition-related amounts, calculated by determining the jurisdictional location of the pre-tax amounts and applying that jurisdiction's applicable tax rate. For the twelve months ended December 31, 2018, also includes a tax charge related to the non-deductibility of certain costs associated with the 2018 acquisition of Abaxis.
(3) Certain significant items include the following:
 
Fourth Quarter
 
Full Year
 
2018

 
2017

 
2018

 
2017

Operational efficiency initiative(a)
$
(1
)
 
$
1

 
$
(1
)
 
$
5

Supply network strategy(a)
2

 
8

 
10

 
15

Other restructuring charges and cost-reduction/productivity initiatives(b)
(4
)
 
4

 
7

 
4

Net gain on sale of assets(c)
(42
)
 
—

 
(42
)
 
—

Stand-up costs(d)
—

 
3

 
—

 
3

Other(e)
—

 
(1
)
 
(17
)
 
(2
)
Total certain significant items—pre-tax
(45
)
 
15

 
(43
)
 
25

Income taxes(f)
(13
)
 
(242
)
 
29

 
(238
)
Total certain significant items—net of tax
$
(32
)
 
$
257

 
$
(72
)
 
$
263

Certain amounts may reflect rounding adjustments.
(a)
Represents consulting fees and product transfer costs, adjustments to inventory reserves and accelerated depreciation included in Cost of sales, consulting fees included in Selling, general and administrative expenses, employee termination costs and exit costs included in Restructuring charges and certain acquisition-related costs, and net (gains)/losses on sales of certain manufacturing sites and products included in Other (income)/deductions—net, related to cost-reduction and productivity initiatives.
(b)
Represents employee termination costs/(reversals) in Europe as a result of initiatives to better align our organizational structure, included in Restructuring charges and certain acquisition-related costs.
(c)
Represents a net gain related to the divestiture of certain agribusiness products within our International segment, included in Other (income)/deductions—net.

9 |

(d)
Represents 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, included in Cost of sales.
(e)
For 2018, primarily represents a net gain related to the relocation of a manufacturing site in China, included in Other (income)/deductions—net.
For 2017, primarily represents costs associated with changes to our operating model in Cost of sales and Selling, general and administrative expenses, and income related to an insurance recovery from commercial settlements in Mexico recorded in 2014 and 2016, included in Other (income)/deductions—net.
(f)
Included in Provision for taxes on income. Represents the tax effect of the associated pre-tax certain significant items amounts, calculated by determining the jurisdictional location of the pre-tax amounts and applying that jurisdiction's applicable tax rate.
For 2018, also includes (i) a net tax benefit of $45 million related to a measurement period adjustment to the one-time mandatory deemed repatriation tax on the company's undistributed non-U.S. earnings, pursuant to the Tax Cuts and Jobs Act enacted on December 22, 2017, and (ii) a tax charge of approximately $17 million related to the disposal of certain assets.
For 2017, also includes (i) a provisional net tax charge of $229 million related to the impact of the Tax Cuts and Jobs Act enacted on December 22, 2017, including a one-time mandatory deemed repatriation tax on the company’s undistributed non-U.S. earnings, partially offset by a tax benefit related to the remeasurement of the company’s deferred tax assets and liabilities, as of the date of enactment, due to the reduction in the U.S. federal corporate tax rate, (ii) a net tax charge of approximately $3 million as a result of the implementation of certain operational changes, and (iii) a tax charge of approximately $2 million related to the disposal of certain assets.


10 |

ZOETIS INC.
ADJUSTED SELECTED COSTS AND EXPENSES(a) 
(UNAUDITED)
(millions of dollars)
 
 
 
 
 
 
 
Fourth Quarter
 
% Change
 
 
2018

 
2017

 
Total
 
 
Foreign Exchange
 
Operational(b)
Adjusted cost of sales
 
$
526

 
$
454

 
16
%
 
 
1
 %
 
15
%
As a percent of revenue
 
33.6
%
 
31.1
%
 
NA

 
 
NA

 
NA

Adjusted SG&A expenses
 
$
401

 
$
359

 
12
%
 
 
(3
)%
 
15
%
Adjusted R&D expenses
 
124

 
110

 
13
%
 
 
(1
)%
 
14
%
Adjusted net income attributable to Zoetis
 
382

 
341

 
12
%
 
 
(9
)%
 
21
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Full Year
 
% Change
 
 
2018

 
2017

 
Total
 
 
Foreign Exchange
 
Operational(b)
Adjusted cost of sales
 
$
1,876

 
$
1,761

 
7
%
 
 
2
 %
 
5
%
As a percent of revenue
 
32.2
%
 
33.2
%
 
NA

 
 
NA

 
NA

Adjusted SG&A expenses
 
$
1,450

 
$
1,325

 
9
%
 
 
—
 %
 
9
%
Adjusted R&D expenses
 
430

 
380

 
13
%
 
 
—
 %
 
13
%
Adjusted net income attributable to Zoetis
 
1,525

 
1,185

 
29
%
 
 
(2
)%
 
31
%
 
 
 
 
 
 
 
 
 
 
 
 
Certain amounts and percentages may reflect rounding adjustments.
(a)
Adjusted cost of sales, adjusted selling, general, and administrative (SG&A) expenses, adjusted research and development (R&D) expenses, and adjusted net income attributable to Zoetis are defined as the corresponding reported U.S. generally accepted accounting principles (GAAP) income statement line items excluding purchase accounting adjustments, acquisition-related costs, and certain significant items. Reconciliations of certain reported to adjusted information for the three and twelve months ended December 31, 2018 and 2017 are provided in the materials accompanying this report. These adjusted income statement line item measures are not, and should not be viewed as, substitutes for the corresponding U.S. GAAP line items. For the corresponding GAAP line items, see Consolidated Statements of Income and Reconciliation of GAAP Reported to Non-GAAP Adjusted Information.
(b)
Operational growth (a non-GAAP financial measure) is defined as growth excluding the impact of foreign exchange.

11 |

ZOETIS INC.
2019 GUIDANCE
Selected Line Items
(millions of dollars, except per share amounts)
Full Year 2019
Revenue
$6,175 to $6,300
   Operational growth(a)
7.5% to 9.5%
   Organic operational growth(b)
4.5% to 6.5%
Adjusted cost of sales as a percentage of revenue(c)
31% to 32%
Adjusted SG&A expenses(c)
$1,470 to $1,520
Adjusted R&D expenses(c)
$445 to $465
Adjusted interest expense and other (income)/deductions(c)
Approximately $220
Effective tax rate on adjusted income(c)
20% to 21%
Adjusted diluted EPS(c)
$3.42 to $3.52
Adjusted net income(c)
$1,650 to $1,700
   Operational growth(a)(d)
8% to 11%
Certain significant items and acquisition-related costs(e)
$90 to $120
 
 
The guidance reflects foreign exchange rates as of late January 2019.
Reconciliations of 2019 reported guidance to 2019 adjusted guidance follows:
 
(millions of dollars, except per share amounts)
Reported
Certain significant items and acquisition-related costs(e)
Purchase accounting
Adjusted(b)
 
 
Cost of sales as a percentage of revenue
32.5% - 33.5%
~ (1.0%)
~ (0.5%)
31% - 32%
 
SG&A expenses
$1,545 to $1,595
 
($75)
$1,470 to $1,520
 
R&D expenses
$447 to $467
 
($2)
$445 to $465
 
Interest expense and other (income)/deductions
~ $220
 
 
~ $220
 
Effective tax rate
20% to 21%
 
 
20% to 21%
 
Diluted EPS
$2.83 to $2.99
$0.15 to $0.22
$0.37
$3.42 to $3.52
 
Net income attributable to Zoetis
$1,365 to $1,445
$75 to $105
~ $180
$1,650 to $1,700
(a)
Operational growth (a non-GAAP financial measure) excludes the impact of foreign exchange.
(b)
Organic operational growth (a non-GAAP financial measure) excludes the impact of the acquisition of Abaxis as well as foreign exchange.
(c)
Adjusted net income and its components and adjusted diluted EPS are defined as reported U.S. generally accepted accounting principles (GAAP) net income and its components and reported diluted EPS excluding purchase accounting adjustments, acquisition-related costs and certain significant items. Adjusted cost of sales, adjusted selling, general and administrative (SG&A) expenses, adjusted research and development (R&D) expenses, and adjusted interest expense and other (income)/deductions are income statement line items prepared on the same basis, and, therefore, components of the overall adjusted income measure. Despite the importance of these measures to management in goal setting and performance measurement, adjusted net income and its components and adjusted diluted EPS are non-GAAP financial measures that have no standardized meaning prescribed by U.S. GAAP and, therefore, have limits in their usefulness to investors. Because of the non-standardized definitions, adjusted net income and its components and adjusted diluted EPS (unlike U.S. GAAP net income and its components and diluted EPS) may not be comparable to the calculation of similar measures of other companies. Adjusted net income and its components and adjusted diluted EPS are presented solely to permit investors to more fully understand how management assesses performance. Adjusted net income and its components and adjusted diluted EPS are not, and should not be viewed as, substitutes for U.S. GAAP net income and its components and diluted EPS.
(d)
We do not provide a reconciliation of forward-looking non-GAAP adjusted net income operational growth to the most directly comparable GAAP reported financial measure because we are unable to calculate with reasonable certainty the foreign exchange impact of unusual gains and losses, acquisition-related expenses, potential future asset impairments and other certain significant items, without unreasonable effort. The foreign exchange impacts of these items are uncertain, depend on various factors, and could have a material impact on GAAP reported results for the guidance period.
(e)
Primarily includes certain nonrecurring costs related to the acquisition of Abaxis and other charges.

12 |

ZOETIS INC.
CONSOLIDATED REVENUE BY SEGMENT(a) AND SPECIES
(UNAUDITED)
(millions of dollars)

 
 
Fourth Quarter
 
% Change
 
 
2018

 
2017

 
Total
 
 
Foreign Exchange
 
Operational(b)
Revenue:
 
 
 
 
 
 
 
 
 
 
 
Livestock
 
$
872

 
$
891

 
(2
)%
 
 
(4
)%
 
2
 %
Companion Animal
 
664

 
561

 
18
 %
 
 
(3
)%
 
21
 %
Contract Manufacturing & Human Health Diagnostics
 
28

 
8

 
*

 
 
*

 
*

Total Revenue
 
$
1,564

 
$
1,460

 
7
 %
 
 
(4
)%
 
11
 %
 
 
 
 
 
 
 
 
 
 
 
 
U.S.
 
 
 
 
 
 
 
 
 
 
 
Livestock
 
$
384

 
$
374

 
3
 %
 
 
—
 %
 
3
 %
Companion Animal
 
425

 
338

 
26
 %
 
 
—
 %
 
26
 %
Total U.S. Revenue
 
$
809

 
$
712

 
14
 %
 
 
—
 %
 
14
 %
 
 
 
 
 
 
 
 
 
 
 
 
International
 
 
 
 
 
 
 
 
 
 
 
Livestock
 
$
488

 
$
517

 
(6
)%
 
 
(8
)%
 
2
 %
Companion Animal
 
239

 
223

 
7
 %
 
 
(7
)%
 
14
 %
Total International Revenue
 
$
727

 
$
740

 
(2
)%
 
 
(7
)%
 
5
 %
 
 
 
 
 
 
 
 
 
 
 
 
Livestock:
 
 
 
 
 
 
 
 
 
 
 
Cattle
 
$
525

 
$
543

 
(3
)%
 
 
(4
)%
 
1
 %
Swine
 
163

 
166

 
(2
)%
 
 
(5
)%
 
3
 %
Poultry
 
127

 
122

 
4
 %
 
 
(4
)%
 
8
 %
Fish
 
40

 
39

 
3
 %
 
 
(5
)%
 
8
 %
Other
 
17

 
21

 
(19
)%
 
 
(3
)%
 
(16
)%
Total Livestock Revenue
 
$
872

 
$
891

 
(2
)%
 
 
(4
)%
 
2
 %
 
 
 
 
 
 
 
 
 
 
 
 
Companion Animal:
 
 
 
 
 
 
 
 
 
 
 
Dogs and Cats
 
$
613

 
$
514

 
19
 %
 
 
(3
)%
 
22
 %
Horses
 
51

 
47

 
9
 %
 
 
(3
)%
 
12
 %
Total Companion Animal Revenue
 
$
664

 
$
561

 
18
 %
 
 
(3
)%
 
21
 %
 
 
 
 
 
 
 
 
 
 
 
 
* Calculation not meaningful.
Certain amounts and percentages may reflect rounding adjustments.
(a)
For a description of each segment, see Zoetis' most recent Annual Report on Form 10-K.
(b)
Operational revenue growth (a non-GAAP financial measure) is defined as revenue growth excluding the impact of foreign exchange.


13 |

ZOETIS INC.
CONSOLIDATED REVENUE BY SEGMENT(a) AND SPECIES
(UNAUDITED)
(millions of dollars)

 
 
Full Year
 
% Change
 
 
2018

 
2017

 
Total
 
 
Foreign Exchange
 
Operational(b)
Revenue:
 
 
 
 
 
 
 
 
 
 
 
Livestock
 
$
3,154

 
$
3,037

 
4
 %
 
 
—
 %
 
4
 %
Companion Animal
 
2,613

 
2,226

 
17
 %
 
 
—
 %
 
17
 %
Contract Manufacturing & Human Health Diagnostics
 
58

 
44

 
32
 %
 
 
1
 %
 
31
 %
Total Revenue
 
$
5,825

 
$
5,307

 
10
 %
 
 
—
 %
 
10
 %
 
 
 
 
 
 
 
 
 
 
 
 
U.S.
 
 
 
 
 
 
 
 
 
 
 
Livestock
 
$
1,269

 
$
1,244

 
2
 %
 
 
—
 %
 
2
 %
Companion Animal
 
1,608

 
1,376

 
17
 %
 
 
—
 %
 
17
 %
Total U.S. Revenue
 
$
2,877

 
$
2,620

 
10
 %
 
 
—
 %
 
10
 %
 
 
 
 
 
 
 
 
 
 
 
 
International
 
 
 
 
 
 
 
 
 
 
 
Livestock
 
$
1,885

 
$
1,793

 
5
 %
 
 
(1
)%
 
6
 %
Companion Animal
 
1,005

 
850

 
18
 %
 
 
1
 %
 
17
 %
Total International Revenue
 
$
2,890

 
$
2,643

 
9
 %
 
 
—
 %
 
9
 %
 
 
 
 
 
 
 
 
 
 
 
 
Livestock:
 
 
 
 
 
 
 
 
 
 
 
Cattle
 
$
1,754

 
$
1,735

 
1
 %
 
 
(1
)%
 
2
 %
Swine
 
663

 
621

 
7
 %
 
 
1
 %
 
6
 %
Poultry
 
522

 
479

 
9
 %
 
 
—
 %
 
9
 %
Fish
 
132

 
118

 
12
 %
 
 
—
 %
 
12
 %
Other
 
83

 
84

 
(1
)%
 
 
1
 %
 
(2
)%
Total Livestock Revenue
 
$
3,154

 
$
3,037

 
4
 %
 
 
—
 %
 
4
 %
 
 
 
 
 
 
 
 
 
 
 
 
Companion Animal:
 
 
 
 
 
 
 
 
 
 
 
Dogs and Cats
 
2,445

 
2,075

 
18
 %
 
 
1
 %
 
17
 %
Horses
 
168

 
151

 
11
 %
 
 
1
 %
 
10
 %
Total Companion Animal Revenue
 
$
2,613

 
$
2,226

 
17
 %
 
 
—
 %
 
17
 %
 
 
 
 
 
 
 
 
 
 
 
 
* Calculation not meaningful.
Certain amounts and percentages may reflect rounding adjustments.
(a)
For a description of each segment, see Zoetis' most recent Annual Report on Form 10-K.
(b)
Operational revenue growth (a non-GAAP financial measure) is defined as revenue growth excluding the impact of foreign exchange.


14 |

ZOETIS INC.
CONSOLIDATED REVENUE BY KEY INTERNATIONAL MARKETS
(UNAUDITED)
(millions of dollars)

 
 
Fourth Quarter
 
% Change
 
 
2018

 
2017

 
Total
 
 
Foreign Exchange
 
Operational(a)
Total International
 
$
727.2

 
$
739.5

 
(2
)%
 
 
(7
)%
 
5
 %
Australia
 
36.8

 
41.5

 
(11
)%
 
 
(7
)%
 
(4
)%
Brazil
 
84.6

 
95.2

 
(11
)%
 
 
(19
)%
 
8
 %
Canada
 
64.4

 
61.3

 
5
 %
 
 
(5
)%
 
10
 %
China
 
41.3

 
37.2

 
11
 %
 
 
(5
)%
 
16
 %
France
 
38.3

 
36.3

 
6
 %
 
 
(2
)%
 
8
 %
Germany
 
34.9

 
41.0

 
(15
)%
 
 
(2
)%
 
(13
)%
Italy
 
24.5

 
23.6

 
4
 %
 
 
(2
)%
 
6
 %
Japan
 
34.9

 
36.6

 
(5
)%
 
 
(1
)%
 
(4
)%
Mexico
 
26.2

 
25.5

 
3
 %
 
 
(6
)%
 
9
 %
Spain
 
26.8

 
25.5

 
5
 %
 
 
(3
)%
 
8
 %
United Kingdom
 
46.1

 
44.2

 
4
 %
 
 
(2
)%
 
6
 %
Other Developed
 
95.5

 
99.4

 
(4
)%
 
 
(3
)%
 
(1
)%
Other Emerging
 
172.9

 
172.2

 
—
 %
 
 
(11
)%
 
11
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Full Year
 
% Change
 
 
2018

 
2017

 
Total
 
 
Foreign Exchange
 
Operational(a)
Total International
 
$
2,889.8

2,642,900,000.0

$
2,642.9

 
9
 %
 
 
—
 %
 
9
 %
Australia
 
188.6

 
175.6

 
7
 %
 
 
(2
)%
 
9
 %
Brazil
 
294.7

 
299.8

 
(2
)%
 
 
(13
)%
 
11
 %
Canada
 
202.8

 
184.4

 
10
 %
 
 
1
 %
 
9
 %
China
 
211.4

 
174.4

 
21
 %
 
 
4
 %
 
17
 %
France
 
129.8

 
121.0

 
7
 %
 
 
5
 %
 
2
 %
Germany
 
146.8

 
137.2

 
7
 %
 
 
6
 %
 
1
 %
Italy
 
104.0

 
88.8

 
17
 %
 
 
6
 %
 
11
 %
Japan
 
149.0

 
137.8

 
8
 %
 
 
2
 %
 
6
 %
Mexico
 
100.0

 
85.8

 
17
 %
 
 
—
 %
 
17
 %
Spain
 
109.9

 
92.7

 
19
 %
 
 
7
 %
 
12
 %
United Kingdom
 
181.2

 
149.2

 
21
 %
 
 
5
 %
 
16
 %
Other Developed
 
361.4

 
339.4

 
6
 %
 
 
2
 %
 
4
 %
Other Emerging
 
710.2

 
656.8

 
8
 %
 
 
(3
)%
 
11
 %
Certain amounts and percentages may reflect rounding adjustments.
(a) Operational growth (a non-GAAP financial measure) is defined as growth excluding the impact of foreign exchange.


15 |

ZOETIS INC.
SEGMENT(a) EARNINGS
(UNAUDITED)
(millions of dollars)
 
 
Fourth Quarter
 
% Change
 
 
2018

 
2017

 
Total
 
 
Foreign Exchange
 
Operational(b)
U.S.:
 
 
 
 
 
 
 
 
 
 
 
Revenue
 
$
809

 
$
712

 
14
 %
 
 
—
 %
 
14
%
Cost of sales
 
175

 
153

 
14
 %
 
 
—
 %
 
14
%
Gross profit
 
634

 
559

 
13
 %
 
 
—
 %
 
13
%
    Gross margin
 
78.4
%
 
78.5
%
 
 
 
 
 
 
 
Operating expenses
 
128

 
109

 
17
 %
 
 
—
 %
 
17
%
Other (income)/deductions
 
—

 
(3
)
 
*

 
 
*

 
*

U.S. Earnings
 
$
506

 
$
453

 
12
 %
 
 
—
 %
 
12
%
 
 
 
 
 
 
 
 
 
 
 
 
International:
 
 
 
 
 
 
 
 
 
 
 
Revenue
 
$
727

 
$
740

 
(2
)%
 
 
(7
)%
 
5
%
Cost of sales
 
240

 
244

 
(2
)%
 
 
(5
)%
 
3
%
Gross profit
 
487

 
496

 
(2
)%
 
 
(9
)%
 
7
%
    Gross margin
 
67.0
%
 
67.0
%
 
 
 
 
 
 
 
Operating expenses
 
148

 
143

 
3
 %
 
 
(7
)%
 
10
%
Other (income)/deductions
 
1

 
—

 
*

 
 
*

 
*

International Earnings
 
$
338

 
$
353

 
(4
)%
 
 
(9
)%
 
5
%
 
 
 
 
 
 
 
 
 
 
 
 
Total Reportable Segments
 
$
844

 
$
806

 
5
 %
 
 
(4
)%
 
9
%
 
 
 
 
 
 
 
 
 
 
 
 
Other business activities(c)
 
(90
)
 
(89
)
 
1
 %
 
 
 
 
 
Reconciling Items:
 
 
 
 
 
 
 
 
 
 
 
Corporate(d)
 
(196
)
 
(188
)
 
4
 %
 
 
 
 
 
Purchase accounting adjustments(e)
 
(67
)
 
(22
)
 
*

 
 
 
 
 
Acquisition-related costs(f)
 
(22
)
 
(2
)
 
*

 
 
 
 
 
Certain significant items(g)
 
45

 
(15
)
 
*

 
 
 
 
 
Other unallocated(h)
 
(96
)
 
(60
)
 
60
 %
 
 
 
 
 
Total Earnings(i)
 
$
418

 
$
430

 
(3
)%
 
 
 
 
 
* Calculation not meaningful
Certain amounts and percentages may reflect rounding adjustments.
(a)
For a description of each segment, see Zoetis' most recent Annual Report on Form 10-K.
(b)
Operational growth (a non-GAAP financial measure) is defined as growth excluding the impact of foreign exchange.
(c)
Other business activities reflect the research and development costs managed by our Research and Development organization as well as our contract manufacturing business and human health diagnostics business.
(d)
Corporate includes, among other things, administration expenses, interest expense, certain compensation and other costs not charged to our operating segments.
(e)
Purchase accounting adjustments include certain charges related to the amortization of fair value adjustments to inventory, intangible assets and property, plant and equipment not charged to our operating segments.
(f)
Acquisition-related costs include costs associated with acquiring and integrating newly acquired businesses, such as transaction costs and integration costs.
(g)
Certain significant items includes 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 items primarily include restructuring charges and implementation costs associated with our cost-reduction/productivity initiatives that are not associated with an acquisition, costs associated with the operational efficiency initiative and supply network strategy, certain legal and commercial settlements, and the impact of divestiture-related gains and losses.
(h)
Includes overhead expenses associated with our manufacturing and supply operations not directly attributable to an operating segment, as well as procurement costs.
(i)
Defined as income before provision for taxes on income.

16 |

ZOETIS INC.
SEGMENT(a) EARNINGS
(UNAUDITED)
(millions of dollars)
 
 
Full Year
 
% Change
 
 
2018

 
2017

 
Total
 
 
Foreign Exchange
 
Operational(b)
U.S.:
 
 
 
 
 
 
 
 
 
 
 
Revenue
 
$
2,877

 
$
2,620

 
10
%
 
 
—
%
 
10
%
Cost of sales
 
606

 
565

 
7
%
 
 
—
%
 
7
%
Gross profit
 
2,271

 
2,055

 
11
%
 
 
—
%
 
11
%
    Gross margin
 
78.9
%
 
78.4
%
 

 
 

 

Operating expenses
 
456

 
421

 
8
%
 
 
—
%
 
8
%
Other (income)/deductions
 
—

 
(3
)
 
*

 
 
*

 
*

U.S. Earnings
 
$
1,815

 
$
1,637

 
11
%
 
 
—
%
 
11
%
 
 
 
 
 
 
 
 
 
 
 
 
International:
 
 
 
 
 
 
 
 
 
 
 
Revenue
 
$
2,890

 
$
2,643

 
9
%
 
 
—
%
 
9
%
Cost of sales
 
929

 
889

 
4
%
 
 
—
%
 
4
%
Gross profit
 
1,961

 
1,754

 
12
%
 
 
—
%
 
12
%
    Gross margin
 
67.9
%
 
66.4
%
 
 
 
 
 
 
 
Operating expenses
 
559

 
515

 
9
%
 
 
—
%
 
9
%
Other (income)/deductions
 
3

 
(1
)
 
*

 
 
*

 
*

International Earnings
 
$
1,399

 
$
1,240

 
13
%
 
 
—
%
 
13
%
 
 
 
 
 
 
 
 
 
 
 
 
Total Reportable Segments
 
$
3,214

 
$
2,877

 
12
%
 
 
—
%
 
12
%
 
 
 
 
 
 
 
 
 
 
 
 
Other business activities(c)
 
(337
)
 
(313
)
 
8
%
 
 
 
 
 
Reconciling Items:
 
 
 
 
 
 
 
 
 
 
 
Corporate(d)
 
(666
)
 
(625
)
 
7
%
 
 
 
 
 
Purchase accounting adjustments(e)
 
(162
)
 
(88
)
 
84
%
 
 
 
 
 
Acquisition-related costs(f)
 
(63
)
 
(10
)
 
*

 
 
 
 
 
Certain significant items(g)
 
43

 
(25
)
 
*

 
 
 
 
 
Other unallocated(h)
 
(339
)
 
(291
)
 
16
%
 
 
 
 
 
Total Earnings(i)
 
$
1,690

 
$
1,525

 
11
%
 
 
 
 
 
* Calculation not meaningful
Certain amounts and percentages may reflect rounding adjustments.
(a)
For a description of each segment, see Zoetis' most recent Annual Report on Form 10-K.
(b)
Operational growth (a non-GAAP financial measure) is defined as growth excluding the impact of foreign exchange.
(c)
Other business activities reflect the research and development costs managed by our Research and Development organization as well as our contract manufacturing business and human health diagnostics business.
(d)
Corporate includes, among other things, administration expenses, interest expense, certain compensation and other costs not charged to our operating segments.
(e)
Purchase accounting adjustments include certain charges related to the amortization of fair value adjustments to inventory, intangible assets and property, plant and equipment not charged to our operating segments.
(f)
Acquisition-related costs include costs associated with acquiring and integrating newly acquired businesses, such as transaction costs and integration costs.
(g)
Certain significant items includes 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 items primarily include restructuring charges and implementation costs associated with our cost-reduction/productivity initiatives that are not associated with an acquisition, costs associated with the operational efficiency initiative and supply network strategy, certain legal and commercial settlements, and the impact of divestiture-related gains and losses.
(h)
Includes overhead expenses associated with our manufacturing and supply operations not directly attributable to an operating segment, as well as procurement costs.
(i)
Defined as income before provision for taxes on income.

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