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EX-32.1 - EXHIBIT 32.1 - CEO CERTIFICATION - Mead Johnson Nutrition Coa321-ceocertificationq32015.htm
EX-31.2 - EXHIBIT 31.2 - CFO CERTIFICATION - Mead Johnson Nutrition Coa312-cfocertificationq32015.htm
EX-32.2 - EXHIBIT 32.2 - CFO CERTIFICATION - Mead Johnson Nutrition Coa322-cfocertificationq32015.htm
EX-31.1 - EXHIBIT 31.1 - CEO CERTIFICATION - Mead Johnson Nutrition Coa311-ceocertificationq32015.htm



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2015
 
Commission File Number: 001-34251
 
MEAD JOHNSON NUTRITION COMPANY
(Exact Name of Registrant as Specified in Its Charter)
 
Delaware
 
80-0318351
(State or Other Jurisdiction of
 Incorporation or Organization)
 
(I.R.S. Employer
 Identification No.)
 
2701 Patriot Blvd.
Glenview, Illinois 60026
(Address of Principal Executive Offices and Zip Code)
 
Registrant’s Telephone Number, Including Area Code: (847) 832-2420
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): 
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
  Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes £ No ý
 
As of October 19, 2015, there were 197,133,005 shares of the registrant’s common stock outstanding.







MEAD JOHNSON NUTRITION COMPANY
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2015
 
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 



PART I — FINANCIAL INFORMATION
 
ITEM 1.      FINANCIAL STATEMENTS.

MEAD JOHNSON NUTRITION COMPANY 
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars and shares in millions, except per share data)
(UNAUDITED)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
NET SALES
$
977.5

 
$
1,090.7

 
$
3,104.3

 
$
3,315.1

Cost of Products Sold
346.8

 
437.9

 
1,096.7

 
1,270.4

GROSS PROFIT
630.7

 
652.8

 
2,007.6

 
2,044.7

Operating Expenses:
 

 
 

 
 

 
 

Selling, General and Administrative
216.1

 
240.2

 
679.5

 
715.4

Advertising and Promotion
156.1

 
158.9

 
490.7

 
489.2

Research and Development
26.3

 
28.7

 
79.9

 
82.5

Other (Income)/Expenses – net
6.2

 
(17.6
)
 
17.1

 
(21.1
)
EARNINGS BEFORE INTEREST AND INCOME TAXES
226.0

 
242.6

 
740.4

 
778.7

 
 
 
 
 
 
 
 
Interest Expense – net
14.8

 
18.3

 
42.5

 
46.0

EARNINGS BEFORE INCOME TAXES
211.2

 
224.3

 
697.9

 
732.7

 
 
 
 
 
 
 
 
Provision for Income Taxes
56.6

 
36.0

 
173.6

 
160.5

NET EARNINGS
154.6

 
188.3

 
524.3

 
572.2

Less Net Earnings/(Loss) Attributable to Noncontrolling Interests
(0.6
)
 
0.7

 
(1.2
)
 
10.8

NET EARNINGS ATTRIBUTABLE TO SHAREHOLDERS
$
155.2

 
$
187.6

 
$
525.5

 
$
561.4

Earnings per Share – Basic
 

 
 

 
 
 
 
Net Earnings Attributable to Shareholders
$
0.77

 
$
0.93

 
$
2.59

 
$
2.77

Earnings per Share – Diluted
 

 
 

 
 
 
 
Net Earnings Attributable to Shareholders
$
0.77

 
$
0.92

 
$
2.59

 
$
2.77

 
 
 
 
 
 
 
 
Weighted Average Shares - Basic
201.4

 
202.2

 
202.2

 
202.1

Weighted Average Shares – Diluted
201.7

 
202.7

 
202.6

 
202.6

Dividends Declared per Share
$
0.4125

 
$
0.3750

 
$
1.2375

 
$
1.1250

 
The accompanying notes are an integral part of these condensed consolidated financial statements.



1


MEAD JOHNSON NUTRITION COMPANY
 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in millions)
(UNAUDITED)



 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
NET EARNINGS
$
154.6

 
$
188.3

 
$
524.3

 
$
572.2

 
 
 
 
 
 
 
 
OTHER COMPREHENSIVE INCOME/(LOSS)
 

 
 

 
 
 
 
Foreign Currency Translation Adjustments
 

 
 

 
 
 
 
Translation Adjustments
(55.5
)
 
(28.6
)
 
(105.1
)
 
(56.5
)
Tax Benefit (Expense)
0.6

 
(2.4
)
 
0.7

 
0.3

Deferred Gains/(Losses) on Derivatives Qualifying as Hedges
 

 
 

 
 

 
 

Deferred Gains/(Losses) on Derivatives Qualifying as Hedges for the Period
12.7

 
6.0

 
22.0

 
(64.3
)
Reclassification Adjustment for (Gains)/Losses Included in Net Earnings
(5.3
)
 
0.5

 
(13.1
)
 
(2.8
)
Tax Benefit (Expense)
(1.9
)
 
(1.9
)
 
(0.8
)
 
24.5

Pension and Other Post-employment Benefits
 

 
 

 
 

 
 

Reclassification Adjustment for Losses Included in Net Earnings

 

 

 
0.2

OTHER COMPREHENSIVE LOSS
(49.4
)
 
(26.4
)
 
(96.3
)
 
(98.6
)
 
 
 
 
 
 
 
 
COMPREHENSIVE INCOME
105.2

 
161.9

 
428.0

 
473.6

 
 
 
 
 
 
 
 
Less Comprehensive Income/(Loss) Attributable to Noncontrolling Interests
(0.3
)
 
0.2

 
9.3

 
4.0

 
 
 
 
 
 
 
 
COMPREHENSIVE INCOME ATTRIBUTABLE TO SHAREHOLDERS
$
105.5

 
$
161.7

 
$
418.7

 
$
469.6

 
The accompanying notes are an integral part of these condensed consolidated financial statements.

2


MEAD JOHNSON NUTRITION COMPANY
  
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars and shares in millions, except per share data)
(UNAUDITED) 
 
September 30, 2015
 
December 31, 2014
ASSETS
 

 
 

CURRENT ASSETS:
 

 
 

Cash and Cash Equivalents
$
1,363.5

 
$
1,297.7

Receivables—net of allowances of $6.5 and $9.6, respectively
368.9

 
387.8

Inventories
518.6

 
555.5

Deferred Income Taxes – net of valuation allowance
77.9

 
86.8

Income Taxes Receivable
37.2

 
7.7

Prepaid Expenses and Other Assets
69.1

 
82.6

Total Current Assets
2,435.2

 
2,418.1

Property, Plant and Equipment – net
933.2

 
912.7

Goodwill
147.0

 
162.7

Other Intangible Assets – net
65.0

 
75.4

Deferred Income Taxes – net of valuation allowance
47.9

 
65.1

Other Assets
149.6

 
142.5

TOTAL
$
3,777.9

 
$
3,776.5

LIABILITIES AND EQUITY
 

 
 

CURRENT LIABILITIES:
 

 
 

Short-term Borrowings
$
1.5

 
$
4.1

Accounts Payable
450.1

 
512.3

Dividends Payable
83.0

 
76.6

Accrued Expenses and Other Liabilities
198.1

 
203.7

Accrued Rebates and Returns
368.8

 
329.1

Deferred Income – current
20.9

 
34.3

Income Taxes – payable and deferred
71.2

 
46.4

Total Current Liabilities
1,193.6

 
1,206.5

Long-Term Debt
1,839.3

 
1,503.9

Deferred Income Taxes – noncurrent
10.3

 
12.4

Pension and Other Post-employment Liabilities
136.5

 
211.1

Other Liabilities – noncurrent
206.0

 
192.8

Total Liabilities
3,385.7

 
3,126.7

COMMITMENTS AND CONTINGENCIES


 


 
 
 
 
REDEEMABLE NONCONTROLLING INTEREST

 
66.0

 
 
 
 
EQUITY
 

 
 

Shareholders’ Equity
 

 
 

Common Stock, $0.01 par value: 3,000 authorized, 207.7 and 207.2 issued, respectively
2.1

 
2.1

Additional Paid-in/(Distributed) Capital
(572.3
)
 
(641.3
)
Retained Earnings
2,026.4

 
1,775.0

Treasury Stock – at cost
(799.6
)
 
(362.6
)
Accumulated Other Comprehensive Loss
(305.1
)
 
(198.9
)
Total Shareholders’ Equity
351.5

 
574.3

Noncontrolling Interests
40.7

 
9.5

Total Equity
392.2

 
583.8

TOTAL
$
3,777.9

 
$
3,776.5

 
The accompanying notes are an integral part of these condensed consolidated financial statements.

3


MEAD JOHNSON NUTRITION COMPANY
 
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(Dollars in millions)
(UNAUDITED)
 
 
Common
Stock
 
Additional
Paid-in
(Distributed)
Capital
 
Retained
Earnings
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Loss
 
Non-
controlling
Interests
 
Total 
Equity
 
Redeemable
Non-
controlling
Interest
Balance as of January 1, 2015
$
2.1

 
$
(641.3
)
 
$
1,775.0

 
$
(362.6
)
 
$
(198.9
)
 
$
9.5

 
$
583.8

 
$
66.0

Stock-based Compensation Awards
 

 
43.5

 
(11.3
)
 
 
 
 

 
 

 
32.2

 
 

Treasury Stock Acquired
 

 
 

 
 

 
(437.0
)
 
 

 
 

 
(437.0
)
 
 

Distributions to Noncontrolling Interests
 

 
 

 
 

 
 

 
 

 
(6.1
)
 
(6.1
)
 
(0.8
)
Cash Dividends Declared
 

 
 

 
(250.0
)
 
 

 
 

 
 

 
(250.0
)
 
 

Net Earnings
 

 
 

 
525.5

 
 

 
 

 
(1.7
)
 
523.8

 
0.5

Redeemable Noncontrolling Interest Accretion
 

 
 

 
(12.8
)
 
 

 
 

 
 

 
(12.8
)
 
12.8

Other Comprehensive Income/(Loss)
 

 
0

 
 

 
 

 
(95.4
)
 
0.4

 
(95.0
)
 
(1.3
)
Acquisition of Redeemable Noncontrolling Interest
 
 
25.5

 
 
 
 
 
(10.8
)
 
38.6

 
53.3

 
(77.2
)
Balance as of September 30, 2015
$
2.1

 
$
(572.3
)
 
$
2,026.4

 
$
(799.6
)
 
$
(305.1
)
 
$
40.7

 
$
392.2

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of January 1, 2014
$
2.1

 
$
(721.5
)
 
$
1,432.3

 
$
(351.9
)
 
$
(69.2
)
 
$
8.7

 
$
300.5

 
$
49.7

Stock-based Compensation Awards
 
 
49.8

 
 

 
(7.9
)
 
 

 
 

 
41.9

 
 

Treasury Stock Acquired
 
 


 
 

 
(48.5
)
 
 

 
 

 
(48.5
)
 
 

Distributions to Noncontrolling Interests
 
 


 
 

 
 

 
 

 
(4.4
)
 
(4.4
)
 
 
Cash Dividends Declared
 
 


 
(227.9
)
 
 

 
 

 
 

 
(227.9
)
 
 

Net Earnings
 
 


 
561.4

 
 

 
 

 
10.2

 
571.6

 
0.6

Redeemable Noncontrolling Interest Accretion
 
 
 
 
(17.6
)
 
 
 
 
 
 
 
(17.6
)
 
17.6

Other Comprehensive Loss
 
 


 
 

 
 

 
(91.8
)
 
 
 
(91.8
)
 
(6.8
)
Balance as of September 30, 2014
$
2.1

 
$
(671.7
)
 
$
1,748.2

 
$
(408.3
)
 
$
(161.0
)
 
$
14.5

 
$
523.8

 
$
61.1

 
The accompanying notes are an integral part of these condensed consolidated financial statements.

4


MEAD JOHNSON NUTRITION COMPANY
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
(UNAUDITED)

 
Nine Months Ended September 30,
 
2015
 
2014
CASH FLOWS FROM OPERATING ACTIVITIES:
 

 
 

Net Earnings
$
524.3

 
$
572.2

Adjustments to Reconcile Net Earnings to Net Cash Provided by Operating Activities:
 

 
 

Depreciation and Amortization
73.4

 
67.8

Other
63.1

 
30.2

Changes in Assets and Liabilities
34.7

 
(56.4
)
Payments for Settlement of Interest Rate Forward Swaps

 
(45.0
)
Pension and Other Post-employment Benefit Contributions
(86.6
)
 
(4.2
)
Net Cash Provided by Operating Activities
608.9

 
564.6

CASH FLOWS FROM INVESTING ACTIVITIES:
 

 
 

Capital Expenditures
(125.2
)
 
(144.0
)
Sale of Property, Plant and Equipment
0.4

 
0.2

Proceeds from/(Investment in) Other Companies

 
4.0

Net Cash Used in Investing Activities
(124.8
)
 
(139.8
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 

 
 

Proceeds from Short-term Borrowings
1.5

 
3.2

Repayments of Short-term Borrowings
(4.0
)
 
(3.5
)
Repayments of Notes Payable

 
(500.0
)
Payments of Dividends
(243.6
)
 
(220.7
)
Purchases of Treasury Stock
(437.0
)
 
(49.7
)
Long-term Notes, net of original issue discounts and expenses paid

 
492.3

Long-term Revolver Borrowings
322.0

 

Stock-based Compensation related Proceeds and Excess Tax Benefits
24.0

 
27.3

Stock-based Compensation Tax Withholdings
(11.3
)
 
(7.9
)
Purchase of Trading Securities
(16.2
)
 

Sale of Trading Securities
21.7

 

Purchase of Redeemable Shares
(24.2
)
 

Distributions to Noncontrolling Interests
(6.9
)
 
(4.4
)
Net Cash Used in Financing Activities
(374.0
)
 
(263.4
)
Effects of Changes in Exchange Rates on Cash and Cash Equivalents
(44.3
)
 
(17.0
)
NET INCREASE IN CASH AND CASH EQUIVALENTS
65.8

 
144.4

CASH AND CASH EQUIVALENTS:
 

 
 

Beginning of Period
1,297.7

 
1,050.8

End of Period
$
1,363.5

 
$
1,195.2

 
The accompanying notes are an integral part of these condensed consolidated financial statements.

5


MEAD JOHNSON NUTRITION COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
1.                                      ORGANIZATION
 
Mead Johnson Nutrition Company (“MJN”, “we” or the “Company”) is a global leader in pediatric nutrition. The Company’s comprehensive product portfolio addresses a broad range of nutritional needs for infants, children and expectant and nursing mothers. MJN’s product portfolio consists of two principal product categories: infant formula and children’s nutrition. These product categories can be separated into the following five general product types: (i) routine infant, (ii) solutions, (iii) specialty, (iv) children’s nutrition and (v) other. MJN’s routine infant formula is intended for healthy consumers while its solutions and specialty products are offered for infants with mild to severe nutritional needs. The Company’s children’s nutrition products are designed to meet the nutritional needs of children at different stages of development. MJN’s other products include vitamins and supplements. MJN markets products under different names in various regions across the world, based on regional marketing strategies and regional brand recognition.

2.                                      ACCOUNTING POLICIES
 
Basis of Presentation—The Company prepared the accompanying unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X issued by the Securities and Exchange Commission (“SEC”). Under those rules, certain footnotes and other financial information that are normally required by GAAP for annual financial statements have been condensed or omitted. The Company is responsible for the financial statements and the related notes included in this Form 10-Q.
 
The condensed consolidated financial statements include all of the normal and recurring adjustments necessary for the fair presentation of the Company’s financial position as of September 30, 2015 and December 31, 2014, and results of operations and cash flows for the three and nine months ended September 30, 2015 and 2014. Intercompany balances and transactions have been eliminated. Revenues, expenses, assets and liabilities can vary during each quarter of the year. Accordingly, the results and trends in these unaudited condensed consolidated financial statements may not be indicative of full-year operating results or future performance.
 
The accounting policies used in preparing these condensed consolidated financial statements are the same as those used to prepare the Company’s annual report on Form 10-K for the year ended December 31, 2014 (“2014 Form 10-K”). These unaudited condensed consolidated financial statements and the related notes should be read in conjunction with the audited year-end financial statements and accompanying notes included in the Company’s 2014 Form 10-K.

In the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2014, financing cash flow amounts reflected as purchases of treasury stock and stock-based-compensation tax withholdings have been separated to conform to the presentation for the nine months ended September 30, 2015. These amounts were previously combined and classified as purchases of treasury stock.

During the three months ended September 30, 2015, the Company changed the method used to estimate the interest cost components of net periodic benefit cost for defined benefit pension and other post-retirement benefit plans. See Note 7 for discussion of the Company’s interest cost calculation.

Recently Adopted Accounting Standards—In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (Topics 205 and 360). ASU 2014-08 changes the criteria for determining whether disposals are reported as discontinued operations and modifies related disclosure requirements. ASU 2014-08 was effective for the Company in the period beginning January 1, 2015. The adoption of this standard did not have a material impact on the condensed consolidated financial statements.

Recently Issued Accounting Standards—In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The updated standard will replace most existing revenue recognition guidance in GAAP when it becomes effective and permits the use of either the retrospective or cumulative effect transition method. For MJN, ASU No. 2014-09 becomes effective in the first quarter of 2018. The Company is currently evaluating the effect, if any, that the updated standard will have on its condensed consolidated financial statements and related disclosures.


6



In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs. This standard amends the existing guidance to require that debt issuance costs be presented in the balance sheet as a deduction from the carrying amount of the related debt liability instead of as a deferred charge. ASU No. 2015-03 is effective on a retrospective basis for annual reporting periods beginning after December 15, 2015, but early adoption is permitted. The Company does not expect the adoption of this update to have a material effect on the condensed consolidated financial statements.
In August 2015, the FASB issued ASU 2015-15, “Presentation and Subsequent Measurement of Debt Issuance Costs Associated With Line-of-Credit Arrangements — Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting to clarify that given the absence of authoritative guidance within ASU No. 2015-03 for debt issuance costs related to the line-of-credit arrangements, such costs may be presented as an asset and subsequently amortized ratably over the term of the line-of-credit arrangement. The Company does not expect the adoption of this update to have a material effect on the condensed consolidated financial statements.

3.                                      EARNINGS PER SHARE
 
The numerator for basic and diluted earnings per share is net earnings attributable to shareholders. Net earnings has been reduced by dividends and undistributed earnings attributable to unvested share based incentive plan awards. The denominator for basic earnings per share is the weighted-average shares outstanding during the period. The denominator for diluted earnings per share is the weighted-average shares outstanding adjusted for the effect of dilutive stock options and performance share awards.

The following table presents the calculation of basic and diluted earnings per share: 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In millions, except per share data)
 
2015
 
2014
 
2015
 
2014
Basic earnings per share:
 
 

 
 

 
 

 
 

Weighted-average shares outstanding
 
201.4

 
202.2

 
202.2

 
202.1

Net earnings attributable to shareholders
 
$
155.2

 
$
187.6

 
$
525.5

 
$
561.4

Dividends and undistributed earnings attributable to unvested shares
 
(0.5
)
 
(0.3
)
 
(1.4
)
 
(1.0
)
Net earnings attributable to shareholders used for basic earnings per share calculation
 
$
154.7

 
$
187.3

 
$
524.1

 
$
560.4

Net earnings attributable to shareholders per share
 
$
0.77

 
$
0.93

 
$
2.59

 
$
2.77

Diluted earnings per share:
 
 

 
 

 
 

 
 

Weighted-average shares outstanding
 
201.4

 
202.2

 
202.2

 
202.1

Incremental shares outstanding assuming the exercise/vesting of dilutive stock options/performance shares
 
0.3

 
0.5

 
0.4

 
0.5

Weighted-average shares — diluted
 
201.7

 
202.7

 
202.6

 
202.6

Net earnings attributable to shareholders
 
$
155.2

 
$
187.6

 
$
525.5

 
$
561.4

Dividends and undistributed earnings attributable to unvested shares
 
(0.5
)
 
(0.3
)
 
(1.4
)
 
(1.0
)
Net earnings attributable to shareholders used for diluted earnings per share calculation
 
$
154.7

 
$
187.3

 
$
524.1

 
$
560.4

Net earnings attributable to shareholders per share
 
$
0.77

 
$
0.92

 
$
2.59

 
$
2.77


Potential shares outstanding from all stock-based awards were 2.5 million and 2.8 million as of September 30, 2015 and 2014, respectively. Of these shares, 2.2 million and 2.3 million were not included in the diluted earnings per share calculation for the three months ended September 30, 2015 and 2014, respectively, and 2.1 million and 2.3 million were not included in the diluted earnings per share calculation for the nine months ended September 30, 2015 and 2014, respectively.

4.                                      INCOME TAXES
 
For the three and nine months ended September 30, 2015, the effective tax rate (“ETR”) was 26.8% and 24.9%, respectively, compared with 16.0% and 21.9%, for the same periods in 2014. The ETR increase was primarily due to a change in the reserve for uncertain tax positions, the majority of which relates to the running of statute of limitations in various jurisdictions during the comparable periods in 2014, and an unfavorable change in geographic earnings mix in 2015.


7



The Company’s gross reserve for uncertain tax positions including penalties and interest, as of September 30, 2015 and December 31, 2014, was $160.6 million and $146.8 million, respectively. The Company believes that it has adequately provided for all uncertain tax positions. The Company is currently under examination by taxing authorities in various jurisdictions in which it operates, including the United States. It is reasonably possible that new issues may be raised by tax authorities and that these issues may require increases in the balance of the reserve for uncertain tax positions. 
 
Pursuant to the Amended and Restated Tax Matters Agreement dated December 18, 2009, Bristol-Myers Squibb Company (“BMS”), the Company’s former parent, maintains responsibility for all uncertain tax positions which may exist in the pre-initial public offering period or which may exist as a result of the initial public offering transaction. The Company has a receivable from BMS for uncertain tax positions, including penalties and interest, of $10.6 million and $9.7 million as of September 30, 2015 and December 31, 2014, respectively.

5.                                      SEGMENT INFORMATION
 
MJN operates in four geographic operating segments: Asia, Europe, Latin America and North America. Based on this operating segmentation, the chief operating decision maker regularly assesses information for decision making purposes, including allocation of resources. Due to similarities between North America and Europe, the Company aggregates these two operating segments into one reportable segment. As a result, the Company has three reportable segments: Asia, Latin America and North America/Europe.

Corporate and Other consists of unallocated global business support activities, including research and development, marketing, supply chain costs, and general and administrative expenses; net actuarial gains and losses related to defined benefit pension and other post-employment plans; and income or expenses incurred within the operating segments that are not reflective of underlying operations and affect the comparability of the operating segments’ results.

The following table summarizes net sales and earnings before interest and income taxes for each of the reportable segments: 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
Net Sales
 
Earnings Before Interest and Income Taxes
 
Net Sales
 
Earnings Before Interest and Income Taxes
(In millions)
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
Asia
 
$
476.8

 
$
561.5

 
$
154.2

 
$
186.2

 
$
1,571.0

 
$
1,729.8

 
$
542.1

 
$
623.4

Latin America
 
184.5

 
222.9

 
38.9

 
52.6

 
587.3

 
659.7

 
141.0

 
152.6

North America/Europe
 
316.2

 
306.3

 
101.3

 
66.8

 
946.0

 
925.6

 
264.9

 
200.9

Total reportable segments
 
977.5

 
1,090.7

 
294.4

 
305.6

 
3,104.3

 
3,315.1

 
948.0

 
976.9

Corporate and Other
 

 

 
(68.4
)
 
(63.0
)
 

 

 
(207.6
)
 
(198.2
)
Total
 
$
977.5

 
$
1,090.7

 
$
226.0

 
$
242.6

 
$
3,104.3

 
$
3,315.1

 
$
740.4

 
$
778.7


6.                                      EMPLOYEE STOCK BENEFIT PLANS
 
The following table summarizes stock-based compensation expense related to stock options, performance share awards and restricted stock units.
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In millions)
 
2015
 
2014
 
2015
 
2014
Stock options
 
$
1.8

 
$
1.8

 
$
5.7

 
$
5.3

Performance share awards
 
(1.1
)
 
2.9

 
4.4

 
9.7

Restricted stock units
 
3.4

 
2.8

 
9.5

 
7.8

Total pre-tax stock-based compensation expense
 
$
4.1

 
$
7.5

 
$
19.6

 
$
22.8

Net tax benefit related to stock-based compensation expense
 
$
(1.3
)
 
$
(2.5
)
 
$
(6.5
)
 
$
(7.8
)
 






8



During the nine months ended September 30, 2015, the Company granted the following awards: 
(Shares in millions)
 
Shares Granted
 
Weighted-
Average Grant
Date Fair Value
Stock options
 
0.4

 
$
20.24

Performance share awards
 
0.2

 
$
98.74

Restricted stock units
 
0.2

 
$
101.18

 
As of September 30, 2015, the Company had the following award expense yet to be recognized: 
(Dollars in millions)
 
Unrecognized
Compensation
Expense
 
Expected
Weighted-Average
Period to be
Recognized
(years)
Stock options
 
$
9.6

 
1.8
Performance share awards
 
$
2.7

 
0.9
Restricted stock units
 
$
28.8

 
2.4
 
7.                                      PENSION AND OTHER POST-EMPLOYMENT BENEFIT PLANS
 
The net periodic benefit cost of the Company’s defined benefit pension and post-employment benefit plans includes: 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
Pension Benefits
 
Other Benefits
 
Pension Benefits
 
Other Benefits
(In millions)
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
Service cost – benefits earned during the period
 
$
0.6

 
$
0.8

 
$
0.3

 
$
0.2

 
$
2.1

 
$
3.6

 
$
0.9

 
$
0.6

Interest cost on projected benefit obligations
 
2.6

 
3.6

 
0.5

 
0.4

 
10.0

 
11.2

 
1.5

 
1.2

Amortization of transition cost
 

 

 

 

 

 
0.2

 

 

Expected return on plan assets
 
(3.4
)
 
(3.8
)
 

 

 
(10.3
)
 
(11.6
)
 

 

  Net periodic benefit cost
 
$
(0.2
)
 
$
0.6

 
$
0.8

 
$
0.6

 
$
1.8

 
$
3.4

 
$
2.4

 
$
1.8

Curtailments
 

 
(5.4
)
 

 

 

 
(5.4
)
 

 

Net Actuarial (Gains)/Losses
 
11.4

 
9.3

 

 

 
9.9

 
16.4

 

 

Total net periodic expense/(benefit)
 
$
11.2

 
$
4.5

 
$
0.8

 
$
0.6

 
$
11.7

 
$
14.4

 
$
2.4

 
$
1.8

 
The Company remeasures its U.S. pension plan when year-to-date aggregate lump sum settlements exceed anticipated interest costs for the year, and in each subsequent quarter of that fiscal year.  Because aggregate lump sum settlements exceeded anticipated interest costs for 2014 and 2015 during the second quarter of each respective year, the Company remeasured its U.S. pension plan in both the second and third quarter of 2014 and 2015. During the three and nine months ended September 30, 2015, the Company recognized a net actuarial loss of $11.4 million and $9.9 million, respectively.
During the three and nine months ended September 30, 2014, the Company recognized a net actuarial loss of $9.3 million and $16.4 million, respectively.

During the three months ended September 30, 2015, the Company changed the method used to estimate the interest cost components of net periodic benefit cost for defined benefit pension and other post-retirement benefit plans. Historically, the interest cost components were estimated using a single weighted-average discount rate derived from the yield curve used to measure the projected benefit obligation at the beginning of the period. The Company has elected to use a full yield curve approach in the estimation of these components of benefit cost by applying the specific spot rates along the yield curve used in the determination of the projected benefit obligation to the relevant projected cash flows. The Company made this change to improve the correlation between projected benefit cash flows and the corresponding yield curve spot rates and to provide a more precise measurement of interest costs. This change does not affect the measurement of total benefit obligations as the change in interest cost is completely offset in the actuarial loss reported in the period. The Company has accounted for this change as a change in estimate and, accordingly, has accounted for it prospectively starting in the the third quarter of 2015. The reduction in interest cost for the three and nine months ended September 30, 2015 associated with this change in estimate is $1 million.

During the three and nine months ended September 30, 2014, the Company recognized a gain of $5.4 million within Other Expenses/(Income) - net related to the curtailment of a defined benefit pension plan outside the U.S.


9


For the nine months ended September 30, 2015 and 2014, the Company contributed $86.6 million and $4.2 million, respectively, primarily to U.S. pension plans in 2015 and plans outside the U.S. in 2014.


8.                               OTHER (INCOME)/EXPENSES - NET
 
The components of other (income)/expenses - net were:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In millions)
 
2015
 
2014
 
2015
 
2014
Settlement related to the China investigation
 
$

 
$

 
$
12.0

 
$

Foreign exchange (gains)/losses - net
 
4.9

 
(8.2
)
 
6.8

 
(6.0
)
Severance and other costs
 
0.6

 

 
4.3

 

Gain on sale of investment
 

 

 

 
(4.0
)
Marketable securities (gain)/loss
 
0.8

 

 
(5.6
)
 

Pension curtailment gain
 

 
(5.4
)
 

 
(5.4
)
Other - net
 
(0.1
)
 
(4.0
)
 
(0.4
)
 
(5.7
)
Other (income)/expenses - net
 
$
6.2

 
$
(17.6
)
 
$
17.1

 
$
(21.1
)

The settlement related to the China investigation for the nine months ended September 30, 2015 is described further in Note 20. Commitments and Contingencies.

Foreign exchange (gains)/losses - net for the nine months ended September 30, 2014 included a $6.1 million loss related to the Company’s February 2014 adoption of a new exchange rate for purposes of remeasuring the monetary assets and liabilities of its Venezuelan subsidiary. See Note 19. Venezuela Currency Matters for additional information.

Marketable securities (gain)/loss for the three and nine months ended September 30, 2015 included an $0.8 million loss and a $5.6 million gain, respectively, related to marketable securities. See Note 17. Marketable Securities for additional information.

9.                                      REDEEMABLE NONCONTROLLING INTEREST
 
On March 15, 2012, the Company acquired 80% of the outstanding capital stock of Nutricion para el Conosur S.A. (“Nutricion”) which manufactures, distributes and sells infant formula and children’s nutrition products in Argentina under the SanCor Bebé and Bebé Plus brands (the “Argentine Acquisition”). Under the terms of an agreement related to the Argentine Acquisition, the noncontrolling interest owner had the right to require MJN to purchase (the “Put Right”) its remaining 20% interest or to sell (the “Call Right”) up to an additional 20% of the outstanding capital stock of Nutricion. The Put Right was to be exercisable once from September 15, 2015 to September 15, 2018 and the decision to exercise was not within the control of MJN. The price paid upon exercise was to be determined based on established multiples of sales and earnings of the acquired business. As a result of the Put Right, the noncontrolling interest was presented as redeemable noncontrolling interest outside of equity on the balance sheet. Accretion to the redemption value of the Put Right was being recognized through equity using an interest method over the period from March 2012 to June 2015.

On June 30, 2015, the Company acquired an additional 10% of the outstanding capital stock of Nutricion, thereby increasing MJN’s ownership interest to 90%. The agreed upon purchase price paid to the noncontrolling interest owner was $24.4 million as of June 30, 2015 (based upon the agreed local currency price). The purchase price was settled during the second and third quarters of 2015. Following the impact of foreign exchange, the cash outflow associated with the acquisition was $24.2 million.

As a result of the transaction, the noncontrolling interest owner no longer has a Put Right and the Call Right was amended. The amended Call Right gives the noncontrolling interest owner the right to require MJN to sell up to 10% of the outstanding capital stock of Nutricion. The amended Call Right is exercisable from June 30, 2015 to June 30, 2022. Due to the termination of the Put Right, the remaining noncontrolling interest was recharacterized from redeemable noncontrolling interest outside of equity to noncontrolling interests within equity on the balance sheet beginning on June 30, 2015.




10.                                      NET EARNINGS ATTRIBUTABLE TO NONCONTROLLING INTERESTS

10


 
Net earnings attributable to noncontrolling interests consists of a 11%, 10% and 10% interest held by third parties in operating entities in China, Argentina and Indonesia, respectively.  See Note 9. Redeemable Noncontrolling Interest for additional information related to Argentina.

11.                               INVENTORIES
 
The major categories of inventories were as follows:
(In millions)
 
September 30, 2015
 
December 31, 2014
Finished goods
 
$
270.0

 
$
286.9

Work in process
 
84.9

 
88.9

Raw and packaging materials
 
163.7

 
179.7

Inventories
 
$
518.6

 
$
555.5


12.                               PROPERTY, PLANT AND EQUIPMENT
 
The major categories of property, plant and equipment were as follows: 
(In millions)
 
September 30, 2015
 
December 31, 2014
Land
 
$
12.4

 
$
12.5

Buildings and Improvements
 
722.5

 
719.8

Machinery, equipment and fixtures
 
761.8

 
736.6

Construction in progress
 
121.4

 
93.3

Accumulated depreciation
 
(684.9
)
 
(649.5
)
Property, plant and equipment — net
 
$
933.2

 
$
912.7


13.                               GOODWILL
 
The Company tests goodwill for impairment in the third quarter of each year and whenever an event occurs or circumstances change that would, more likely than not, reduce the fair value of a reporting unit below its carrying amount. The Company completed its annual impairment test in the third quarter of 2015 and concluded that no impairment existed.
For the nine months ended September 30, 2015 and 2014, the change in the carrying amount of goodwill by reportable segment was as follows:
(In millions)
Asia
 

Latin America
 
North America/
Europe
 
Total
Balance as of January 1, 2015
$

 
$
143.7

 
$
19.0

 
$
162.7

Translation adjustments

 
(15.7
)
 

 
(15.7
)
Balance as of September 30, 2015
$

 
$
128.0

 
$
19.0

 
$
147.0

 
 
 
 
 
 
 
 
Balance as of January 1, 2014
$

 
$
177.8

 
$
19.0

 
$
196.8

Translation adjustments

 
(26.3
)
 

 
(26.3
)
Balance as of September 30, 2014
$

 
$
151.5

 
$
19.0

 
$
170.5

 
As of September 30, 2015, the Company had no accumulated impairment loss.


11


14.                               OTHER INTANGIBLE ASSETS
 
The Company tests intangible assets not subject to amortization for impairment in the third quarter of each year and whenever an event occurs or circumstances change that indicate that it is more likely than not that the asset is impaired. The Company completed its annual impairment test in the third quarter of 2015 and concluded that no impairment existed.
The gross carrying value and accumulated amortization by class of intangible assets as of September 30, 2015 and December 31, 2014 were as follows: 
 
 
As of September 30, 2015
 
As of December 31, 2014
(In millions)
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Book
Value
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Book
Value
Indefinite-lived intangible assets:
 
 

 
 

 
 

 
 

 
 

 
 

Trademark(1) .
 
$
23.6

 
$

 
$
23.6

 
$
26.0

 
$

 
$
26.0

Non-compete agreement(1) .
 
4.7

 

 
4.7

 
5.1

 

 
5.1

Sub-total
 
28.3

 

 
28.3

 
31.1

 

 
31.1

Amortizable intangible assets:
 
 

 
 

 
 

 
 

 
 

 
 

Computer software
 
134.8

 
(99.5
)
 
35.3

 
130.3

 
(87.8
)
 
42.5

Distributor-customer relationship(1) .
 
2.2

 
(0.8
)
 
1.4

 
2.5

 
(0.7
)
 
1.8

Sub-total
 
137.0

 
(100.3
)
 
36.7

 
132.8

 
(88.5
)
 
44.3

Total other intangible assets
 
$
165.3

 
$
(100.3
)
 
$
65.0

 
$
163.9

 
$
(88.5
)
 
$
75.4

(1) Changes in balances result from currency translation and amortization.

15.                               DEBT
 
Short-Term Borrowings
 
As of September 30, 2015 and December 31, 2014, the Company had short-term borrowings of $1.5 million and $4.1 million, respectively, which consisted of borrowings made by the Company’s subsidiary in Argentina. For the nine months ended September 30, 2015, these borrowings had a weighted-average interest rate of 27.0%.

See Note 21. Subsequent Events for a description of the Company’s term loan entered into on October 21, 2015.
 
Long-Term Debt
 
The components of long-term debt were as follows: 
(Dollars in millions)
 
September 30, 2015
 
December 31, 2014
Principal Value:
 
 

 
 

Revolver Borrowings
 
$
322.0

 
$

4.90% Notes due 2019
 
700.0

 
700.0

5.90% Notes due 2039
 
300.0

 
300.0

   4.60% Notes due 2044
 
500.0

 
500.0

Sub-total
 
1,822.0

 
1,500.0

Adjustments to Principal Value:
 
 

 
 

Unamortized basis adjustment for settled interest rate swaps
 
7.4

 
8.8

Unamortized bond discount
 
(3.8
)
 
(4.0
)
Fair-value interest rate swaps
 
13.7

 
(0.9
)
Long-term debt
 
$
1,839.3

 
$
1,503.9


Revolver Borrowings

As of September 30, 2015, the Company had borrowings of $322.0 million from its five-year revolving credit facility agreement (“Credit Facility”) with a weighted-average interest rate of 1.3%. The proceeds from the Credit Facility were primarily used to repurchase shares of company stock. As of September 30, 2015 and December 31, 2014, the Company had $428.0 million and $750.0 million, respectively, available under this facility.


12


During the nine months ended September 30, 2014, the Company amended its revolving credit facility agreement to provide for, among other things, an increase in the aggregate amount available for borrowing under the facility, the addition of certain financial institutions as lenders and the extension of the facility’s maturity date. The amended credit facility is unsecured and repayable at maturity in June 2019, subject to annual extensions if a sufficient number of lenders agree. The maximum amount of outstanding borrowings and letters of credit permitted at any one time under the amended facility is $750.0 million, which may be increased from time to time up to $1.0 billion at the Company’s request, subject to obtaining additional commitments and other customary conditions. The credit facility contains financial covenants, whereby the ratio of consolidated total debt to consolidated Earnings Before Interest, Income Taxes, Depreciation and Amortization (“EBITDA”) cannot exceed 3.50 to 1.0, and the ratio of consolidated EBITDA to consolidated interest expense cannot be less than 3.0 to 1.0. The Company was in compliance with these financial covenants as of September 30, 2015.

Borrowings under the Credit Facility bear interest at a rate that is determined as a base rate plus a margin. The base rate is either (a) LIBOR for a specified interest period or (b) a floating rate based upon JPMorgan Chase Bank’s prime rate, the Federal Funds rate or LIBOR. The margin is determined by reference to the Company’s credit rating. The margin can range from 0% to 1.375% over the base rate. In addition, the Company incurs an annual 0.125% facility fee on the entire facility commitment of $750.0 million.

Long-Term Notes

In the third quarter of 2014, the Company redeemed all of its $500.0 million of 3.50% Notes due in 2014 (the “2014 Notes”). The redemption price, which was calculated in accordance with the terms of the 2014 Notes and included principal plus a make-whole premium, was $503.5 million.

During the nine months ended September 30, 2014, the Company issued and sold $500.0 million of 4.60% senior notes due June 1, 2044 at a public offering price of 99.465% (the “2044 Notes”). Net proceeds from the sale of the 2044 Notes, after deducting underwriters' discounts and offering expenses, were $492.0 million. Interest on the 2044 Notes is payable semi-annually on June 1 and December 1 of each year. Proceeds from the 2044 Notes, together with cash on hand, was used to redeem the 2014 Notes. In addition, the Company settled a series of cash flow interest rate forward swaps into which it originally entered during the fourth quarter of 2013. These swaps mitigated interest rate exposure associated with the Company’s offering of the 2044 Notes. See Note 16 for discussion of the Company’s interest rate forward swaps.

During the nine months ended September 30, 2014, the Company entered into a series of fair value interest rate swaps that effectively convert the Company’s 4.90% Notes due 2019 (the “2019 Notes”) from a fixed rate structure to a floating rate structure. As of September 30, 2015, these swaps have resulted in a fair value adjustment of $13.7 million to increase long-term debt, which is offset by a long-term derivative asset. See Note 16 for a discussion of the fair value swaps.

Using quoted prices in markets that are not active, the Company determined that the fair value of its long-term debt was $1,890.3 million (Level 2) as of September 30, 2015.
 
The components of interest expense-net were as follows: 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In millions)
 
2015
 
2014
 
2015
 
2014
Interest expense
 
$
16.8

 
$
20.6

 
$
49.7

 
$
53.2

Interest income
 
(2.0
)
 
(2.3
)
 
(7.2
)
 
(7.2
)
Interest expense-net
 
$
14.8

 
$
18.3

 
$
42.5

 
$
46.0


16.                               DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS
 
The Company is exposed to market risk due to changes in foreign currency exchange rates, commodities pricing and interest rates. To manage that risk, the Company enters into certain derivative financial instruments, when available on a cost-effective basis, to hedge its underlying economic exposure. The Company does not enter into derivatives for speculative purposes. These financial instruments are classified as Level 2 in the fair value hierarchy at September 30, 2015 and December 31, 2014, and there were no transfers between levels in the fair value hierarchy during the periods then ended.


13


The following table summarizes the fair value of the Company's outstanding derivatives:
(In millions)
Hedge Designation
Balance Sheet Location
 
September 30, 2015
 
December 31, 2014
Foreign exchange contracts
Cash Flow
Prepaid expenses and other assets
 
$
13.3

 
$
13.0

Interest rate forward swaps
Fair Value
Other assets
 
13.7

 

Commodity contracts
Cash Flow
Prepaid expenses and other assets
 
0.7

 

Foreign exchange contracts
Cash Flow
Accrued expenses
 

 
(0.2
)
Commodity contracts
Cash Flow
Accrued expenses
 
(0.3
)
 
(0.8
)
Interest rate forward swaps
Fair Value
Other liabilities
 

 
(0.9
)
Net asset/(liability) of derivatives designated as hedging items
 
 
 
$
27.4

 
$
11.1


The Company’s derivative financial instruments present certain market and counterparty risks; however, concentration of counterparty risk is mitigated as the Company deals with a variety of major banks worldwide whose long-term debt is rated A- or higher by Standard & Poor’s Rating Service, Fitch Ratings, or Moody’s Investors Service, Inc. In addition, only conventional derivative financial instruments are used. The Company would not be materially impacted if any of the counterparties to the derivative financial instruments outstanding at September 30, 2015 failed to perform according to the terms of its agreement. Based upon the risk profile of the Company's portfolio, MJN does not require collateral or any other form of securitization to be furnished by the counterparties to its derivative financial instruments.

Cash Flow Hedges
 
As of September 30, 2015 and December 31, 2014, all of the Company’s cash flow hedges qualify as hedges of forecasted cash flows and the effective portion of changes in fair value are temporarily reported in accumulated other comprehensive income (loss). During the period that the underlying hedged transaction impacts earnings, the effective portion of the changes in the fair value of the cash flow hedges is recognized within earnings. The Company assesses effectiveness at inception and on a quarterly basis. These assessments determine whether derivatives designated as qualifying hedges continue to be highly effective in offsetting changes in the cash flows of hedged items. Any ineffective portion of the change in fair value is included in current period earnings.

The Company will discontinue cash flow hedge accounting when the forecasted transaction is no longer probable of occurring on the originally forecasted date, or 60 days thereafter, or when the hedge is no longer effective. For the three and nine months ended September 30, 2015 and 2014, the Company did not discontinue any cash flow hedges.

Foreign Exchange Contracts

The Company uses foreign exchange contracts to hedge forecasted transactions, primarily foreign currency denominated inter-company purchases anticipated in the next 18 months and designates these derivative instruments as foreign currency cash flow hedges when appropriate. When the underlying inter-company purchases impact the Company’s consolidated earnings, the effective portion of the hedge is recognized within cost of products sold. Ineffectiveness related to the Company’s foreign exchange hedges on earnings was $0.7 million and $0.8 million for the nine months ended September 30, 2015, and 2014, respectively.

As of September 30, 2015, the notional value of the Company’s outstanding foreign exchange forward contracts designated as hedging instruments was $189.5 million, with a fair value of $13.3 million in net assets. As of December 31, 2014, the notional value of the Company’s outstanding foreign exchange forward contracts designated as hedging instruments was $247.9 million, with a fair value of $12.8 million in net assets. The fair value of all foreign exchange forward contracts is based on quarter-end forward currency rates. The fair value of foreign exchange forward contracts should be viewed in relation to the fair value of the underlying hedged transactions and the overall reduction in exposure to fluctuations in foreign currency exchange rates.
 








14


The change in accumulated other comprehensive income (loss) and the impact on earnings from foreign exchange contracts that qualified as cash flow hedges were as follows: 
(In millions)
 
2015
 
2014
Balance—January 1
 
$
10.4

 
$
3.2

Derivatives qualifying as cash flow hedges deferred in other comprehensive income
 
23.0

 
(0.1
)
Derivatives qualifying as cash flow hedges reclassified to cost of products sold (effective portion)
 
(15.4
)
 
(3.3
)
Change in deferred taxes
 
(0.2
)
 
0.9

Balance—September 30
 
$
17.8

 
$
0.7

 
At September 30, 2015, the balance of the effective portion of changes in fair value on foreign exchange forward contracts that qualified for cash flow hedge accounting included in accumulated other comprehensive income was $17.8 million, $17.3 million of which is expected to be reclassified into earnings within the next 12 months.

Interest Rate Forward Swaps
During 2013, the Company entered into interest rate forward starting swaps with a combined notional value of $500.0 million. The forward starting rates of the swaps ranged from 3.79% to 3.94% and had an effective date of October 31, 2014. The forward starting swaps effectively mitigated the interest rate exposure associated with the Company’s offering of the 2044 Notes, the proceeds of which were used to redeem all of the Company’s 2014 Notes. These derivative instruments were designated as cash flow hedges at inception and were highly effective in offsetting fluctuations in the benchmark interest rate. During 2014, and around the time of the issuance of the 2044 Notes, the Company paid $45.0 million to settle the outstanding forward swaps. This payment was recognized in accumulated other comprehensive loss and will be amortized over the life of the 2044 Notes. There was $0.5 million of ineffectiveness related to the forward swaps through the date of settlement which was recognized as a loss within other (income)/expenses-net during the nine month period ended September 30, 2014. During the three and nine months ended September 30, 2015, $0.4 million and $1.1 million of amortization of the settlement amount was recognized as incremental interest expense within interest expense-net.

Commodity Hedges
The Company utilizes commodity hedges to minimize the variability in cash flows due to fluctuations in market prices of the Company’s non-fat dry milk purchases for North America. The maturities of the commodity contracts are scheduled to match the pricing terms of the Company’s existing bulk purchase agreements. When the underlying non-fat dry milk purchases impact the Company’s consolidated earnings, the effective portion of the hedge is recognized within cost of products sold.

As of September 30, 2015, the Company had commodity contracts outstanding which committed the Company to approximately $4.4 million of forecasted non-fat dry milk purchases. The effective portion of the hedges, which was recorded at fair value in a net asset position as a component of accumulated other comprehensive income (loss), was $0.4 million as of September 30, 2015 and $0.8 million as of December 31, 2014. The ineffective portion recognized within other (income)/expenses-net was insignificant for the three and nine month periods ended September 30, 2015, and September 30, 2014.
 
Fair Value Hedges
 
Interest Rate Swaps

In November 2009, the Company executed several interest rate swaps to convert $700.0 million of the Company’s then newly-issued fixed rate debt to be paid in 2014 and 2019 to variable rate debt. In November 2010, the Company terminated $200.0 million notional amount of fixed-to-floating interest rate swaps in exchange for cash of $15.6 million. In July 2011, the Company terminated the remaining $500.0 million notional amount of fixed-to-floating interest rate swaps in exchange for cash of $23.5 million. The related basis adjustments of the underlying hedged items are being recognized as a reduction of interest expense over the remaining life of the underlying debt. For the three and nine months ended September 30, 2015, the amortization of the settled swaps related to the 2019 Notes resulted in a $0.5 million and $1.4 million reduction in interest expense, respectively, compared to a $0.5 million and $1.4 million reduction for the three and nine months ended September 30, 2014, respectively. Because the Company redeemed the 2014 Notes in the third quarter of 2014, the amortization of the related swaps was completed at that time, and there was no amortization related to these swaps in the three and nine months ended September 30, 2015.

15


In May 2014 the Company entered into eight interest rate swaps with multiple counterparties, which have an aggregate notional amount of $700.0 million of outstanding principal. This series of swaps effectively converts the $700.0 million of 2019 Notes from fixed to floating rate debt for the remainder of their term. These interest rate swaps were outstanding as of September 30, 2015, and the conversion of fixed to floating rate resulted in a reduction in interest expense of $2.4 million and $7.6 million for the three and nine months ended September 30, 2015. During the three and nine months ended September 30, 2014, the conversion of fixed to floating rate resulted in a reduction in interest expense of $2.5 million and $3.6 million, respectively.

The following table summarizes the interest rate swaps outstanding as of September 30, 2015, all of which have a hedge inception date of May 2014 and will mature in November 2019:
(Dollars in millions)
 
Notional Amount of Underlying
 
Fixed Rate Received
 
Variable Rate Paid
(U.S. 3 Month LIBOR +)
 
Fair Value Asset
Swaps associated with the 2019 Notes
 
$
700.0

 
4.9
%
 
3.14
%
 
$
13.7



See Note 15. Debt for additional information related to the Company’s long-term debt.

Other Financial Instruments
 
The Company does not hedge the interest rate risk associated with money market funds which totaled $165.6 million and $395.4 million as of September 30, 2015 and December 31, 2014, respectively. Money market funds are classified as Level 2 in the fair value hierarchy and are included in cash and cash equivalents on the balance sheet. The money market funds have quoted market prices that are generally equivalent to par. See Note 17. Marketable Securities for additional information related to the Company’s marketable securities.

17.                                      MARKETABLE SECURITIES
 
As of September 30, 2015 and December 31, 2014, the Company held no investments in debt securities. During the three months ended September 30, 2015, the Company sold debt securities prior to maturity for $21.7 million, which had been classified as trading securities and included in prepaid expenses and other assets in the condensed consolidated balance sheets. These investments were carried at fair value based on quoted market prices and classified as Level 1 in the fair value hierarchy. The cost basis for the Company’s debt securities is determined by the specific identification method. Realized and unrealized gains and losses on trading securities are included in other (income)/expenses - net in the Company’s condensed consolidated statements of earnings.

During the three and nine months ended September 30, 2015, the Company recognized a net loss on trading securities of $0.8 million, and a net gain on trading securities of $5.6 million, respectively, resulting from fluctuations in fair value and foreign exchange.

18.                               EQUITY
 
Changes in common shares and treasury stock were as follows: 
(In millions)
 
Common Shares
Issued
 
Treasury Stock
 
Cost of Treasury
Stock
Balance as of January 1, 2015
 
207.2

 
4.9

 
$
362.6

Stock-based compensation
 
0.5

 

 

Treasury stock purchases
 

 
5.7

 
437.0

Balance as of September 30, 2015
 
207.7

 
10.6

 
$
799.6

 
 
 
 
 
 
 
Balance as of January 1, 2014
 
206.8

 
4.8

 
$
351.9

Stock-based compensation
 
0.8

 
0.1

 
7.9

Treasury stock purchases
 

 
0.6

 
48.5

Balance as of September 30, 2014
 
207.6

 
5.5

 
$
408.3

 

16


The Company may use either authorized and unissued shares or treasury shares to meet share requirements resulting from the exercise of stock options and vesting of performance share awards and restricted stock units. Treasury stock is recognized at the cost to reacquire the shares. Shares issued from treasury are recognized using the first-in first-out method.
 
On September 10, 2013, MJN’s board of directors approved a share repurchase authorization of up to $500.0 million of the Company’s common stock (the “2013 Authorization”). During the three months ended September 30, 2015, the Company repurchased $437.0 million of treasury shares and, as of September 30, 2015, had $0.4 million available under the 2013 Authorization. See Note 21. Subsequent Events for a description of the $1.5 billion share repurchase authorization approved by the board of directors on October 20, 2015.

Changes in accumulated other comprehensive loss by component were as follows:
(In millions)
 
Foreign Currency Translation Adjustments
 
Deferred Gains/(Losses) on Derivatives Qualifying as Hedges
 
Pension and Other Post-employment Benefits
 
Total
 
Noncontrolling Interest
 
Redeemable Noncontrolling Interest
 
Balance as of January 1, 2015
 
$
(180.4
)
 
$
(17.8
)
 
$
(0.7
)
 
$
(198.9
)
 
$
1.9

 
$
(21.6
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Deferred Gains/(Losses)
 
(103.5
)
 
22.0

 
 
 
(81.5
)
 
(0.3
)
(1
)
(1.3
)
(1
)
  Reclassification Adjustment for (Gains)/Losses Included in Net Earnings
 
 
 
(13.1
)
 
 
 
(13.1
)
 
 
 
 
 
  Tax Benefit/(Expense)
 
0.7

 
(0.8
)
 
 
 
(0.1
)
 
 
 
 
 
Acquisition of Noncontrolling Interest
 
(11.5
)
 
 
 
 
 
(11.5
)
 
(11.4
)
 
22.9

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of September 30, 2015
 
$
(294.7
)
 
$
(9.7
)
 
$
(0.7
)
 
$
(305.1
)
 
$
(9.8
)
 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of January 1, 2014
 
$
(83.6
)
 
$
15.4

 
$
(1.0
)
 
$
(69.2
)
 
$
1.9

 
$
(14.4
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Deferred Gains/(Losses)
 
(49.7
)
 
(64.3
)
(2)


 
(114.0
)
 


(1
)
(6.8
)
(1
)
  Reclassification Adjustment for (Gains)/Losses Included in Net Earnings
 


 
(2.8
)
 
0.2

 
(2.6
)
 


 


 
  Tax Benefit/(Expense)
 
0.3

 
24.5

 


 
24.8

 


 


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of September 30, 2014
 
$
(133.0
)
 
$
(27.2
)
 
$
(0.8
)
 
$
(161.0
)
 
$
1.9

 
$
(21.2
)
 
(1) Represents foreign currency translation adjustments.
(2) See Note 16. Derivatives and Other Financial Instruments for additional information related to interest rate forward swaps.






17


Reclassification adjustments out of accumulated other comprehensive loss were as follows:
 
Three Months Ended September 30,
 
Affected Statement of Earnings Lines
 
 
 
 
(In millions)
Cost of Products Sold
 
Tax Benefit/(Expense)
 
Net
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
Deferred Gains/(Losses) on Derivatives Qualifying as Hedges:
 
 
 
 
 
 
 
 
 
 
 
  Forward Exchange Contracts
$
6.2

 
$

 
$
(0.5
)
 
$
0.1

 
$
5.7

 
$
0.1

  Commodity Contracts
(0.6
)
 
$

 
0.2

 
$

 
(0.4
)
 
$

  Interest Rate Forward Swap
(0.3
)
 
$
(0.5
)
 
0.1

 

 
(0.2
)
 
$
(0.5
)
 
 
 
 
 
 
 
 
 
 
 
 
Pension and Other Post-employment Benefit Plans:
 
 
 
 
 
 
 
 
 
 
 
  Prior Service Benefits

 

 

 

 

 

Total Reclassifications
$
5.3

 
$
(0.5
)
 
$
(0.2
)
 
$
0.1

 
$
5.1

 
$
(0.4
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
Affected Statement of Earnings Lines
 
 
 
 
(In millions)
Cost of Products Sold
 
Tax Benefit/(Expense)
 
Net
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
Deferred Gains/(Losses) on Derivatives Qualifying as Hedges:
 
 
 
 
 
 
 
 
 
 
 
  Forward Exchange Contracts
$
15.4

 
$
3.3

 
$
(4.5
)
 
$
(0.9
)
 
$
10.9

 
$
2.4

  Commodity Contracts
(1.3
)
 
$

 
0.5

 
$

 
(0.8
)
 
$

  Interest Rate Forward Swap
(1.0
)
 
$
(0.5
)
 
0.4

 
$

 
(0.6
)
 
$
(0.5
)
 
 
 
 
 
 
 
 
 
 
 
 
Pension and Other Post-employment Benefit Plans:
 
 
 
 
 
 
 
 
 
 
 
  Prior Service Benefits

 
(0.2
)
 

 

 

 
(0.2
)
Total Reclassifications
$
13.1

 
$
2.6

 
$
(3.6
)
 
$
(0.9
)
 
$
9.5

 
$
1.7


19.                               VENEZUELA CURRENCY MATTERS
 
During the first quarter of 2014, the Venezuelan government enacted changes affecting the country’s currency exchange and other controls. In late January 2014, the government announced the replacement of the Commission for the Administration of Foreign Exchange (“CADIVI”) with a new foreign currency administration, the National Center for Foreign Commerce (“CENCOEX”). In conjunction with this replacement, CENCOEX assumed control of the sale and purchase of foreign currency in Venezuela, and has maintained the official exchange rate of 6.3 Bolivares Fuertes (“VEF”) to 1.0 U.S. dollar (“USD”) (the “Official Rate”). Entities can continue to seek approval to transact through the CENCOEX mechanism at the Official Rate, which is honored for certain priority transactions.

Additional changes in January 2014 expanded the types of transactions that may be subject to the weekly auction mechanism under the Complimentary Currency Administration System (“SICAD I”). MJN concluded that among other items, future inter-company dividend remittances qualify for the purchase of foreign currency at the SICAD I rate under the revised law. As such, MJN adopted the SICAD I rate for purposes of remeasuring the net monetary assets of its Venezuelan subsidiary effective February 28, 2014. The remeasurement impact of this adoption was a loss of $6.1 million, which was recognized in MJN’s Statement of Earnings as a component of other (income)/expenses - net. Because the SICAD I auction rate is a floating rate, the potential exists for additional financial impacts if the auction rate changes significantly.

In February 2015, the Venezuelan government enacted additional changes to its foreign exchange regime. The changes maintain a three-tiered system, including the Official Rate determined by CENCOEX. A new, alternative currency market, the Marginal Foreign Exchange System (“SIMADI”), was created with a floating exchange rate generally based on supply and demand. In connection with the establishment of SIMADI, SICAD I became known as SICAD. As of September 30, 2015, CENCOEX traded 6.3 VEF to 1.0 USD, the SICAD auction market traded 13.5 VEF to 1.0 USD and the SIMADI market

18


traded at 199.4 VEF to 1.0 USD. The Company continues to assess the impact, if any, of these changes as the government of Venezuela issues regulations to implement them.

It is possible that the Venezuelan government will further refine or alter mechanisms through which companies are able to access USD, which could change the rate at which MJN can access USD and the rate used by the Company to remeasure the net monetary assets of its Venezuelan subsidiary. This could have an unfavorable impact on MJN’s operating results and future business operations. In addition, the foreign exchange control in Venezuela has limited our ability to repatriate earnings and MJN’s Venezuelan subsidiary’s ability to remit dividends and pay inter-company balances at any official exchange rate or at all.

For both the year ended December 31, 2014 and the nine months ended September 30, 2015, MJN’s Venezuelan subsidiary had net sales that represented approximately 2%, of total Company net sales. As of September 30, 2015, the Venezuelan subsidiary had approximately $42 million of net monetary assets.


20.                               COMMITMENTS AND CONTINGENCIES
 
In the ordinary course of business, the Company is subject to lawsuits, investigations, government inquiries and claims, including, but not limited to, product liability claims, advertising disputes and inquiries, consumer fraud suits, other commercial disputes, premises claims and employment and environmental, health, and safety matters.

The Company records accruals for contingencies when it is probable that a liability will be incurred and the loss can be reasonably estimated. Although the Company cannot predict with certainty the final resolution of lawsuits, investigations and claims asserted against the Company, MJN does not believe any currently pending legal proceeding to which the Company is a party will have a material effect on the Company’s business or financial condition, although an unfavorable outcome in excess of amounts recognized as of September 30, 2015, with respect to one or more of these proceedings could have a material effect on the Company’s results of operations and cash flows for the periods in which a loss is recognized.

As previously disclosed, on July 28, 2015, the Company entered into a settlement agreement with the SEC fully resolving the SEC’s investigation of certain of the Company’s promotional practices in China during the period 2008 - 2013. Under the terms of the settlement agreement, Mead Johnson agreed to disgorgement, as well as the payment of pre-judgment interest and a penalty, resulting in an aggregate payment of $12.0 million. The settlement agreement provides that the Company neither admits nor denies the allegations in the settlement and order. In addition, on July 28, 2015, the Company was informed by the United States Department of Justice (“DOJ”) that the DOJ has closed its inquiry into possible violations of the Foreign Corrupt Practices Act by the Company.

21.                               SUBSEQUENT EVENTS

Share Repurchase Authorization
On October 20, 2015, the Company’s board of directors approved a new share repurchase authorization of $1.5 billion of the Company’s common stock (the “2015 Repurchase Authorization”). The Company expects to finance the share repurchases through the issuance of debt, which may include long-term notes. The adoption of the new program follows the substantial completion of purchases of common stock under the prior repurchase authorization approved in September 2013. Shares will be repurchased from time to time in the open market or in privately negotiated transactions, including without limitation, the anticipated use of a $1.0 billion accelerated share repurchase program (described below).
Accelerated Share Repurchase Agreement
The Company expects to enter into a $1.0 billion accelerated share repurchase agreement (the “ASR Agreement”) in the short-term with an investment bank. The ASR Agreement and related accelerated share repurchase program will be made pursuant to the 2015 Repurchase Authorization described above.
Under the ASR Agreement, approximately 11 million shares will be received by the Company once the ASR Agreement is executed. At final settlement of the ASR Agreement, which is expected to occur during or prior to the second quarter of 2016, the investment bank may be required to deliver additional shares of common stock to the Company or the Company may be required to deliver shares of its common stock to the investment bank, with the number of shares to be delivered based on the volume-weighted average price of Company’s common stock during the term of the accelerated share repurchase program. 



19



Term Loan
The Company has entered into a six-month $1.0 billion term loan agreement dated as of October 21, 2015, with lenders who administer its existing Credit Facility. The proceeds of such borrowings are expected to fund the accelerated share repurchase program, but may also be used for working capital and other general corporate purposes.



20


ITEM 2.                              MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 

Business Overview
 
MJN is a global leader in pediatric nutrition. The Company’s comprehensive product portfolio addresses a broad range of nutritional needs for infants, children and expectant and nursing mothers. With over 100 years of innovation experience, MJN has developed or improved many breakthrough or industry-defining products across each of its product categories. MJN’s product portfolio consists of two principal product categories: infant formula and children’s nutrition. These product categories can be separated into the following five general product types: (i) routine infant, (ii) solutions, (iii) specialty, (iv) children’s nutrition and (v) other. MJN’s routine infant formula is intended for healthy consumers while its solutions and specialty products are offered for infants with mild to severe nutritional needs. The Company’s children’s nutrition products are designed to meet the nutritional needs of children at different stages of development. MJN’s other products include vitamins and supplements. MJN markets products under different names in various regions across the world, based on regional marketing strategies and regional brand recognition.

MJN operates in four geographic operating segments: Asia, Europe, Latin America and North America. Based on this operating segmentation, the chief operating decision maker regularly assesses information for decision making purposes, including allocation of resources. Due to similarities between North America and Europe, the Company aggregated these two operating segments into one reportable segment. As a result, the Company has three reportable segments: Asia, Latin America and North America/Europe.


Three Months Results of Operations
 
Below is a summary of comparative results of operations for the three months ended September 30, 2015 and 2014
 
 
 
 
 
 
 
 
% of Net Sales
(Dollars in millions, except per share data)
 
2015
 
2014
 
% Change
 
2015
 
2014
Net Sales
 
$
977.5

 
$
1,090.7

 
(10
)%
 
 
 
 
Gross Profit
 
630.7

 
652.8

 
(3
)%
 
65
%
 
60
%
Operating Expenses
 
404.7

 
410.2

 
(1
)%
 
41
%
 
38
%
Earnings before Interest and Income Taxes
 
226.0

 
242.6

 
(7
)%
 
23
%
 
22
%
Interest Expense—net
 
14.8

 
18.3

 
(19
)%
 
2
%
 
2
%
Earnings before Income Taxes
 
211.2

 
224.3

 
(6
)%
 
22
%
 
21
%
Provision for Income Taxes
 
56.6

 
36.0

 
57
 %
 
6
%
 
4
%
    Effective Tax Rate
 
26.8
%
 
16.0
%
 
 
 
 
 
 
Net Earnings
 
154.6

 
188.3

 
(18
)%
 
16
%
 
17
%
Less: Net Earnings/(Loss) Attributable to Noncontrolling Interests
 
(0.6
)
 
0.7

 
(186
)%
 
n/a

 
n/a

Net Earnings Attributable to Shareholders
 
$
155.2

 
$
187.6

 
(17
)%
 
16
%
 
17
%
Weighted-Average Common Shares— Diluted
 
201.7

 
202.7

 
 
 
 
 
 
Earnings per Common Share—Diluted
 
$
0.77

 
$
0.92

 
(16
)%
 
 
 
 
 
The results for the three months ended September 30, 2015 and 2014 include several items that affect the comparability of MJN’s results. These items include significant expenses/(income) not indicative of on-going results (“Specified Items”) and are listed in the table below.
 
 
Three Months Ended September 30,
(In millions)
 
2015
 
2014
  Pension and other post-employment mark-to-market adjustment
 
$
11.4

 
$
9.3

  Legal, settlements and related costs
 
0.6

 
(0.5
)
  Severance and other expenses
 
0.3

 

Pension curtailment gain
 

 
(5.4
)
Marketable securities loss
 
0.8

 

Specified Items
 
$
13.1

 
$
3.4

Income tax impact on Specified Items
 
(6.3
)
 
(3.1
)
Specified Items - net
 
$
6.8

 
$
0.3


21


See “Item 1. Financial Statements - Note 17. Marketable Securities” for further additional information regarding marketable securities.

Net Sales 
Net sales by reportable segments are shown in the table below:
 
 
Three Months Ended September 30,
 
 
 
% Change Due to
(Dollars in millions)
 
2015
 
2014
 
% Change
 
Volume
 
Price/Mix
 
Foreign
Exchange
Asia
 
$
476.8

 
$
561.5

 
(15
)%
 
(7
)%
 
(4
)%
 
(4
)%
Latin America
 
184.5

 
222.9

 
(17
)%
 
(5
)%
 
4
 %
 
(16
)%
North America/Europe
 
316.2

 
306.3

 
3
 %
 
3
 %
 
4
 %
 
(4
)%
Net Sales
 
$
977.5

 
$
1,090.7

 
(10
)%
 
(4
)%
 
 %
 
(6
)%
 
Supplemental disclosure of net sales by product category appears in the table below: 
 
 
Three Months Ended September 30,
 
 
(Dollars in millions)
 
2015
 
2014
 
% Change
Infant formula
 
$
581.7

 
$
619.2

 
(6
)%
Children’s nutrition
 
379.0

 
451.5

 
(16
)%
Other
 
16.8

 
20.0

 
(16
)%
Net Sales
 
$
977.5

 
$
1,090.7

 
(10
)%

Asia sales decreased 15% compared to the prior year period. In China, market factors including competitive promotional activity and an ongoing shift in consumer demand for imported product continued to negatively impact our locally manufactured brands. Our recent launch of a fully imported product in China is performing well in the fast growing baby stores and e-commerce channels where the Company has historically been under-indexed. In the rest of Asia, volume declined due to market share losses and category softness. In Malaysia, consumption was negatively impacted by the local government’s levy of a sales related tax.
 
Latin America sales decreased 17% compared to the prior year period primarily due to the strengthening of the U.S. dollar against the Mexican Peso. Increased prices in Argentina and Colombia partially offset the adverse impact of foreign exchange during the third quarter. We gained market share in certain key markets as we realized the benefits of our investment strategy; however these gains were more than offset by soft economic conditions, and in the case of Mexico, a prevalent competitor’s price based promotional activity within the children’s nutrition segment negatively impacted volumes. Additionally, in Venezuela, we made the decision to slow shipments to distribution channels due to constraints placed by the Venezuelan government on the release of U.S. dollars.
 
North America/Europe sales increased 3% compared to the prior year period. Adverse foreign exchange was primarily driven by the strengthening of the U.S. dollar against the Canadian dollar. Additionally, prices increased throughout the segment, most significantly in the U.S. and Canada. Volume increases were driven by the U.S. and Canada markets which both benefited from improved market share positions.

As discussed above, we continue to note exposure related to adverse foreign currency exchange rates similar to those highlighted in the Annual Report on Form 10-K for the year ended December 31, 2014. We remain cautious of the impact of such exchange rates on our net sales results because a substantial portion of our sales are outside of the U.S. and the U.S. dollar remains strong in relation to many relevant currencies. We have implemented certain measures to offset some of the impact that lower sales has on our margins including cost reduction programs and productivity improvements. However, if the U.S. dollar continues to strengthen or does so at an accelerated pace, we may experience a greater impact to our business.

22



MJN recognizes revenue net of various sales adjustments to arrive at net sales as reported on the statements of earnings. These adjustments are referred to as gross-to-net sales adjustments. The reconciliation of gross sales to net sales is as follows: 
 
 
Three Months Ended September 30,
 
% of Gross Sales
(Dollars in millions)
 
2015
 
2014
 
2015
 
2014
Gross Sales
 
$
1,320.7

 
$
1,423.8

 
100
%
 
100
%
Gross-to-Net Sales Adjustments
 
 

 
 

 
 

 
 

WIC Rebates
 
189.4

 
201.7

 
14
%
 
14
%
Sales Discounts
 
90.9

 
70.1

 
7
%
 
5
%
Returns
 
20.2

 
23.2

 
2
%
 
1
%
Other (including Cash Discounts, Coupons)
 
42.7

 
38.1

 
3
%
 
3
%
Total Gross-to-Net Sales Adjustments
 
343.2

 
333.1

 
26
%
 
23
%
Total Net Sales
 
$
977.5

 
$
1,090.7

 
74
%
 
77
%
The gross-to-net sales adjustments increased as a percentage of gross sales compared with the prior year period, mainly due to increased sales discounts in China reflecting the market’s price competitiveness.
 
Gross Profit
 
 
Three Months Ended September 30,
 
 
(Dollars in millions)
 
2015
 
2014
 
% Change
Net Sales
 
$
977.5

 
$
1,090.7

 
(10
)%
Cost of Products Sold
 
346.8

 
437.9

 
(21
)%
Gross Profit
 
$
630.7

 
$
652.8

 
(3
)%
Gross Margin
 
64.5
%
 
59.9
%
 
 

The increase in gross margin resulted primarily from lower dairy input costs across all segments.

Operating Expenses
 
 
Three Months Ended September 30,
 
 
 
% of Net Sales
(Dollars in millions)
 
2015
 
2014
 
% Change
 
2015
 
2014
Selling, General and Administrative
 
$
216.1

 
$
240.2

 
(10
)%
 
22
%
 
22
 %
Advertising and Promotion
 
156.1

 
158.9

 
(2
)%
 
16
%
 
15
 %
Research and Development
 
26.3

 
28.7

 
(8
)%
 
3
%
 
3
 %
Other (Income)/Expenses—net
 
6.2

 
(17.6
)
 
(135
)%
 
1
%
 
(2
)%
 
Selling, General and Administrative Expenses
 
Selling, general and administrative expenses decreased primarily due to the translation of foreign currency into the stronger U.S. dollar. In addition, lower provisions for incentive related compensation reduced expenses in the current year.
 
Advertising and Promotion Expenses
 
Advertising and promotion expenses decreased slightly from the prior year quarter; however, this decrease was driven by foreign currency translation. We continued to invest in demand-creation initiatives during the quarter, with increases in Mexico on a local currency basis and increases in the U.S. to support commercial activities in those markets.

Other (Income)/Expenses—net  
 
 
Three Months Ended September 30,
(In millions)
 
2015
 
2014
Foreign exchange (gains)/losses - net
 
4.9

 
(8.2
)
Severance and other costs
 
0.6

 

Pension curtailment gain
 

 
(5.4
)
Marketable securities loss
 
0.8

 

Other - net
 
(0.1
)
 
(4.0
)
Other (income)/expenses - net
 
$
6.2

 
$
(17.6
)

23



See “Item 1. Financial Statements - Note 8. Other (Income)/Expenses - Net” for additional information related to foreign exchange (gains)/losses - net, “Item 1. Financial Statements - Note 7. Pension and Other Post-Employment Benefit Plans” for information regarding pension curtailment gain, and “Item 1. Financial Statements - Note 17. Marketable Securities” for additional information regarding marketable securities.

Earnings before Interest and Income Taxes 
Earnings before interest and income taxes (“EBIT”) from the Company’s three reportable segments is reduced by Corporate and Other expenses. Corporate and Other consists of unallocated global business support activities, including research and development, marketing, supply chain costs, and general and administrative expenses; net actuarial gains and losses related to defined benefit pension and other post-employment plans; and income or expenses incurred within the Company’s operating segments that are not reflective of ongoing operations and affect the comparability of the operating segments’ results.
 
 
Three Months Ended September 30,
 
 
 
% of Net Sales
(Dollars in millions)
 
2015
 
2014
 
% Change
 
2015
 
2014
Asia
 
$
154.2

 
$
186.2

 
(17
)%
 
32
%
 
33
%
Latin America
 
38.9

 
52.6

 
(26
)%
 
21
%
 
24
%
North America/Europe
 
101.3

 
66.8

 
52
 %
 
32
%
 
22
%
Corporate and Other
 
(68.4
)
 
(63.0
)
 
(9
)%
 
n/a

 
n/a

EBIT
 
$
226.0

 
$
242.6

 
(7
)%
 
23
%
 
22
%

EBIT in Asia decreased primarily due to lower sales. The decline was partially offset by higher gross margin as a result of lower dairy costs in addition to prior year start-up expenses related to our manufacturing center in Singapore that did not recur in the current quarter.
 
EBIT in Latin America decreased primarily due to lower sales partially offset by higher gross margin. On a local currency basis, EBIT increased slightly due to lower dairy costs which were partly offset by substantial demand-creating investments behind several new product launches. In addition, the prior year quarter included significant foreign exchange gains which were generated from cash received at the official Venezuelan government rate compared to the SICAD I rate adopted by the Company in February 2014. See “Item 1. Financial Statements - Note 19. Venezuela Currency Matters” for further additional information regarding exchange rate variability in Venezuela.

EBIT in North America/Europe increased significantly due to sales growth, higher gross margin driven by lower dairy input costs, and lower selling, general and administrative expenses as compared to the prior year period. This was partly offset by higher demand-creation investments.
 
Corporate and Other expenses increased primarily due the nonrecurrence of a prior year pension curtailment gain as well as higher pension actuarial losses in the current year compared to the prior year. Partially offsetting these increases was lower provisions for incentive related compensation in the current year.
  
Income Taxes
The ETR for the three months ended September 30, 2015 and 2014 was 26.8% and 16.0%, respectively. The ETR increase was primarily due to a change in the reserve for uncertain tax positions, the majority of which relates to the running of the statute of limitations in various jurisdictions during the comparable period in 2014, and an unfavorable change in geographic earnings mix in the current period.
 
Net Earnings Attributable to Noncontrolling Interests
Net earnings attributable to noncontrolling interests consists of a 11%, 10% and 10% interest held by third parties in the Company’s operating entities in China, Argentina and Indonesia, respectively. See “Item 1. Financial Statements - Note 9. Redeemable Noncontrolling Interest” for additional information related to Argentina.

Net Earnings Attributable to Shareholders
For the foregoing reasons, net earnings attributable to shareholders for the three months ended September 30, 2015 decreased 17% to $155.2 million compared with the three months ended September 30, 2014.
 


24


Nine Months Results of Operations
 
Below is a summary of comparative results of operations for the nine months ended September 30, 2015 and 2014
 
 
 
 
 
 
 
 
% of Net Sales
(Dollars in millions, except per share data)
 
2015
 
2014
 
% Change
 
2015
 
2014
Net Sales
 
$
3,104.3

 
$
3,315.1

 
(6
)%
 
 
 
 
Gross Profit
 
2,007.6

 
2,044.7

 
(2
)%
 
65
%
 
62
%
Operating Expenses
 
1,267.2

 
1,266.0

 
 %
 
41
%
 
38
%
Earnings before Interest and Income Taxes
 
740.4

 
778.7

 
(5
)%
 
24
%
 
23
%
Interest Expense—net
 
42.5

 
46.0

 
(8
)%
 
1
%
 
1
%
Earnings before Income Taxes
 
697.9

 
732.7

 
(5
)%
 
22
%
 
22
%
Provision for Income Taxes
 
173.6

 
160.5

 
8
 %
 
6
%
 
5
%
    Effective Tax Rate
 
24.9
%
 
21.9
%
 
 
 
 
 
 
Net Earnings
 
524.3

 
572.2

 
(8
)%
 
17
%
 
17
%
Less: Net Earnings/(Loss) Attributable to Noncontrolling Interests
 
(1.2
)
 
10.8

 
(111
)%
 
n/a

 
n/a

Net Earnings Attributable to Shareholders
 
$
525.5

 
$
561.4

 
(6
)%
 
17
%
 
17
%
Weighted-Average Common Shares— Diluted
 
202.6

 
202.6

 
 
 
 
 
 
Earnings per Common Share—Diluted
 
$
2.59

 
$
2.77

 
(6
)%
 
 
 
 

The results for the nine months ended September 30, 2015 and 2014 include several items that affect the comparability of MJN’s results. These items include significant expenses/(income) not indicative of on-going results (“Specified Items”) and are listed in the table below.
 
 
Nine Months Ended September 30,
(In millions)
 
2015
 
2014
  Pension and other post-employment mark-to-market adjustment
 
$
9.9

 
$
16.4

  Settlement related to the China investigation
 
12.0

 

  Legal, settlements and related costs
 
1.7

 
9.6

  Severance and other expenses
 
2.8

 
0.3

Pension curtailment gain
 

 
(5.4
)
Marketable securities gain - net
 
(5.6
)
 

Specified Items
 
$
20.8

 
$
20.9

Income tax impact on Specified Items
 
(7.2
)
 
(9.1
)
Specified Items - net
 
$
13.6

 
$
11.8


See “Item 1. Financial Statements - Note 20. Commitments and Contingencies” for further discussion of the settlement related to the China investigation and “Item 1. Financial Statements - Note 17. Marketable Securities” for further additional information regarding the marketable securities gain.

Net Sales 
Net sales by reportable segments are shown in the table below:
 
 
Nine Months Ended September 30,
 
 
 
% Change Due to
(Dollars in millions)
 
2015
 
2014
 
% Change
 
Volume
 
Price/Mix
 
Foreign
Exchange
Asia
 
$
1,571.0

 
$
1,729.8

 
(9
)%
 
(6
)%
 
(1
)%
 
(2
)%
Latin America
 
587.3

 
659.7

 
(11
)%
 
(3
)%
 
7
 %
 
(15
)%
North America/Europe
 
946.0

 
925.6

 
2
 %
 
1
 %
 
4
 %
 
(3
)%
Net Sales
 
$
3,104.3

 
$
3,315.1

 
(6
)%
 
(3
)%
 
2
 %
 
(5
)%
 







25


Supplemental disclosure of net sales by product category appears in the table below:
 
 
Nine Months Ended September 30,
 
 
(Dollars in millions)
 
2015
 
2014
 
% Change
Infant formula
 
$
1,827.8

 
$
1,897.3

 
(4
)%
Children’s nutrition
 
1,222.5

 
1,353.5

 
(10
)%
Other
 
54.0

 
64.3

 
(16
)%
Net Sales
 
$
3,104.3

 
$
3,315.1

 
(6
)%

Asia sales decreased 9% compared to the prior year period. In China, the rapid evolution towards the fast growing baby store and e-commerce channels, where we have lower representation, contributed to the decline. In addition, elevated levels of price-based promotional activity and an ongoing shift in consumer demand for imported products continued to negatively impact our locally manufactured brands. Earlier this year, MJN launched a fully imported product into the China market which better meets consumer demands and simultaneously broadens our portfolio in the baby store and e-commerce channels. In the rest of Asia, volume declined due to market share losses and category softness. In Malaysia, consumption was also impacted negatively by the local government’s levy of a sales related tax.

Latin America sales decreased 11% compared to the prior year period. The adverse impact of foreign currency translation decreased Latin America sales by 15% which was primarily driven by the strengthening of the U.S. dollar against the Mexican Peso, Venezuelan Bolivar and Brazilian Real. Price increases in Venezuela, Argentina and Colombia partially offset the impact of adverse foreign currency translation. Volume declines were primarily driven by Venezuela and Mexico. We made the decision to slow shipments to distribution channels in Venezuela due to constraints placed by the Venezuelan government on the release of U.S. dollars and, in Mexico, a prevalent competitor's price-based promotional activity within the children’s nutrition segment negatively impacted volumes.

North America/Europe sales increased 2% compared to the prior year period. Adverse foreign exchange impacts were primarily driven by the strengthening of the U.S. dollar against the Canadian dollar. Prices increased throughout the segment, most significantly in the U.S. and Canada. In the U.S., the benefit to pricing in 2015 is related to price increases taken in 2014. Volume increases were driven by the U.S. and Canada which benefited from improved market share positions.

MJN recognizes revenue net of various sales adjustments to arrive at net sales as reported on the statements of earnings. These adjustments are referred to as gross-to-net sales adjustments. The reconciliation of gross sales to net sales is as follows: 
 
 
Nine Months Ended September 30,
 
% of Gross Sales
(Dollars in millions)
 
2015
 
2014
 
2015
 
2014
Gross Sales
 
$
4,101.7

 
$
4,265.7

 
100
%
 
100
%
Gross-to-Net Sales Adjustments
 
 

 
 

 
 

 
 

WIC Rebates
 
575.9

 
588.1

 
14
%
 
14
%
Sales Discounts
 
232.2

 
183.6

 
6
%
 
4
%
Returns
 
63.1

 
62.6

 
1
%
 
1
%
Other (including Cash Discounts, Coupons)
 
126.2

 
116.3

 
3
%
 
3
%
Total Gross-to-Net Sales Adjustments
 
997.4

 
950.6

 
24
%
 
22
%
Total Net Sales
 
$
3,104.3

 
$
3,315.1

 
76
%
 
78
%
The gross-to-net sales adjustments increased as a percentage of gross sales compared with the prior year period, mainly due to sales discounts in China reflecting the market’s price competitiveness.

Gross Profit
 
 
Nine Months Ended September 30,
 
 
(Dollars in millions)
 
2015
 
2014
 
% Change
Net Sales
 
$
3,104.3

 
$
3,315.1

 
(6
)%
Cost of Products Sold
 
1,096.7

 
1,270.4

 
(14
)%
Gross Profit
 
$
2,007.6

 
$
2,044.7

 
(2
)%
Gross Margin
 
64.7
%
 
61.7
%
 
 

The increase in gross margin resulted primarily from lower dairy input costs across all segments.

Operating Expenses

26


 
 
Nine Months Ended September 30,
 
 
 
% of Net Sales
(Dollars in millions)
 
2015
 
2014
 
% Change
 
2015
 
2014
Selling, General and Administrative
 
$
679.5

 
$
715.4

 
(5
)%
 
22
%
 
22
 %
Advertising and Promotion
 
490.7

 
489.2

 
 %
 
16
%
 
15
 %
Research and Development
 
79.9

 
82.5

 
(3
)%
 
3
%
 
2
 %
Other Expenses—net
 
17.1

 
(21.1
)
 
(181
)%
 
1
%
 
(1
)%
 
Selling, General and Administrative Expenses
 
Selling, general and administrative expenses decreased compared to the prior year period as cost increases were more than offset by the impact of foreign currency translation. In addition, lower provisions for incentive related compensation reduced expenses in the current year.
 
Advertising and Promotion Expenses
 
Advertising and promotion expenses were flat compared to the prior year period due to foreign currency translation. On a local currency basis, demand-creating investments increased mainly due to investments in China to support our imported premium product offering and in Mexico to support new product launches.

Other (Income)/Expenses—net
 
 
Nine Months Ended September 30,
(In millions)
 
2015
 
2014
Settlement related to the China investigation
 
$
12.0

 
$

Foreign exchange (gains)/losses - net
 
6.8

 
(6.0
)
Severance and other costs
 
4.3

 

Gain on sale of investment
 

 
(4.0
)
Marketable securities gain
 
(5.6
)
 

Pension curtailment gain
 

 
(5.4
)
Other - net
 
(0.4
)
 
(5.7
)
Other (income)/expenses - net
 
$
17.1

 
$
(21.1
)

See Item 1. Financial Statements - Note 20. Commitments and Contingencies” for additional information regarding the settlement related to the China investigation, “Item 1. Financial Statements - Note 8. Other (Income)/Expenses - Net” for additional information related to Foreign exchange (gains)/losses - net, “Item 1. Financial Statements - Note 17. Marketable Securities” for additional information regarding marketable securities, and “Item 1. Financial Statements - Note 7. Pension and Other Post-Employment Benefit Plans” for additional information regarding pension curtailment.

Earnings before Interest and Income Taxes 
EBIT from the Company’s three reportable segments is reduced by Corporate and Other expenses. Corporate and Other consists of unallocated global business support activities, including research and development, marketing, supply chain costs, and general and administrative expenses; net actuarial gains and losses related to defined benefit pension and other post-employment plans; and income or expenses incurred within the Company’s operating segments that are not reflective of ongoing operations and affect the comparability of the operating segments’ results.
 
 
Nine Months Ended September 30,
 
 
 
% of Net Sales
(Dollars in millions)
 
2015
 
2014
 
% Change
 
2015
 
2014
Asia
 
$
542.1

 
$
623.4

 
(13
)%
 
35
%
 
36
%
Latin America
 
141.0

 
152.6

 
(8
)%
 
24
%
 
23
%
North America/Europe
 
264.9

 
200.9

 
32
 %
 
28
%
 
22
%
Corporate and Other
 
(207.6
)
 
(198.2
)
 
(5
)%
 
n/a

 
n/a

EBIT
 
$
740.4

 
$
778.7

 
(5
)%
 
24
%
 
23
%

EBIT in Asia decreased primarily due to lower sales and increased demand-creation investments in China to support our imported premium product offering. The decline was partially offset by higher gross margin as a result of lower dairy costs in addition to prior year start-up expenses related to our manufacturing center in Singapore that did not recur in the current period.


27


EBIT in Latin America decreased due to lower sales partially offset by higher gross margin. On a local currency basis, EBIT increased primarily due to lower dairy costs which were partially offset by higher demand-creating investments. In addition, the prior year included foreign exchange gains generated from cash received at the official Venezuelan government rate compared to the SICAD I rate adopted by the Company in February 2014. See “Item 1. Financial Statements - Note 19. Venezuela Currency Matters” for further additional information regarding exchange rate variability in Venezuela.

EBIT in North America/Europe increased primarily due to higher gross margin, higher sales and more efficient demand-generation investments as compared to the prior year period.
 
Corporate and Other expenses increased compared to the prior year period primarily as a result of the settlement related to the China investigation, partially offset by lower provisions for incentive related compensation in the current year. See “Item 1. Financial Statements - Note 20. Commitments and Contingencies” for further discussion regarding the settlement related to the China investigation.
 
Income Taxes
The ETR for the nine months ended September 30, 2015 and 2014 was 24.9% and 21.9%, respectively. The ETR increase was primarily due to an unfavorable change in geographic earnings mix and a change in the reserve for uncertain tax positions, the majority of which relates to the running of the statute of limitations in various jurisdictions during the comparable period in 2014.

Net Earnings Attributable to Noncontrolling Interests
Net earnings attributable to noncontrolling interests consists of a 11%, 10% and 10% interest held by third parties in the Company’s operating entities in China, Argentina and Indonesia, respectively. See “Item 1. Financial Statements - Note 9. Redeemable Noncontrolling Interest” for additional information related to Argentina.

Net Earnings Attributable to Shareholders
For the foregoing reasons, net earnings attributable to shareholders for the nine months ended September 30, 2015 decreased 6% to $525.5 million compared with the nine months ended September 30, 2014.


28


Liquidity and Capital Resources
 
Overview
 
The Company’s primary sources of liquidity are cash on hand, cash from operations and available borrowings under its revolving credit facility. Cash flows from operating activities represent the inflow of cash from customers net of the outflow of cash for raw material purchases, manufacturing, operating expenses, interest and taxes. Cash flows used in investing activities primarily represent capital expenditures, for equipment, buildings and computer software, and acquisitions. Cash flows used in financing activities primarily represent proceeds and repayments of long-term and short-term borrowings, dividend payments and share repurchases.
 
Cash and cash equivalents totaled $1,363.5 million at September 30, 2015, of which $1,355.0 million was held outside of the United States. Cash and cash equivalents totaled $1,297.7 million as of December 31, 2014, of which $1,083.8 million was held outside of the United States.

During the nine months ended September 30, 2015 and 2014, approximately $54 million and $33 million of cash, respectively, was repatriated to the United States from multiple jurisdictions whose earnings and profits are not permanently invested abroad.

As a result of the Company’s evaluation of its global cash position, management has asserted that earnings and profits in certain foreign jurisdictions are permanently invested abroad. MJN will continue to evaluate its global cash position and whether earnings and profits of certain other foreign jurisdictions are permanently invested abroad. As of September 30, 2015, approximately $1,150 million of cash and cash equivalents were held by foreign subsidiaries whose undistributed earnings, either partially or entirely, are considered permanently invested. MJN’s intent is to invest these earnings in its foreign operations and its current plans do not demonstrate a need to repatriate them to fund the Company’s U.S. operations. If MJN decides at a later date to repatriate these earnings to the United States, the Company would be required to provide U.S. taxes on these amounts.

Cash Flows
 
The Company believes that cash on hand and cash from operations will be sufficient to support its working capital needs, pay its operating expenses, satisfy debt obligations, fund capital expenditures and make dividend payments. 
 
 
Nine Months Ended September 30,
(Dollars in millions)
 
2015
 
2014
Cash flow provided by/(used in):
 
 

 
 

Operating Activities
 
 

 
 

Net Earnings
 
$
524.3

 
$
572.2

Depreciation and Amortization
 
73.4

 
67.8

Other
 
63.1

 
30.2

Changes in Assets and Liabilities
 
34.7

 
(56.4
)
     Payments for Settlement of Interest Rate Forward Swaps
 

 
(45.0
)
Pension and Other Post-employment Benefit Contributions
 
(86.6
)
 
(4.2
)
Total Operating Activities
 
608.9

 
564.6

Investing Activities
 
(124.8
)
 
(139.8
)
Financing Activities
 
(374.0
)
 
(263.4
)
Effects of Changes in Exchange Rates on Cash and Cash Equivalents
 
(44.3
)
 
(17.0
)
Net Increase in Cash and Cash Equivalents
 
$
65.8

 
$
144.4

 
For the nine months ended September 30, 2015, cash flow from operating activities was $608.9 million and primarily driven by net earnings and decreases in working capital which were partially offset by a significant contribution to our U.S. Retirement Plan. For the nine months ended September 30, 2014, cash flow from operating activities was $564.6 million driven by net earnings, partially offset by an increase in working capital, defined as accounts receivable plus inventory less accounts payable (excluding capital related items), and $45.0 million of payments related to the settlement of interest rate forward swaps.
 
Cash flow used in investing activities was $15.0 million less than the prior year period. The decrease was the result of lower capital expenditures in 2015 as compared to 2014.
 

29


Cash flow used in financing activities was $374.0 million for the nine months ended September 30, 2015, primarily driven by $437.0 million used to repurchase the company’s common stock, $243.6 million of dividend payments and $24.2 million used to purchase an additional 10% of shares in our business in Argentina, bringing our ownership to 90%. These outflows were partially offset by $322.0 million of revolving credit facility borrowings. For the nine months ended September 30, 2014, cash flow used by financing activities was $263.4 million and included repayment of $500.0 million for our 2014 notes, $220.7 million of dividend payments and $49.7 million used to repurchase the company’s common stock, partially offset by $492.3 million of net proceeds related to the offering of the Company’s 2044 Notes, after deducting underwriters’ discounts and offering expenses, and $27.3 million of inflow related to stock-based compensation.

Capital Expenditures
 
Capital expenditures and the cash outflow for capital expenditures were as follows:
(In millions)
 
Capital Expenditures
 
Cash Outflow for Capital
Expenditures
Nine Months Ended September 30, 2015
 
$
110.8

 
$
125.2

 
 
 
 
 
Nine Months Ended September 30, 2014
 
$
97.9

 
$
144.0


Contractual Obligations
 
During March 2015, the Company committed to a 15-year lease obligation related to a planned relocation of its corporate offices in 2017. As of September 30, 2015, MJN’s contractual operating lease obligation is $1.3 million in 2018, $2.7 million in 2019 and $40.5 million, in the aggregate, for the years thereafter.

Short-Term Borrowings

As of September 30, 2015 and December 31, 2014, the Company had short-term borrowings of $1.5 million and $4.1 million, respectively, made by its subsidiary in Argentina.

The Company has entered into a six-month $1.0 billion term loan agreement dated as of October 21, 2015, with lenders who administer our existing revolving credit facility. The proceeds of such borrowings are expected to fund the accelerated share repurchase program described under “Share Repurchases” below, but may also be used for working capital and other general corporate purposes.

Revolving Credit Facility

During the nine months ended September 30, 2014 we amended our revolving credit facility to provide for, among other things, an increase in the aggregate amount available for borrowing from $500.0 million to $750.0 million (which may be increased from time to time up to $1.0 billion at the request of the Company, subject to obtaining additional commitments and other customary conditions), lower fees, an increase in the number of financial institutions as lenders and the extension of the maturity date from June 2016 to June 2019. For additional information regarding this amended facility, see “Item 1. Financial Statements - Note 15. Debt.” As of September 30, 2015, we had borrowed $322.0 million against our revolving credit facility and had $428.0 million available to us under this facility.

Long-Term Debt
 
In the nine months ended September 30, 2014, we issued and sold $500.0 million of 2044 Notes.  In the fourth quarter of 2013, prior to the offering of our 2044 Notes, we entered into a series of interest rate forward swaps to lock in an interest rate of approximately 5.3%, reflecting then-prevailing rates, in anticipation of the offering.  The fair value of these interest rate forward swaps was dependent on the movements in thirty-year interest rates. As a result of a rise in interest rates leading up to December 31, 2013, these interest rate forward swaps were in a gain position with a fair value of $19.4 million as of that date. However, as a result of a subsequent decline in thirty-year interest rates, the fair value of these interest rate swaps declined $64.4 million, resulting in a loss position with a fair value of $45.0 million upon our settlement in May 2014. This $45.0 million was a deferred loss and is being amortized into interest expense over the life of the 2044 Notes resulting in an effective interest rate of 4.90% on the 2044 Notes.

30


During the three months ended September 30, 2014, we redeemed all $500.0 million of the 2014 Notes. The redemption price, which was calculated in accordance with the terms of the 2014 Notes and included principal plus a make-whole premium, was $503.5 million.
In the nine month period ended September 30, 2014, we also entered into a series of interest rate swaps to convert our 2019 Notes from fixed to floating for the remainder of their term in order to diversify our interest rate exposure.  These interest rate swaps have an aggregate notional amount of $700 million of outstanding principal.

For information regarding Short-Term Borrowings, Long-Term Debt and Interest Rate Swaps, see “Item 1. Financial Statements - Note 15. Debt and Note 16. Derivatives and Other Financial Instruments.”

Share Repurchases

In September 2013, the Company’s board of directors approved a share repurchase authorization of up to $500.0 million of the Company’s common stock (the “2013 Authorization”). The 2013 Authorization was intended to offset the dilutive effect on earnings per share from stock-based compensation and allow for opportunistic stock purchases to return capital to stockholders. The authorization does not have an expiration date. During the third quarter, the Company repurchased 5.6 million shares of stock at an average price of $77.47. As of September 30, 2015, $0.4 million remained available under the authorization.

On October 20, 2015, the Company’s board of directors approved a new share repurchase authorization of $1.5 billion of the Company’s common stock (the “2015 Repurchase Authorization”). The Company expects to finance the share repurchases through the issuance of debt, which may include long-term notes. The adoption of the new program follows the substantial completion of purchases of common stock under the prior repurchase authorization approved in September 2013. Shares will be repurchased from time to time in the open market or in privately negotiated transactions, including without limitation, the anticipated use of a $1.0 billion accelerated share repurchase program, described below.
The Company expects to enter into a $1.0 billion accelerated share repurchase agreement (the “ASR Agreement”) in the short-term with an investment bank. The ASR Agreement and related accelerated share repurchase program will be made pursuant to the 2015 Repurchase Authorization described above.
Under the ASR Agreement, approximately 11 million shares will be received by the Company once the ASR Agreement is executed. At final settlement of the ASR Agreement, which is expected to occur during or prior to the first quarter of 2016, the investment bank may be required to deliver additional shares of common stock to the Company or the Company may be required to deliver shares of its common stock to the investment bank, with the number of shares to be delivered based on the volume-weighted average price of Company’s common stock during the term of the accelerated share repurchase program. 

Fuel for Growth Program
The Company is planning a productivity program referred to as “Fuel for Growth” (“FFG”). FFG is targeting reductions in the Company’s non-advertising and promotional expenses of 300 basis points, with emphasis on generating productivity in our external and internal infrastructure costs. The program is expected to generate savings of approximately $120 million over the next three years, with benefits expected to begin in 2016. The company expects to incur charges associated with selected program activities during the fourth quarter of 2015 and the first quarter of 2016. The Company’s preliminary estimate of expected charges to be incurred during the fourth quarter of 2015 is approximately $25 million.

Special Note Regarding Forward-Looking Statements
 
This Quarterly Report on Form 10-Q and other written and oral statements that the Company makes from time to time contain certain “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You can identify these forward-looking statements by the fact they use words such as “should,” “expect,” “anticipate,” “estimate,” “target,” “may,” “project,” “guidance,” “intend,” “plan,” “believe” and other words and terms of similar meaning and expression. Such statements are likely to relate to, among other things, a discussion of goals, plans and projections regarding financial position, results of operations, cash flows, market position, product development, product approvals, sales efforts, expenses, capital expenditures, performance or results of current and anticipated products and the outcome of contingencies such as legal proceedings and financial results. Forward-looking statements can also be identified by the fact that they do not relate strictly to historical or current facts. Such forward-looking statements are based on current expectations that involve inherent risks, uncertainties and assumptions that may cause actual results to differ materially from expectations as of the date of this filing. These risks include, but are not limited to: (1) the ability to sustain

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brand strength, particularly the Enfa family of brands; (2) the effect on the Company’s reputation of real or perceived quality issues; (3) the effect of regulatory restrictions related to the Company’s products; (4) the adverse effect of commodity costs; (5) increased competition from branded, private label, store and economy-branded products; (6) the effect of an economic downturn on consumers’ purchasing behavior and customers’ ability to pay for product; (7) inventory reductions by customers; (8) the adverse effect of changes in foreign currency exchange rates; (9) the effect of changes in economic, political and social conditions in the markets where the Company operates; (10) changing consumer preferences; (11) the possibility of changes in the Women, Infant and Children (“WIC”) program, or participation in WIC; (12) legislative, regulatory or judicial action that may adversely affect the Company’s ability to advertise its products, maintain product margins, or negatively impact the Company’s reputation or result in fines or penalties that decrease earnings; and (13) the ability to develop and market new, innovative products. For additional information regarding these and other factors, see the Company’s filings with the SEC, including the 2014 Form 10-K, which filings are available upon request from the SEC or at www.meadjohnson.com. The Company cautions readers not to place undue reliance on any forward-looking statements, which speak only as of the date made. The Company undertakes no obligation to publicly update any forward looking statement, whether as a result of new information, future events or otherwise.



ITEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 
Other than as stated below, there have been no material changes in the information reported under Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” contained in the 2014 Form 10-K and under Item 3 to Part I of each of the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2015 and the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2015.

Venezuela Currency Risk
As of September 30, 2015, CENCOEX traded 6.3 VEF to 1.0 USD, the SICAD auction market traded 13.5 VEF to 1.0 USD and the SIMADI market traded at approximately 199.4 VEF to 1.0 USD. The Company continues to assess the impact of the Venezuela government’s regulations with respect to its foreign exchange regime. In addition, the foreign exchange control in Venezuela has limited our ability to repatriate earnings and MJN’s Venezuelan subsidiary’s ability to remit dividends and pay inter-company balances at any official exchange rate or at all. As of September 30, 2015, the Company’s Venezuelan subsidiary had approximately $42 million of net monetary assets.


ITEM 4.     CONTROLS AND PROCEDURES.
 
Disclosure Controls and Procedures. Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer (our principal executive officer and principal financial officer, respectively), we have evaluated our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of September 30, 2015. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that, as of September 30, 2015, the Company’s disclosure controls and procedures were effective in ensuring information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting. There has been no change in the Company’s internal control over financial reporting during the quarter ended September 30, 2015 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.


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PART II - OTHER INFORMATION

ITEM 1.            LEGAL PROCEEDINGS.
 
Information pertaining to legal proceedings can be found in Part I of this report under “Item 1. Financial Statements - Note 20. Commitments and Contingencies” and is incorporated by reference herein.
 
ITEM 1A.         RISK FACTORS.
 
There is no material change in the information reported under “Item 1A. Risk Factors” contained in the Company’s 2014 Form 10-K.

ITEM 2.     UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
 
(c) Issuer Purchases of Equity Securities

The following table includes information about the Company’s stock repurchases during the three-month period ending September 30, 2015:

(Dollars in millions, except per share amounts)


Period
Total Number of
Shares Purchased 
(1)
 
Average Price Paid per Share
(2)
 
Total Number of Shares Purchased as Part of Publicly Announced Program
 
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program
(3)
July 1, 2015 through July 31, 2015

 
$

 

 
$
437.4

August 1, 2015 through August 31, 2015
1,963,500

 
81.06

 
1,963,500

 
278.3

September 1, 2015 through September 30, 2015
3,677,198

 
75.56

 
3,677,198

 
0.4

Total
5,640,698

 
$
77.47

 
5,640,698

 
$
0.4

                                     
(1)
The total number of shares purchased does not include shares surrendered to the Company to pay the exercise price in connection with the exercise of employee stock options or shares surrendered to the Company to satisfy tax withholding obligations in connection with the exercise of employee stock options or the vesting of restricted stock units and performance share awards.
(2) 
Average Price Paid per Share includes commissions.
(3)
On September 11, 2013, the Company announced that its board of directors approved a share repurchase authorization of up to $500.0 million of the Company’s common stock (the “2013 Authorization”). The 2013 Authorization does not have an expiration date. On October 22, 2015, the Company announced that its board of directors approved a new share repurchase authorization of an additional $1.5 billion of the Company’s common stock (the “2015 Authorization”). The 2015 Authorization does not have an expiration date.


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ITEM 6.     EXHIBITS.
 

 
Exhibit
Number
 
Exhibit Description
 
 
 
10.1
 
Employment Letter, dated June 30, 2015, between Mead Johnson Nutrition Company and Michel Cup (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 2, 2015)
 
 
 
10.2
 
Employment Letter, dated September 1, 2015, between Mead Johnson Nutrition Company and Charles M. Urbain (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 1, 2015)
 
 
 
31.1
 
Rule 13a-14(a) and 15d-14(a) Certification of the Chief Executive Officer
 
 
 
31.2
 
Rule 13a-14(a) and 15d-14(a) Certification of the Chief Financial Officer
 
 
 
32.1
 
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
32.2
 
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
101.INS
 
XBRL Instance Document
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document



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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
MEAD JOHNSON NUTRITION COMPANY
 
 
 
 
Date:
October 22, 2015
By:
/s/ Michel Cup
 
 
 
Michel Cup
 
 
 
Executive Vice President and Chief Financial Officer
 
 
 
(Authorized Officer and Principal Financial Officer)


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