Mead Johnson Nutrition Co - FORM 10-Q

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EX-32.1 - SECTION 906 CEO CERTIFICATION - Mead Johnson Nutrition Co	dex321.htm
EX-31.1 - SECTION 302 CEO CERTIFICATION - Mead Johnson Nutrition Co	dex311.htm
EX-31.2 - SECTION 302 CFO CERTIFICATION - Mead Johnson Nutrition Co	dex312.htm
EX-32.2 - SECTION 906 CFO CERTIFICATION - Mead Johnson Nutrition Co	dex322.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, 2010

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)

(IRS 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 x No ¨

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

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):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of October 25, 2010, there were 204,576,337 shares of Common Stock outstanding.

MEAD JOHNSON NUTRITION COMPANY

FORM 10-Q

INDEX


			PAGE
PART I – Financial Information
	ITEM 1.	Financial Statements
		Consolidated Statements of Earnings for the three and nine months ended September 30, 2010 and 2009 (unaudited)		1
		Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009 (unaudited)		2
		Consolidated Statements of Cash Flows for the nine months ended September 30, 2010 and 2009 (unaudited)		3
		Notes to Consolidated Financial Statements		4
	ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		14
	ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk		22
	ITEM 4.	Controls and Procedures		22

PART II – Other Information
	ITEM 1.	Legal Proceedings		22
	ITEM 1A.	Risk Factors		22
	ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds		23
	ITEM 6.	Exhibits		24

PART I - FINANCIAL INFORMATION

ITEM 1. Financial Statements.

INTERIM CONSOLIDATED FINANCIAL STATEMENTS OF MEAD JOHNSON NUTRITION COMPANY

MEAD JOHNSON NUTRITION COMPANY

CONSOLIDATED STATEMENTS OF EARNINGS

(Dollars and shares in millions, except per share data)

(UNAUDITED)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
NET SALES	$	810.2	$	699.8	$	2,337.9	$	2,112.1
COST OF PRODUCTS SOLD		296.3		244.6		846.8		728.3

GROSS PROFIT		513.9		455.2		1,491.1		1,383.8

EXPENSES:
SELLING, GENERAL AND ADMINISTRATIVE		190.2		164.0		544.2		482.2
ADVERTISING AND PRODUCT PROMOTION		112.4		105.2		326.7		282.7
RESEARCH AND DEVELOPMENT		18.5		17.6		58.3		51.3
OTHER EXPENSES/(INCOME)—NET		27.3		8.7		25.6		1.0


EARNINGS BEFORE INTEREST AND INCOME TAXES		165.5		159.7		536.3		566.6

INTEREST EXPENSE—NET		12.0		23.0		35.7		75.3

EARNINGS BEFORE INCOME TAXES		153.5		136.7		500.6		491.3

PROVISION FOR INCOME TAXES		46.1		37.9		143.2		147.9


NET EARNINGS		107.4		98.8		357.4		343.4
Less: Net Earnings attributable to noncontrolling interests		1.3		1.2		4.3		7.8


NET EARNINGS ATTRIBUTABLE TO SHAREHOLDERS	$	106.1	$	97.6	$	353.1	$	335.6


Earnings per Share – Basic
Net Earnings attributable to shareholders	$	0.52	$	0.48	$	1.72	$	1.68


Earnings per Share – Diluted
Net Earnings attributable to shareholders	$	0.52	$	0.48	$	1.72	$	1.68


Weighted Average Shares		204.6		204.5		204.5		199.3
Dividends declared per Share	$	0.225	$	0.20	$	0.675	$	0.50

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

MEAD JOHNSON NUTRITION COMPANY

CONSOLIDATED BALANCE SHEETS

(Dollars and shares in millions, except per share data)

(UNAUDITED)


	September 30, 2010			December 31, 2009
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents	$	501.9		$	561.1
Receivables—net of allowances of $6.5 and $6.2, respectively		360.3			317.6
Note Receivable		—			30.0
Inventories		345.1			309.9
Deferred Income Taxes—net of valuation allowance		91.2			89.4
Income Taxes Receivable		15.3			5.6
Prepaid Expenses and Other Assets		37.7			22.5

Total Current Assets		1,351.5			1,336.1
Property, Plant and Equipment—net		544.9			501.4
Goodwill		117.5			117.5
Other Intangible Assets—net		76.5			50.5
Deferred Income Taxes—net of valuation allowance		15.8			16.0
Other Assets		111.4			48.8

TOTAL	$	2,217.6		$	2,070.3

LIABILITIES AND EQUITY (DEFICIT)
CURRENT LIABILITIES:
Short-Term Borrowings	$	3.2		$	120.0
Accounts Payable		349.5			361.3
Dividends Payable		46.3			41.0
Accrued Expenses		207.9			206.6
Accrued Rebates and Returns		263.7			268.2
Deferred Income—current		26.1			19.9
Income Taxes—payable and deferred		40.3			83.2

Total Current Liabilities		937.0			1,100.2
Long-Term Debt		1,548.4			1,484.9
Deferred Income—noncurrent		2.1			2.8
Deferred Income Taxes—noncurrent		28.7			5.1
Pension, Post Retirement and Post Employment Liabilities		94.7			123.6
Other Liabilities		22.4			18.0

Total Liabilities		2,633.3			2,734.6
COMMITMENTS AND CONTINGENCIES
EQUITY (DEFICIT):
Shareholders’ Equity:
Common Stock, $0.01 par value: 4,200 authorized, 204.6 and 204.5 issued and outstanding, respectively		2.0			2.0
Additional Paid-in (Distributed) Capital		(781.7	)		(797.4	)
Retained Earnings		420.4			206.1
Treasury Stock—at cost		(0.2	)		—
Accumulated Other Comprehensive Income (Loss)		(64.4	)		(85.6	)

Total Shareholders’ Equity (Deficit)		(423.9	)		(674.9	)
Noncontrolling Interests		8.2			10.6

Total Equity (Deficit)		(415.7	)		(664.3	)

TOTAL	$	2,217.6		$	2,070.3

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

MEAD JOHNSON NUTRITION COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in millions)

(UNAUDITED)


	Nine Months Ended September 30,
	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Earnings	$	357.4		$	343.4
Adjustments to Reconcile Net Earnings to Net Cash Provided by Operating Activities:
Depreciation and Amortization		47.4			43.9
Changes in Assets and Liabilities		(43.8	)		47.2
Pension and Other Post Retirement Benefits Contributions		(35.0	)		(26.3	)
Other		22.9			8.5

Net Cash Provided by Operating Activities		348.9			416.7
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for Capital Expenditures		(142.3	)		(59.3	)
Proceeds from Sale of Property, Plant and Equipment		2.2			1.6
Proceeds from Sale of Intangible Asset		—			11.9
Investment in Other Companies		(5.5	)		—

Net Cash Used in Investing Activities		(145.6	)		(45.8	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Short-Term Borrowings		103.2			—
Repayments of Short-Term Borrowings		(220.0	)		—
Payment for Capital Lease Termination		(47.0	)		—
Proceeds from Promissory Note from BMS		30.0			—
Cash Dividends Paid		(133.4	)		(61.4	)
Issuance of Stock for Stock-Based Compensation		1.6			—
Treasury Stock Purchases		(0.2	)		—
Proceeds from Initial Public Offering, net of offering costs		—			782.3
Repayment of Related-Party Debt and Lease		—			(602.8	)
Net Transfers from BMS, excluding noncash items		—			97.7
Distributions to Noncontrolling Interests		—			(1.5	)

Net Cash Provided by (Used in) Financing Activities		(265.8	)		214.3
Effects of Changes in Exchange Rates on Cash and Cash Equivalents		3.3			12.2

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(59.2	)		597.4

CASH AND CASH EQUIVALENTS:
Beginning of Period		561.1			—

End of Period	$	501.9		$	597.4

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

MEAD JOHNSON NUTRITION COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. ORGANIZATION

Mead Johnson Nutrition Company (MJN or the Company) manufactures, distributes and sells infant formulas, children’s nutritional products and other nutritional products. MJN has a broad product portfolio, which extends across routine, solutions and specialty infant formulas, children’s milks and milk modifiers, pediatric vitamins, dietary supplements for pregnant and breastfeeding mothers, and products for metabolic disorders. These products are generally sold to wholesalers and retailers and are promoted to healthcare professionals, and, where permitted by regulation and policy, directly to consumers.

2. ACCOUNTING POLICIES

Basis of Presentation—The Company prepared the accompanying unaudited consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (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 included in the Form 10-Q.

The consolidated financial statements include all of the normal and recurring adjustments necessary for a fair presentation of the Company’s financial position as of September 30, 2010, and December 31, 2009, the results of operations for the three and nine months ended September 30, 2010 and 2009, and its cash flows for the nine months ended September 30, 2010, and 2009. Material subsequent events are evaluated for disclosure up to the time of issuance of the financial statements. 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 consolidated financial statements may not be indicative of full year operating results or future performance.

The accounting policies used in preparing these 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, 2009 (2009 Form 10-K). These unaudited 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 2009 Form 10-K.

Use of Estimates—The preparation of financial statements in conformity with GAAP requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant assumptions are employed in estimates used in revenue recognition, including sales rebate and return accruals, goodwill, income tax assets and liabilities, income tax expense, and legal liabilities, as well as accounting for stock-based compensation costs and retirement and post retirement benefits, including the actuarial assumptions. Actual results may or may not differ from estimated results.

Recently Issued Accounting Standards—Effective January 1, 2010, the Company adopted Accounting Standards Update (ASU) No. 2009-17, Consolidations (Topic 810), requiring companies to identify the primary beneficiary of a variable interest entity as the enterprise that has both the power to direct the activities of a variable interest entity that most significantly impacts the entity’s economic performance, and the obligation to absorb losses or the right to receive benefits of the entity that could potentially be significant to the variable interest entity. The Company also adopted ASU No. 2009-17’s requirement of on-going reassessments of whether an enterprise is the primary beneficiary and the elimination of the quantitative approach previously required for determining the primary beneficiary. At this time, the Company is not a primary beneficiary of any variable interest entities.

3. EARNINGS PER SHARE

The numerator for basic and diluted earnings per share is net earnings attributable to shareholders reduced by dividends and undistributed earnings attributable to unvested shares. The denominator for basic earnings per share is the weighted average number of 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, restricted stock units, and performance share awards. On February 17, 2009, the Company completed an initial public offering (IPO) of 34.5 million shares of common stock. Immediately prior to the IPO, 170.0 million shares of common stock were outstanding and owned by Bristol-Myers Squibb Company (BMS). There were no Company stock options, restricted stock units, or performance shares outstanding prior to the IPO.

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)	2010			2009			2010			2009
Basic earnings per share:
Weighted average shares outstanding		204.6			204.5			204.5			199.3
Net earnings attributable to shareholders	$	106.1		$	97.6		$	353.1		$	335.6
Dividends and undistributed earnings attributable to unvested shares		(0.4	)		(0.2	)		(1.2	)		(0.5	)

Net earnings attributable to shareholders used for basic earnings per share calculation	$	105.7		$	97.4		$	351.9		$	335.1
Net earnings attributable to shareholders per share	$	0.52		$	0.48		$	1.72		$	1.68
Diluted earnings per share:
Weighted average shares outstanding		204.6			204.5			204.5			199.3
Incremental shares outstanding assuming the exercise/vesting of dilutive stock options/performance shares		0.3			0.1			0.4			—

Weighted average shares – diluted		204.9			204.6			204.9			199.3
Net earnings attributable to shareholders	$	106.1		$	97.6		$	353.1		$	335.6
Dividends and undistributed earnings attributable to unvested shares		(0.4	)		(0.2	)		(1.2	)		(0.5	)

Net earnings attributable to shareholders used for diluted earnings per share calculation	$	105.7		$	97.4		$	351.9		$	335.1
Net earnings attributable to shareholders per share	$	0.52		$	0.48		$	1.72		$	1.68

Potential shares outstanding were 2.3 million and 1.3 million as of September 30, 2010 and 2009, respectively, of which 2.0 million and 1.2 million were not included in the diluted earnings per share calculation for the three months ended September 30, 2010 and 2009, respectively, and 1.9 million and 1.3 million were not included in the diluted earnings per share calculation for the nine months ended September 30, 2010 and 2009, respectively.

4. OTHER EXPENSES/(INCOME)—NET

Included in other expenses/(income)—net for the three months ended September 30, 2009, was $3.4 million in severance and related costs. For the nine months ended September 30, 2009, other expenses/(income)—net included the $11.9 million gain on sale of a non-strategic intangible asset, $10.0 million of income for a patent settlement and $12.2 million of severance and related costs. For the three months ended September 30, 2010, other expenses/(income)—net included $9.1 million in settlement costs for our U.S. defined benefit pension plan and $4.3 million of severance and related costs. For the nine months ended September 30, 2010, other expenses/(income)—net included $9.1 million in settlement costs for our U.S. defined benefit pension plan and $4.8 million of severance and related costs. See Note 8 for discussion on the Company’s pension plans.

Venezuela Foreign Currency—Beginning on January 1, 2010, the Company began accounting for its subsidiary in Venezuela under the rules for highly inflationary economies as the cumulative three-year inflation rate in Venezuela exceeded 100%. Under highly inflationary accounting, the financial statements of our Venezuelan subsidiary are remeasured into U.S. dollars at each balance sheet date and any resulting gains and losses are recorded in current earnings.

The local currency in Venezuela is the bolivar. In Venezuela, a currency control board (CADIVI) is responsible for foreign exchange procedures, including approval of requests for exchanges of bolivars for U.S. dollars at rates established by the government.

In January 2010, the Venezuelan government devalued the bolivar. Prior to this devaluation, the official rate was 2.15 bolivar to the U.S. dollar. Upon devaluation, two official rates were established, an essentials rate of 2.6 bolivar to the U.S. dollar and a non-essentials rate of 4.3 bolivar to the U.S. dollar.

All of the product sold in Venezuela is imported and denominated in U.S. dollars. Approximately 95% of the imports are eligible for the essentials rate and the remainder is eligible for the non-essentials rate. It is anticipated that the non-essentials rate will apply to the repatriation of earnings from Venezuela.

The monetary assets and liabilities in Venezuela have been remeasured at 4.3 bolivar to U.S. dollar as of September 30, 2010. In January 2010, the Company recognized a loss of $8.5 million in other expenses/(income)—net due to the devaluation of the bolivar and the application of highly inflationary accounting.

5. INCOME TAXES

For the three and nine months ended September 30, 2010, the effective tax rate was 30.0% and 28.6%, respectively, compared with 27.7% and 30.1% for the same periods in 2009. The difference in the rates was attributable primarily to the benefits of a tax ruling under which certain profits in the Netherlands are exempt from taxation, management’s assertion that certain foreign earnings and profits are permanently invested abroad, and a favorable change in our geographic earnings mix, offset by unfavorable return-to-provision adjustments on 2009 earnings recognized in the third quarter of 2010.

On February 10, 2009, the Company entered into a tax matters agreement with BMS. This agreement governs the tax relationship between the Company and BMS for the tax periods through the December 23, 2009 split-off of the Company from BMS. Under this agreement, responsibility is allocated between BMS and MJN for the payment of taxes resulting from filing (i) tax returns on a combined, consolidated or unitary basis and (ii) single entity tax returns for entities that have both MJN and non-MJN operations. Accordingly, BMS prepares returns for MJN for all periods during which MJN was included in a combined, consolidated or unitary group with BMS for federal, state, local or foreign tax purposes, as if MJN itself were filing as a combined, consolidated or unitary group. BMS also prepares returns for the Company for all periods during which a single-entity tax return was filed for an entity that has both MJN and non-MJN operations. MJN makes payments to BMS and BMS makes payments to the Company with respect to such returns, as if such returns were actually required to be filed under the laws of the applicable taxing jurisdiction and BMS were the relevant taxing authority of such jurisdiction.

On December 18, 2009, the Company and BMS entered into an Amended and Restated Tax Matters Agreement in anticipation of the split-off from BMS. With respect to the period before the split-off, the Amended and Restated Tax Matters Agreement allocates the responsibility of BMS and MJN for the payment of taxes in the same manner as discussed above with respect to the tax matters agreement. Pursuant to the Amended and Restated Tax Matters Agreement, the Company has consented to join BMS in electing to allocate items ratably between the portion of the taxable year in which the Company was included in the BMS consolidated tax group, and the short period beginning after the split off and ending on December 31, 2009, when the Company was a separate taxpayer. Additionally under the Amended and Restated Tax Matters Agreement, BMS has agreed to indemnify the Company for (i) any tax attributable to a Mead Johnson legal entity for any taxable period ending on or before December 31, 2008, (ii) any tax arising solely as a result of the IPO and the restructuring preceding the IPO, and (iii) any transaction tax associated with the split-off transaction. The Company has agreed to indemnify BMS for (i) any tax payable with respect to any separate return that the Company is required to file or cause to be filed, (ii) any tax incurred as a result of any gain which may be recognized by a member of the BMS affiliated group with respect to a transfer of certain foreign affiliates by the Company in preparation for the IPO, and (iii) any tax arising from the failure or breach of any representation or covenant made by the Company which failure or breach results in the intended tax consequences of the split-off transaction not being achieved. As of September 30, 2010, the Company’s receivable from BMS related to 2009 taxes is $8.4 million.

The Company’s gross reserve for uncertain tax positions, including penalties and interest, as of September 30, 2010, and December 31, 2009, was $19.2 million and $16.9 million, respectively, related to foreign and domestic matters that are not expected to reverse in the next 12 months. Pursuant to the Amended and Restated Tax Matters Agreement dated December 18, 2009, BMS maintains responsibility for all uncertain tax positions which may exist in the pre-IPO period or which may exist as a result of the IPO transaction. The Company has recorded a receivable from BMS for uncertain tax positions of $13.3 million as of September 30, 2010. MJN anticipates that it is reasonably possible that new issues may be raised by tax authorities and that these issues may require increases in the balance of unrecognized tax benefits. The Company believes that it has adequately provided for all uncertain tax positions that are not otherwise indemnified by BMS.

6. SEGMENT INFORMATION

MJN operates in four geographic operating segments: Asia, Europe, Latin America and North America. This operating segmentation is how the chief operating decision maker regularly assesses information for decision making purposes, including allocation of resources. Due to similarities in the economics, products offered, production process, customer base, and regulatory environment, these operating segments have been aggregated into two reportable segments: Asia/Latin America and North America/Europe.

Corporate and Other consists of unallocated general and administrative expenses and global business support activities, including research and development, marketing and supply chain costs.


	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)	2010		2009		2010			2009			2010		2009		2010			2009
Asia/Latin America	$	489.7	$	413.8	$	168.0		$	143.7		$	1,417.4	$	1,200.1	$	492.0		$	438.5
North America/Europe		320.5		286.0		97.4			90.3			920.5		912.0		272.7			310.5

Total operating segments		810.2		699.8		265.4			234.0			2,337.9		2,112.1		764.7			749.0
Corporate and Other		—		—		(99.9	)		(74.3	)		—		—		(228.4	)		(182.4	)

Total	$	810.2	$	699.8	$	165.5		$	159.7		$	2,337.9	$	2,112.1	$	536.3		$	566.6

7. EMPLOYEE STOCK BENEFIT PLANS

The following table summarizes stock-based compensation expense related to MJN stock options, MJN restricted stock units, MJN performance share awards and BMS stock benefit plans.


	Three Months Ended September 30,						Nine Months Ended September 30,
(In millions)	2010			2009			2010			2009
MJN stock options	$	0.9		$	0.9		$	2.9		$	1.7
MJN restricted stock units		2.4			0.4			7.4			0.9
MJN performance share awards		1.2			0.5			3.8			1.1
BMS stock benefit plans		—			2.3			—			6.6

Total stock-based compensation expense	$	4.5		$	4.1		$	14.1		$	10.3

Net tax benefit related to stock-based compensation expense	$	(1.8	)	$	(1.3	)	$	(4.0	)	$	(3.2	)

In the nine months ended September 30, 2010, the Company granted 0.5 million stock options, 0.1 million restricted stock units, and 0.2 million performance share awards. The weighted average grant date fair value of stock options granted was $10.28 per share during the nine months ended September 30, 2010. As of September 30, 2010, there were 1.4 million stock options outstanding and total unrecognized compensation costs related to these stock options is $6.0 million which is expected to be recognized over a weighted average period of 2.3 years. The weighted average grant date fair value of restricted stock units granted was $46.91 per share during the nine months ended September 30, 2010. As of September 30, 2010, there were 0.8 million unvested restricted stock units and total unrecognized compensation costs related to these awards is $19.3 million which is expected to be recognized over a weighted average period of 2.4 years. The weighted average grant date fair value of performance shares granted was $44.38 per share during the nine months ended September 30, 2010. As of September 30, 2010, there were 0.3 million performance share awards outstanding and total unrecognized compensation costs related to these awards is $7.5 million which is expected to be recognized over a weighted average period of 1.6 years.

8. PENSION AND OTHER POST RETIREMENT BENEFIT PLANS

The net periodic benefit cost of the Company’s defined benefit pension and post retirement benefit plans included the following components:


	Three Months Ended September 30,												Nine Months Ended September 30,
	Pension Benefits						Other Benefits						Pension Benefits						Other Benefits
(In millions)	2010			2009			2010			2009			2010			2009			2010			2009
Service cost – benefits earned during the period	$	0.7		$	1.3		$	0.2		$	0.2		$	2.1		$	1.8		$	0.7		$	0.5
Interest cost on projected benefit obligation		4.4			4.8			0.2			0.2			13.3			12.3			0.8			0.7
Expected return on plan assets		(4.0	)		(3.5	)		—			—			(12.1	)		(11.4	)		—			—
Amortization of prior service cost		—			—			(0.1	)		(0.1	)		—			—			(0.1	)		(0.1	)
Amortization of net actuarial loss		0.8			(3.0	)		0.4			0.1			2.2			1.0			0.9			0.6

Net periodic benefit cost	$	1.9		$	(0.4	)	$	0.7		$	0.4		$	5.5		$	3.7		$	2.3		$	1.7
Settlements		9.1			—			—			—			9.1			0.1			—			—

Total net periodic benefit cost	$	11.0		$	(0.4	)	$	0.7		$	0.4		$	14.6		$	3.8		$	2.3		$	1.7

During the third quarter of 2010, the Company recognized $9.1 million of settlement expense in other expenses/(income)—net. Recognition of the settlement expense was triggered upon lump sum payments from our U.S. pension plan exceeding the sum of the annual interest and service cost of the plan.

For the nine months ended September 30, 2010 and 2009, contributions to the pension plans were $35.0 million and $26.3 million, respectively, the majority of which were to the U.S. pension plan.

9. NONCONTROLLING INTERESTS

Net earnings attributable to noncontrolling interests consists of an 11% interest in the Company’s China legal entity and a 10% interest in the Company’s Indonesia legal entity held by third parties.

10. INVENTORIES

The major categories of inventories were as follows:


(In millions)	September 30, 2010		December 31, 2009
Finished goods	$	170.1	$	166.0
Work in process		52.5		26.5
Raw and packaging materials		122.5		117.4

Inventories	$	345.1	$	309.9

11. PROPERTY, PLANT, AND EQUIPMENT

The major categories of property, plant, and equipment were as follows:


(In millions)	September 30, 2010			December 31, 2009
Land	$	4.3		$	4.3
Buildings		464.9			404.3
Machinery, equipment, and fixtures		541.4			498.6
Construction in progress		55.2			77.5
Accumulated depreciation		(520.9	)		(483.3	)

Property, plant and equipment—net	$	544.9		$	501.4

Accrued capital expenditures were $23.2 million and $27.4 million as of September 30, 2010 and 2009, respectively.

12. SHORT-TERM BORROWINGS AND LONG-TERM DEBT

Short-term borrowings were $120.0 million as of December 31, 2009, and consisted of borrowings under the Company’s revolving credit facility agreement (Credit Facility). The Credit Facility is unsecured and repayable on maturity at February 2012, 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 facility agreement is $410.0 million, which amount may be increased from time to time up to $500.0 million at the Company’s request and with the consent of the lenders, subject to satisfaction of customary conditions. The Credit Facility contains customary covenants, including covenants applicable to limiting liens, substantial asset sales and mergers. 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 3.25 to 1.0, and the ratio of consolidated EBITDA to consolidated interest expense cannot be less than 3.00 to 1.00. The Company has been in compliance with these covenants since the inception of the Credit Facility. There were no short-term borrowings under the Credit Facility as of September 30, 2010. Other short-term borrowings were $3.2 million as of September 30, 2010 and consisted of short-term loans.

The components of long-term debt were as follows:


(Dollars in millions)	September 30, 2010		December 31, 2009
3.50% Notes due 2014	$	498.2	$	497.8
4.90% Notes due 2019		697.7		697.6
5.90% Notes due 2039		299.9		299.9

Subtotal		1,495.8		1,495.3
Adjustments to Principal Value:
Fair value of interest rate swaps		52.6		(10.4	)

Long-term debt	$	1,548.4	$	1,484.9

In connection with the Company’s private placement of $1.5 billion of notes in 2009, the Company entered into a registration rights agreement with the representatives of the initial purchasers of the notes (Registration Rights Agreement). As required by the Registration Rights Agreement, the Company completed a registered offer to exchange the outstanding notes for a like amount and kind of substantially identical notes on July 9, 2010.

See Note 13 for discussion on the Company’s interest rate swaps.

As of September 30, 2010, the principal value of long-term debt obligations was $1,495.8 million. Based upon the quoted market prices, the estimated fair value of the Company’s debt was $1,629.3 million as of September 30, 2010.

For the three months ended September 30, 2010, interest expense and interest income were $13.3 million and $1.3 million, respectively, compared with $24.3 million and $1.3 million, respectively, for the same period in 2009. For the nine months ended September 30, 2010, interest expense and interest income were $39.2 million and $3.5 million, respectively, compared with $77.7 million and $2.4 million, respectively, for the same period in 2009.

13. DERIVATIVES

The Company is exposed to market risk due to changes in 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. These financial instruments are measured using inputs based on quoted market prices for similar assets and liabilities in active markets, i.e. level two of the fair value hierarchy. Derivative financial instruments are not used for speculative purposes.

The following table summarizes the Company’s fair value of outstanding derivatives designated as hedging instruments:


(In millions)	Balance Sheet Location		September 30, 2010			December 31, 2009
Derivatives designated as hedging instruments:
Cash flow hedges:
Foreign exchange contracts		Other assets	$	0.6		$	0.3
Foreign exchange contracts		Accrued expenses		(1.2	)		(3.6	)
Fair value hedges:
Interest rate swaps		Other assets		52.6			—
Interest rate swaps		Accrued expenses		—			(10.4	)

Net asset/(liability) of derivatives designated as hedging instruments			$	52.0		$	(13.7	)

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 Ratings Service and 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, 2010 failed to perform according to the terms of its agreement. At this time, the Company does not require collateral or any other form of securitization to be furnished by the counterparties to its derivative financial instruments.

The Company uses foreign currency forward contracts to hedge foreign currency denominated monetary assets and liabilities. The primary objective of these contracts is to protect the U.S. dollar value of foreign currency denominated monetary assets and liabilities from the effects of volatility in foreign exchange rates that might occur prior to their receipt or settlement in U.S. dollars. These contracts are not designated as hedges and are adjusted to fair value through other expenses/(income)—net, other assets and accrued expenses as they occur and substantially offset the change in fair value of the underlying foreign currency denominated monetary asset or liability. The notional and fair value amounts of these contracts were $30.8 million and $1.0 million as of September 30, 2010, respectively. There were no foreign currency forward contracts of this nature as of December 31, 2009.

Cash Flow Hedges

The Company uses foreign currency contracts to hedge forecasted transactions, primarily intercompany transactions, on certain foreign currencies and designates these derivative instruments as foreign currency cash flow hedges when appropriate. For the contracts that qualify as hedges of probable forecasted cash flows, the effective portion of changes in fair value is temporarily reported in accumulated other comprehensive income (loss) and recognized in earnings when the hedged item affects earnings.

Foreign Exchange Contracts—The effective portion of changes in the fair value of foreign exchange contracts, the majority of which qualify as hedges of probable forecasted transactions, is recognized in earnings when the hedged item affects earnings, in cost of products sold, or is deemed ineffective, in other expenses/(income)—net.

The notional value of the Company’s foreign exchange derivative contracts designated as hedging instruments as of September 30, 2010, was $108.8 million, with a fair value of $0.6 million in net liabilities. The notional value of the Company’s foreign exchange derivative contracts designated as hedging instruments as of December 31, 2009, was $64.2 million, with a fair value of $3.3 million in net liabilities. 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.

As of September 30, 2010, 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 (loss) on a pre-tax basis was $0.9 million, $0.6 million net of tax, all of which is expected to be reclassified into earnings within the next 16 months.

The Company assesses effectiveness at the inception of the hedge 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. For the three and nine months ended September 30, 2010 and 2009, the impact of hedge ineffectiveness on earnings was not significant.

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.

Natural Gas Hedge Contracts—There were no natural gas hedge contracts outstanding as of September 30, 2010, and no earnings impact from discontinued natural gas hedges for the three and nine months ended September 30, 2010 and 2009.

The change in accumulated other comprehensive income (loss) and the impact on earnings from foreign exchange and natural gas forwards that qualified as cash flow hedges for the nine months ended September 30, 2010 and 2009, were as follows:


	Foreign Exchange Contracts						Natural Gas Contracts					Total Cash Flow Hedges
(In millions)	2010			2009			2010		2009			2010			2009
Balance as of January 1:	$	(2.9	)	$	6.6		$	—	$	(1.4	)	$	(2.9	)	$	5.2
Derivatives qualifying as cash flow hedges deferred in other comprehensive income		(3.4	)		(5.5	)		—		(1.2	)		(3.4	)		(6.7	)
Derivatives qualifying as cash flow hedges reclassified to cost of products sold (effective portion)		6.6			(5.9	)		—		2.7			6.6			(3.2	)
Change in deferred taxes		(0.9	)		3.5			—		(0.6	)		(0.9	)		2.9

Balance as of September 30:	$	(0.6	)	$	(1.3	)	$	—	$	(0.5	)	$	(0.6	)	$	(1.8	)

Fair Value Hedges

The Company uses fixed-to-floating interest rate swaps as part of an interest rate management strategy. The swaps are recorded at fair value. Interest rate swaps are generally held to maturity and are intended to create a targeted balance of fixed- and floating-rate debt for the Company. The Company does not hedge the interest rate risk associated with money market funds, which totaled $159.0 million and $275.1 million as of September 30, 2010 and December 31, 2009, respectively. Money market funds are classified as level two in the fair value hierarchy and are included in cash and cash equivalents on the balance sheet. There were no ineffective fair value hedges for the three and nine months ended September 30, 2010.

Interest Rate Swaps—In November 2009, the Company executed several interest rate swaps. The total notional amounts of outstanding interest rate swaps were $700.0 million as of September 30, 2010.

The following table summarizes the interest rate swaps outstanding as of September 30, 2010:


(Dollars in millions)	Notional Amount of Underlying Debt		Variable Rate Paid		Year of Transaction		Maturity		Fair Value
Swaps associated with:
3.50% Notes due 2014	$	500.0		1 month U.S. $ LIBOR + 0.890%		2009		2014	$	32.7
4.90% Notes due 2019		200.0		1 month U.S. $ LIBOR + 1.381%		2009		2019		19.9

	$	700.0							$	52.6

The impact on earnings from interest rate swaps that qualified as fair value hedges was as follows:


(In millions)	Three Months Ended September 30, 2010			Nine Months Ended September 30, 2010
Interest expense—net	$	(4.4	)	$	(13.6	)

See Note 12 for discussion on the Company’s long-term debt.

14. EQUITY AND COMPREHENSIVE INCOME

The following table summarizes the Company’s equity and comprehensive income activity:


(In millions)	Total Equity			Total Shareholders’ Equity			Noncontrolling Interests
Balance as of January 1, 2010	$	(664.3	)	$	(674.9	)	$	10.6
Comprehensive income:
Net earnings		357.4			353.1			4.3
Other comprehensive income:
Foreign currency translation adjustment, net of tax of $(8.3)		10.7			10.7			—
Deferred gains (losses) on derivatives qualifying as hedges, net of tax of $(0.9)		2.3			2.3			—
Amortization of deferred losses on pension and other post retirement benefits, net of tax of $(3.6)		8.2			8.2			—

Total comprehensive income		378.6			374.3			4.3

Stock-based compensation		15.7			15.7			—
Treasury stock acquired		(0.2	)		(0.2	)		—
Distributions declared to noncontrolling interests		(6.7	)		—			(6.7	)
Cash dividends declared		(138.8	)		(138.8	)		—

Balance as of September 30, 2010	$	(415.7	)	$	(423.9	)	$	8.2


(In millions)	Total Equity			Total Shareholders’ Equity			Noncontrolling Interests

Balance as of January 1, 2009	$	(1,395.5	)	$	(1,400.9	)	$	5.4
Comprehensive income:
Net earnings		343.4			335.6			7.8
Other comprehensive income:
Foreign currency translation adjustment, net of tax of $1.2		21.7			21.7			—
Deferred gains (losses) on derivatives qualifying as hedges, net of tax of $2.9		(7.0	)		(7.0	)		—
Amortization of deferred losses on pension and other post retirement benefits, net of tax of $(1.3)		2.1			2.1			—

Total comprehensive income		360.2			352.4			7.8

Stock-based compensation		10.3			10.3			—
Net transfers to BMS		(253.5	)		(253.5	)		—
Issuance of stock in connection with initial public offering, net of offering costs		782.3			782.3			—
Distributions to noncontrolling interests		(1.5	)		—			(1.5	)
Assumptions of accumulated unrealized losses on pension and other post retirement benefits, net of tax of $(54.7)		(97.5	)		(97.5	)		—
Cash dividends declared		(102.3	)		(102.3	)		—

Balance as of September 30, 2009	$	(697.5	)	$	(709.2	)	$	11.7

15. 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 is not aware of any environmental, health or safety-related litigation or significant environmental, health and safety-related financial obligations or liabilities arising from current or former operations or properties that are likely to have a material adverse impact on the Company’s business, financial position or results of operations. Liabilities or obligations, which could require the Company to make significant expenditures, could arise in the future, however, as the result of, among other things, changes in, or new interpretations of, existing laws, regulations or enforcement policies, claims relating to on- or off-site contamination, or the imposition of unanticipated investigation or cleanup obligations.

As previously reported, PBM Products, LLC (PBM), a manufacturer and distributor of store brand infant formulas and nutritionals, obtained a judgment in the amount of $13.5 million in a suit filed against the Company’s subsidiary, Mead Johnson & Company, LLC, in the U.S. District Court (Eastern District of Virginia), alleging, among other things, false and misleading advertising with respect to certain Enfamil LIPIL infant formula advertising. After post-trial briefing, the court confirmed that award and also ordered limited injunctive relief. The Company has filed an appeal with the U.S. Court of Appeals for the Fourth Circuit with respect to various aspects of the district court proceedings, including both the jury award and injunction. That appeal remains pending.

In addition, five purported consumer class actions are currently pending against the Company’s subsidiary, Mead Johnson & Company, LLC, two of which also name the Company as a defendant. (The Company has been dismissed as a party from three of these suits, and motions to dismiss the Company from the remaining two suits are pending.) The Company has also received a demand letter threatening the filing of a sixth action. These cases each cite the PBM matter as support for allegations that certain false and misleading advertising of Enfamil LIPIL infant formula has resulted in financial injury to consumers. The Company denies all allegations and will vigorously defend these cases.

16. RELATED-PARTY TRANSACTIONS

The Company is engaged in transactions with its former parent, BMS. These transactions primarily consist of sales to BMS, as it serves as the primary distributor in the European region and will do so through the first half of 2011, and fees for services under a Transitional Services Agreement (TSA). The Company had related-party transactions with BMS from the time of the IPO in February 2009 through the split-off from BMS on December 23, 2009. As of the split-off, BMS is no longer a related party. Activities while BMS was a related party are detailed below.

MJN entered into transactions with BMS for the sale of inventory and services provided to and received from BMS pharmaceutical divisions in various markets worldwide, as well as corporate services provided by BMS for the financial statement periods presented. For the three months ended September 30, 2009, MJN had related party sales to BMS of $22.0 million. For the period subsequent to the IPO through September 30, 2009, MJN had related-party sales to BMS of $67.3 million. Purchases of goods from BMS were $0.2 million and $2.4 million for the three and nine months ended September 30, 2009, respectively.

Prior to the IPO, the Company was allocated costs for various services from BMS. On January 31, 2009, MJN entered into a TSA with BMS whereby BMS agreed to provide MJN with various corporate support services (the BMS Services) and MJN agreed to provide BMS with certain services (the MJN Services). The TSA was amended and restated on December 18, 2009, in anticipation of the split-off from BMS. The BMS Services and the MJN Services will continue for a specified initial term, which will vary with the types of services to be provided, unless earlier terminated or extended according to the terms of the TSA, none of which extend beyond December 31, 2011. MJN pays BMS mutually agreed-upon fees for the BMS Services and BMS pays MJN mutually agreed-upon fees for the MJN Services. The statement of earnings for the nine months ended September 30, 2009, includes one month of costs allocated from BMS and eight months of expenses related to the TSA. Total net costs for the three and nine months ended September 30, 2009, were $14.3 million and $43.8 million, respectively.

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview of Our Business

We are a global leader in pediatric nutrition. We are committed to creating trusted nutritional brands and products that help improve the health and development of infants and children around the world and provide them with the best start in life. Our comprehensive product portfolio addresses a broad range of nutritional needs for infants, children and expectant and nursing mothers. We have over 100 years of innovation experience during which we have developed or improved many breakthrough or industry-defining products across each of our product categories. We operate in four geographic segments: Asia, Europe, Latin America and North America. Due to similarities in the economics, products offered, production process, customer base and regulatory environment, these operating segments have been aggregated into two reportable segments: Asia/Latin America and North America/Europe.

Executive Summary

Sales growth for the nine months ended September 30, 2010, was 11%, including a favorable foreign exchange impact of 2%. We delivered growth of 18% in Asia/Latin America, and 1% in North America/Europe. We expect full year sales to reflect a similar growth trend. Gross margin declined compared to a year ago due to increased manufacturing and commodity costs and we expect the remainder of the year to be negatively affected by a further increase in commodity costs, particularly dairy prices.

Earnings grew by 5% driven by higher sales and gross profit. The benefit of lower interest expense and taxes was offset by higher demand generation investments and infrastructure spending to support our stand-alone business.

Three Months Results of Operations

Below is a summary of comparative results of operations for the three months ended September 30, 2010 and 2009:


	Three Months Ended September 30,
										% of Net Sales
(Dollars and shares in millions, except per share data)	2010			2009			% Change			2010			2009
Net Sales	$	810.2		$	699.8			16	%
Earnings before Interest and Income Taxes (EBIT)		165.5			159.7			4	%		20	%		23	%
Interest Expense—net		12.0			23.0			(48	%)		1	%		3	%
Earnings before Income Taxes		153.5			136.7			12	%		19	%		20	%
Provision for Income Taxes		46.1			37.9			22	%		6	%		5	%
Effective Tax Rate (ETR)		30.0	%		27.7	%
Net Earnings		107.4			98.8			9	%		13	%		14	%
Less: Net Earnings attributable to noncontrolling interests		1.3			1.2			nm	*		0	%		0	%
Net Earnings Attributable to Shareholders		106.1			97.6			9	%		13	%		14	%
Weighted Average Shares—Diluted		204.9			204.6
Earnings per Share—Diluted	$	0.52		$	0.48

*	not meaningful

The results for the three months ended September 30, 2010 and 2009 included several items that affect the comparability of our results. These items include significant expenses not indicative of on-going results (Specified Items) and are listed in the table below.


	Three Months Ended September 30,
(In millions)	2010			2009
IT and other separation costs	$	14.0		$	5.1
Severance and related costs		4.3			3.4
Legal, settlements and related costs		1.0			5.3
IPO-related costs		—			2.1

Specified Items before income taxes	$	19.3		$	15.9
Income tax impact on items above		(7.3	)		(5.8	)
Write-off of deferred tax asset related to BMS stock options		(0.3	)		—

Specified Items after taxes	$	11.7		$	10.1

Net Sales

Our net sales by reportable segments are shown in the table below:


	Three Months Ended September 30,							% Change Due to
(Dollars in millions)	2010		2009		% Change			Volume			Price			Foreign Exchange
Asia/Latin America	$	489.7	$	413.8		18	%		11	%		5	%		2	%
North America/Europe		320.5		286.0		12	%		13	%		0	%		(1	%)

Net Sales	$	810.2	$	699.8		16	%		12	%		3	%		1	%

Our Asia/Latin America segment, which represents 60% of our sales, continues to have significant sales growth. Our success in Asia/Latin America comes from market growth and share gains driven by our investments in sales force, advertising and promotion, and product innovation. Our strongest performance continues to be in China, primarily reflecting increased volume due to market growth, share gains and our geographic expansion. Double-digit sales growth was achieved in most of our largest markets in the segment, including China, Hong Kong and Mexico. In addition, volume in the segment grew due to the transfer of our Brazilian operations from BMS late in the third quarter of 2009 and the strong underlying growth in the business driven by our recent investments in the country.

Sales in the North America/Europe segment increased 12% compared with the year-ago period primarily due to a favorable comparison in the United States. The third quarter of 2009 was affected by the timing of the Enfamil Premium product launch in the United States in the second quarter of 2009 resulting in a temporary retail inventory increase and subsequent lower sales in the third quarter of 2009. Sales benefited marginally from increased demand when a competitor commenced a recall of certain infant formula products in the United States in the last days of the quarter. U.S. sales continued to be adversely affected by a market contraction primarily due to a lower birth rate offset by lower Women, Infants and Children (WIC) program rebates and market share gains.

Our net sales by product category are shown in the table below:


	Three Months Ended September 30,				% Change
(Dollars in millions)	2010		2009		% Change
Infant Formula	$	505.4	$	445.1		14	%
Children’s Nutrition		284.0		233.5		22	%
Other		20.8		21.2		(2	%)

Net Sales	$	810.2	$	699.8		16	%

Infant formula increased 14% with no foreign exchange impact, reflecting increases in the North America/Europe segment, which are predominantly infant formula markets, and growth in the Asia/Latin America segment. Children’s nutrition increased 22%, including a favorable foreign exchange impact of 4%, reflecting the strength of the business in the Asia/Latin America segment where over 90% of our children nutrition sales are generated.

We recognize 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 our gross sales to net sales follows:


	Three Months Ended September 30,				% of Gross Sales
(Dollars in millions)	2010		2009		2010			2009
Gross Sales	$	1,070.6	$	964.3		100	%		100	%
Less: Gross-to-Net Sales Adjustments
WIC Rebates		173.5		187.3		16	%		19	%
Sales Discounts		32.8		26.8		3	%		3	%
Returns		21.4		17.4		2	%		2	%
Cash Discounts		11.4		11.2		1	%		1	%
Prime Vendor Charge-Backs		8.6		9.3		1	%		1	%
Coupons and Other Adjustments		12.7		12.5		1	%		1	%

Total Gross-to-Net Sales Adjustments		260.4		264.5		24	%		27	%

Total Net Sales	$	810.2	$	699.8		76	%		73	%

Gross-to-net sales adjustments declined as a percentage of gross sales primarily due to a decline in WIC rebates. The decline in WIC rebates was due to a reduction in the amount of infant formula provided under the program and a reduction in WIC participants due to lower birth rates.

Gross Profit


	Three Months Ended September 30,						% Change
(Dollars in millions)	2010			2009			% Change
Net Sales	$	810.2		$	699.8			16	%
Cost of Products Sold		296.3			244.6			21	%

Gross Profit	$	513.9		$	455.2			13	%
Gross Margin		63.4	%		65.0	%

Gross margin declined compared to a year ago due to increased commodity and manufacturing costs, partially offset by higher product pricing.

Expenses


	Three Months Ended September 30,				% Change			% of Net Sales
(Dollars in millions)	2010		2009		% Change			2010			2009
Expenses:
Selling, General and Administrative	$	190.2	$	164.0		16	%		23	%		23	%
Advertising and Product Promotion		112.4		105.2		7	%		14	%		15	%
Research and Development		18.5		17.6		5	%		2	%		3	%
Other Expenses/(Income)—net		27.3		8.7		nm			3	%		1	%

Selling, General and Administrative Expenses (SG&A)

The increase in SG&A expenses primarily reflected higher sales force costs to support our strategic growth initiatives, predominantly in China and Brazil. In addition, the increase reflected the temporary duplication of costs as we transition to a new shared service provider for IT, accounting and procurement (Shared Service Overlap), an increase in stand-alone corporate costs and higher Specified Item costs, including IT separation costs.

Advertising and Product Promotion Expenses

The increase in advertising and product promotion expenses reflected continued investment in demand generation activities in support of our strategic growth initiatives.

Research and Development Expenses

The increase in research and development expenses reflected our continued investment in our innovation capability and product pipeline.

Other Expenses/(Income)—net (OIE)

OIE primarily reflected $9.1 million in pension settlement costs for a defined benefit plan in 2010 and an increase in foreign currency losses on assets held in non-functional currencies for the three months ended September 30, 2010 compared with the three months ended September 30, 2009.

Earnings before Interest and Income Taxes

Our EBIT is from our two reportable segments, Asia/Latin America and North America/Europe, reduced by Corporate and Other expenses. Corporate and Other consists of unallocated general and administrative expenses and global business support activities, including research and development, marketing and supply chain costs.


	Three Months Ended September 30,						% Change
(Dollars in millions)	2010			2009			% Change
Asia/Latin America	$	168.0		$	143.7			17	%
North America/Europe		97.4			90.3			8	%
Corporate and Other		(99.9	)		(74.3	)		34	%

Total Earnings before Interest and Income Taxes	$	165.5		$	159.7			4	%

The increase in EBIT for Asia/Latin America was primarily related to sales growth partially offset by increased expenses, primarily sales force and advertising and promotion.

The increase in EBIT for North America/Europe was primarily due to increased sales partially offset by higher commodity costs, primarily dairy, and manufacturing costs.

Corporate and Other expenses increased due to pension settlement costs, Shared Service Overlap, an increase in foreign exchange losses and growth in stand-alone corporate costs.

Interest Expense—net

Interest expense for the three months ended September 30, 2010, primarily represented interest incurred on $1.5 billion of notes. Interest expense has been reduced significantly due to lower interest rates on our refinanced debt combined with the benefit from fixed-to-floating interest rate swaps on a portion of that debt, and a reduction in debt. For the three months ended September 30, 2009, interest expense primarily represented interest incurred on $1.7 billion of notes. The average interest rate on our long-term debt, including the impact of the swaps, was 3.6% and 5.4% for the three months ended September 30, 2010 and 2009, respectively.

Income Taxes

The effective tax rate (ETR) for the three months ended September 30, 2010 and 2009, was 30.0% and 27.7%, respectively. The difference in the rates is attributable primarily to unfavorable return-to-provision adjustments on 2009 earnings recognized in the third quarter of 2010, offset by the benefits of a tax ruling under which certain profits in the Netherlands are exempt from taxation, management’s assertion that certain foreign earnings and profits are permanently invested abroad, and a favorable change in our geographic earnings mix.

Net Earnings Attributable to Noncontrolling Interests

Net earnings attributable to noncontrolling interests consisted of an 11% interest in our China legal entity and a 10% interest in our Indonesia legal entity held by third parties.

Net Earnings Attributable to Shareholders

For the foregoing reasons, net earnings attributable to shareholders for the three months ended September 30, 2010 increased 9% to $106.1 million compared to the three months ended September 30, 2009.

Nine Months Results of Operations

Below is a summary of comparative results of operations for the nine months ended September 30, 2010 and 2009:


	Nine Months Ended September 30,
										% of Net Sales
(Dollars and shares in millions, except per share data)	2010			2009			% Change			2010			2009
Net Sales	$	2,337.9		$	2,112.1			11	%
Earnings before Interest and Income Taxes (EBIT)		536.3			566.6			(5	%)		23	%		27	%
Interest Expense—net		35.7			75.3			(53	%)		2	%		4	%
Earnings before Income Taxes		500.6			491.3			2	%		21	%		23	%
Provision for Income Taxes		143.2			147.9			(3	%)		6	%		7	%
Effective Tax Rate (ETR)		28.6	%		30.1	%
Net Earnings		357.4			343.4			4	%		15	%		16	%
Less: Net Earnings attributable to noncontrolling interests		4.3			7.8			nm			0	%		0	%
Net Earnings Attributable to Shareholders		353.1			335.6			5	%		15	%		16	%
Weighted Average Shares—Diluted		204.9			199.3
Earnings per Share—Diluted	$	1.72		$	1.68

The results for the nine months ended September 30, 2010 and 2009 included several items that affect the comparability of our results. These items include significant expenses not indicative of on-going results (Specified Items) and are listed in the table below.


	Nine Months Ended September 30,
(In millions)	2010			2009
IT and other separation costs	$	33.9		$	9.4
Severance and related costs		4.8			12.2
Legal, settlements and related costs		4.6			(4.7	)
IPO-related costs		—			21.9
Gain on asset sale		—			(11.9	)

Specified Items before income taxes	$	43.3		$	26.9
Income tax impact on items above		(15.6	)		(5.6	)
Write-off of deferred tax asset related to BMS stock options		0.9			—

Specified Items after taxes	$	28.6		$	21.3

Net Sales

Our net sales by reportable segments are shown in the table below:


	Nine Months Ended September 30,				% Change			% Change Due to
(Dollars in millions)	2010		2009		% Change			Volume			Price			Foreign Exchange
Asia/Latin America	$	1,417.4	$	1,200.1		18	%		9	%		6	%		3	%
North America/Europe		920.5		912.0		1	%		(1	%)		1	%		1	%

Net Sales	$	2,337.9	$	2,112.1		11	%		5	%		4	%		2	%

Our Asia/Latin America segment continues to have significant sales growth and represented 61% of sales for the nine months ended September 30, 2010, compared with 57% for the nine months ended September 30, 2009. Our success in Asia/Latin America comes from market growth and share gains driven by our investments in advertising and promotion, sales force, and product innovation. Double-digit sales growth was achieved in most of our markets in the segment, including China, Hong Kong and Mexico. In addition, volume in the segment grew due to the transfer of our growing Brazilian operations from BMS late in the third quarter of 2009. Our strongest performance continues to be in China, primarily reflecting increased volume due to market growth, share gains and our geographic expansion. The segment was adversely affected by sales declines in the Philippines due to market contraction and the expiration of a 2009 marketing services agreement under which we sold pharmaceutical products on behalf of BMS.

For the nine months ended September 30, 2010, sales in the North America/Europe segment have grown 1% compared with the prior year. Sales in the United States, however, were slightly down due to market contraction, primarily due to a lower birth rate, partially offset by lower WIC rebates.

Our net sales by product category are shown in the table below:


	Nine Months Ended September 30,				% Change
(Dollars in millions)	2010		2009		% Change
Infant Formula	$	1,453.4	$	1,376.3		6	%
Children’s Nutrition		825.6		667.5		24	%
Other		58.9		68.3		(14	%)

Net Sales	$	2,337.9	$	2,112.1		11	%

Infant formula increased 6%, including a favorable foreign exchange impact of 1%, reflecting results in the North America/Europe segment, which are predominantly infant formula markets, and growth in the Asia/Latin America segment. Children’s nutrition increased 24%, including a favorable foreign exchange impact of 5%, reflecting the strength of the Asia/Latin America segment where over 90% of our children nutrition sales are generated. The decline in other products is primarily driven by the expiration of a 2009 marketing services agreement under which we sold pharmaceutical products in two Asia markets on behalf of BMS.


	Nine Months Ended September 30,				% of Gross Sales
(Dollars in millions)	2010		2009		2010			2009
Gross Sales	$	3,082.8	$	2,905.2		100	%		100	%
Less: Gross-to-Net Sales Adjustments
WIC Rebates		505.5		569.0		16	%		20	%
Sales Discounts		86.8		76.0		3	%		2	%
Returns		60.4		54.2		2	%		2	%
Cash Discounts		32.3		33.4		1	%		1	%
Prime Vendor Charge-Backs		26.0		29.3		1	%		1	%
Coupons and Other Adjustments		33.9		31.2		1	%		1	%

Total Gross-to-Net Sales Adjustments		744.9		793.1		24	%		27	%

Total Net Sales	$	2,337.9	$	2,112.1		76	%		73	%

Gross Profit


	Nine Months Ended September 30,						% Change
(Dollars in millions)	2010			2009			% Change
Net Sales	$	2,337.9		$	2,112.1			11	%
Cost of Products Sold		846.8			728.3			16	%

Gross Profit	$	1,491.1		$	1,383.8			8	%
Gross Margin		63.8	%		65.5	%

Gross margin declined compared to a year ago due to increased manufacturing and commodity costs, partially offset by higher product pricing. We expect the remainder of the year to be negatively affected by a further increase in commodity costs, particularly dairy prices.

Expenses


	Nine Months Ended September 30,				% Change			% of Net Sales
(Dollars in millions)	2010		2009		% Change			2010			2009
Expenses:
Selling, General and Administrative	$	544.2	$	482.2		13	%		23	%		23	%
Advertising and Product Promotion		326.7		282.7		16	%		14	%		13	%
Research and Development		58.3		51.3		14	%		2	%		2	%
Other Expenses/(Income)—net		25.6		1.0		nm			1	%		0	%

Selling, General and Administrative Expenses

The increase in SG&A expenses reflected increased sales force spending, primarily in China and Brazil, higher stand-alone corporate costs and Shared Service Overlap.

Advertising and Product Promotion Expenses

The increase in advertising and product promotion expenses reflected continued investment in demand generation activities in support of our strategic growth initiatives.

Research and Development Expenses

The increase in research and development expenses reflected our continued investment in our innovation capability and product pipeline.

Other Expenses/(Income)—net (OIE)

For the nine months ended September 30, 2010, OIE included $9.1 million in pension settlement costs for a defined benefit plan, an $8.5 million foreign currency loss from the initial balance sheet remeasurement of our Venezuelan subsidiary upon the devaluation of the bolivar and the application of highly inflationary accounting, and currency losses on assets held in non-functional currencies in our other markets. For the nine months ended September 30, 2009, OIE included a gain on sale of a non-strategic intangible asset and a favorable patent settlement, partially offset by severance costs and currency losses on assets held in non-functional currencies.

Earnings before Interest and Income Taxes


	Nine Months Ended September 30,
(Dollars in millions)	2010			2009			% Change
Asia/Latin America	$	492.0		$	438.5			12	%
North America/Europe		272.7			310.5			(12	%)
Corporate and Other		(228.4	)		(182.4	)		25	%

Total Earnings before Interest and Income Taxes	$	536.3		$	566.6			(5	%)

The increase in EBIT for Asia/Latin America was due to sales growth partially offset by increased expenses, including increased advertising and promotion spending and higher sales force expenses.

The decrease in EBIT for North America/Europe was primarily due to higher commodity and manufacturing costs and increased advertising and promotion spending.

Corporate and Other expenses increased due to higher Specified Item costs, higher stand-alone corporate costs, pension settlement costs and Shared Service Overlap.

Interest Expense—net

Interest expense for the nine months ended September 30, 2010, primarily represented interest incurred on $1.5 billion of notes. Interest expense declined by $39.6 million due to lower interest rates on our refinanced debt, combined with the benefit from fixed-to-floating interest rate swaps on a portion of that debt, and a reduction in debt. For the nine months ended September 30, 2009, interest expense primarily represented interest incurred on $1.7 billion of notes. The average interest rate on our long-term debt, including the impact of the swaps, was 3.6% and 5.6% for the nine months ended September 30, 2010 and 2009, respectively.

Income Taxes

The ETR for the nine months ended September 30, 2010 and 2009, was 28.6% and 30.1%, respectively. The difference in the rates is attributable primarily to the benefits of a tax ruling under which certain profits in the Netherlands are exempt from taxation, management’s assertion that certain foreign earnings and profits are permanently invested abroad, and a favorable change in our geographic earnings mix, offset by unfavorable return-to-provision adjustments on 2009 earnings.

Net Earnings Attributable to Noncontrolling Interests

Net earnings attributable to noncontrolling interests consisted of an 11% interest in our China legal entity and a 10% interest in our Indonesia legal entity held by third parties.

Net Earnings Attributable to Shareholders

For the foregoing reasons, net earnings attributable to shareholders for the nine months ended September 30, 2010 increased 5% to $353.1 million compared to the nine months ended September 30, 2009.

Liquidity and Capital Resources

Overview

Our primary sources of liquidity are cash on hand, cash from operations and available borrowings under our $410.0 million Credit Facility. Cash flows from operating activities represent the inflow of cash from our customers and the outflow of cash for inventory purchases, manufacturing, operating expenses, interest and taxes. Cash flows used in investing activities primarily represent capital

expenditures for equipment, buildings and computer software. Cash flows used in financing activities primarily represent proceeds and repayments of short-term borrowings and dividend payments. On March 16, 2010, our board of directors authorized the repurchase of up to $300 million of the Company’s stock. The repurchase program is primarily intended to offset the dilutive effect on earnings from stock-based compensation over the next three to five years. During the nine months ended September 30, 2010, the number of shares purchased under this program was not significant.

Cash Flows

We believe that cash on hand, cash from operations and availability under our Credit Facility will be sufficient to support our working capital needs, pay our operating expenses, satisfy debt obligations, fund capital expenditures and make dividend payments.


	Nine Months Ended September 30,
(In millions)	2010			2009
Cash flow provided by/(used in):
Operating Activities
Net Earnings	$	357.4		$	343.4
Depreciation and Amortization		47.4			43.9
Changes in Assets and Liabilities		(43.8	)		47.2
Pension and Other Post Retirement Benefits Contributions		(35.0	)		(26.3	)
Other		22.9			8.5

Total Operating Activities		348.9			416.7
Investing Activities		(145.6	)		(45.8	)
Financing Activities		(265.8	)		214.3
Effects of Changes in Exchange Rates on Cash and Cash Equivalents		3.3			12.2

Net increase (decrease) in Cash and Cash Equivalents	$	(59.2	)	$	597.4

The decline in the nine month operating cash flows between 2010 and 2009 was primarily driven by working capital and income taxes payable movements. In 2010, net working capital grew consistent with sales and income taxes payable declined due to cash payments made. In 2009, net working capital improvements were driven by inventory reductions, primarily from lower dairy prices and accounts payable increases from extended terms, and income taxes payable increased partly due to transactions related to the separation from BMS.

Cash flow used in investing activities increased $99.8 million due to higher capital expenditures as noted below. Cash flows used in investing activities in 2010 included a $5.5 million investment in International Pediatric Nutrition Company, our joint venture with Almarai Company in Saudi Arabia serving countries in the Gulf Cooperation Council.

Cash flow used in financing activities was $265.8 million for the nine months ended September 30, 2010, reflecting the repayment of $120.0 million of our short-term Credit Facility borrowing, $133.4 million of dividend payments, and a $47.0 million payment to BMS for our Mexico capital lease termination. These uses were partially offset by the collection of a $30.0 million promissory note from BMS. Cash flow provided by financing activities was $214.3 million for the nine months ended September 30, 2009, reflecting $782.3 million net cash proceeds from the IPO and a $97.7 million net transfer from BMS offset by a $602.8 million repayment of related party debt and dividend payments of $61.4 million.

Capital Expenditures

Our capital expenditures were $115.7 million and the cash outflow for capital expenditures was $142.3 million for the nine months ended September 30, 2010. Our capital expenditures were $64.4 million and the cash outflow for capital expenditures was $59.3 million for the nine months ended September 30, 2009. The increase in capital expenditures is due to capitalized IT separation costs, investment in growth and innovation, including new packaging facilities, and the expansion of our research and development facilities in Evansville, Indiana. We expect capital expenditures to be approximately $150 million in 2010 while cash outflow for capital expenditures for the full year will likely exceed $150 million due to high carryover from the fourth quarter of 2009.

Short-Term Borrowings and Long-Term Debt

Short-term borrowings were $120.0 million as of December 31, 2009, and consisted of borrowings under our Credit Facility. We have been in compliance with all covenants of our Credit Facility since its inception. As of September 30, 2010, we have $410.0 million available to us under our Credit Facility. There were no short-term borrowings under the Credit Facility as of September 30, 2010. Other short-term borrowings were $3.2 million as of September 30, 2010 and consisted of short-term loans. For information on our short-term borrowings, long-term debt and interest rate swaps, see “Item 1. Financial Statements—Note 12.”

Special Note Regarding Forward-Looking Statements

This quarterly report on Form 10-Q and other written and oral statements we make 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 in connection with any discussion of future operating or financial performance. You can also identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. Such forward-looking statements are based on current expectations and involve inherent risks and uncertainties, including factors that could delay, divert or change any of them, and could cause actual outcomes to differ materially from current expectations. These statements are likely to relate to, among other things, our goals, plans and projections regarding our financial position, results of operations, cash flows, market position, product development, product approvals, sales efforts, expenses, performance or results of current and anticipated products and the outcome of contingencies such as legal proceedings and financial results, which are based on current expectations that involve inherent risks and uncertainties, including internal or external factors that could delay, divert or change any of them in the next several years. We have included important factors in the cautionary statements included in our annual report on Form 10-K for the year ended December 31, 2009 (2009 Form 10-K), particularly under “Item 1A. Risk Factors,” that we believe could cause actual results to differ materially from any forward-looking statement.

Although we believe we have been prudent in our plans and assumptions, we can give no assurance that any goal or plan set forth in forward-looking statements can be achieved and we caution readers not to place undue reliance on such statements, which speak only as of the date made. We undertake no obligation to release publicly any revisions to forward-looking statements as a result of new information, future events or otherwise.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.

There is no material change in the information reported under Item 7A, “Inflation,” “Foreign Exchange Risk” and “Commodity Risk” contained in the Company’s 2009 Form 10-K.

ITEM 4. Controls and Procedures.

Disclosure Controls and Procedures. Under the supervision and with the participation of our management, including the Chief Executive Officer and the Chief Financial Officer of the Company (its principal executive officer and principal financial officer, respectively), we have evaluated our disclosure controls and procedures (as defined in the Securities Exchange Act Rule 13a-15(e)) as of September 30, 2010. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting. There has been no change in our internal control over financial reporting that occurred during our fiscal quarter ended September 30, 2010, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. Legal Proceedings.

Information pertaining to legal proceedings can be found in “Item 1. Financial Statements—Note 15,” to the interim consolidated financial statements, and is incorporated by reference herein.

ITEM 1A. Risk Factors.

There have been no material changes from the risk factors disclosed in the Company’s 2009 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, 2010:

(Dollars in millions, except per share amounts)


Period	Total Number of Shares Purchased (1)		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Program		Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program (2)
July 1, 2010 through July 31, 2010		—	$	—		—	$	—
August 1, 2010 through August 31, 2010		2,500		50.728		2,500		299.9
September 1, 2010 through September 30, 2010		—		—		—		—

Total		2,500	$	50.728		2,500	$	299.9

(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.

(2)

In March 2010, the Company announced that its board of directors authorized the Company to repurchase up to $300 million of its common stock, from time to time, on the open market. During the third quarter of 2010, the Company repurchased 2,500 shares for approximately $0.1 million under this program, and the remaining authorization totaled approximately $299.9 million at September 30, 2010. This program does not have an expiration date.

ITEM 6. Exhibits

EXHIBIT INDEX


EXHIBIT NO.

31.1		Rule 13a-14(a) and 15d-14(a) Certification of the President and Chief Executive Officer.

31.2		Rule 13a-14(a) and 15d-14(a) Certification of the President and Chief Financial Officer.

32.1		Certification of the Chief Executive Officer and President 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.

*	Portions of this Exhibit are omitted and have been filed separately with the Securities and Exchange Commission in connection with a pending request for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934.

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.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company