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EX-31.2 - CERTIFICATION OF CFO - Mead Johnson Nutrition Coexhibit312-3q2014.htm
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EX-32.2 - CERTIFICATION OF CFO - Mead Johnson Nutrition Coexhibit322-3q2014.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, 2014
 
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 20, 2014, there were 202,030,074 shares of the registrant’s common stock outstanding.







MEAD JOHNSON NUTRITION COMPANY
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2014
 
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 




PART I — FINANCIAL INFORMATION
 
ITEM 1.      FINANCIAL STATEMENTS.

MEAD JOHNSON NUTRITION COMPANY 
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in millions, except per share data)
(UNAUDITED)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
NET SALES
$
1,090.7

 
$
1,046.8

 
$
3,315.1

 
$
3,140.0

Cost of Products Sold
437.9

 
362.3

 
1,270.4

 
1,129.3

GROSS PROFIT
652.8

 
684.5

 
2,044.7

 
2,010.7

Operating Expenses:
 

 
 

 
 

 
 

Selling, General and Administrative
240.2

 
217.3

 
715.4

 
647.8

Advertising and Promotion
158.9

 
163.8

 
489.2

 
475.9

Research and Development
28.7

 
23.8

 
82.5

 
71.1

Other (Income)/Expenses – net
(17.6
)
 
28.9

 
(21.1
)
 
44.9

EARNINGS BEFORE INTEREST AND INCOME TAXES
242.6

 
250.7

 
778.7

 
771.0

 
 
 
 
 
 
 
 
Interest Expense – net
18.3

 
12.3

 
46.0

 
38.9

EARNINGS BEFORE INCOME TAXES
224.3

 
238.4

 
732.7

 
732.1

 
 
 
 
 
 
 
 
Provision for Income Taxes
36.0

 
68.7

 
160.5

 
199.0

NET EARNINGS
188.3

 
169.7

 
572.2

 
533.1

Less Net Earnings Attributable to Noncontrolling Interests
0.7

 
(1.6
)
 
10.8

 
1.8

NET EARNINGS ATTRIBUTABLE TO SHAREHOLDERS
$
187.6

 
$
171.3

 
$
561.4

 
$
531.3

Earnings per Share – Basic
 

 
 

 
 
 
 
Net Earnings Attributable to Shareholders
$
0.93

 
$
0.85

 
$
2.77

 
$
2.62

Earnings per Share – Diluted
 

 
 

 
 
 
 
Net Earnings Attributable to Shareholders
$
0.92

 
$
0.84

 
$
2.77

 
$
2.61

 
 
 
 
 
 
 
 
Weighted Average Shares - Basic
202.2

 
202.3

 
202.1

 
202.5

Weighted Average Shares – Diluted
202.7

 
202.8

 
202.6

 
203.1

Dividends Declared per Share
$
0.375

 
$
0.340

 
$
1.125

 
$
1.020

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



1



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



 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
NET EARNINGS
$
188.3

 
$
169.7

 
$
572.2

 
$
533.1

 
 
 
 
 
 
 
 
OTHER COMPREHENSIVE INCOME/(LOSS)
 

 
 

 
 
 
 
Foreign Currency Translation Adjustments
 

 
 

 
 
 
 
Translation Adjustments
(28.6
)
 
(4.9
)
 
(56.5
)
 
(66.8
)
Tax Benefit
(2.4
)
 
(0.6
)
 
0.3

 
4.0

Deferred Gains/(Losses) on Derivatives Qualifying as Hedges
 

 
 

 
 

 
 

Deferred Gains/(Losses) on Derivatives Qualifying as Hedges for the Period
6.0

 
1.2

 
(64.3
)
 
5.2

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

 
(0.5
)
 
(2.8
)
 
5.7

Tax Benefit/(Expense)
(1.9
)
 
(0.2
)
 
24.5

 
(3.0
)
Pension and Other Post-employment Benefits
 

 
 

 
 

 
 

Reclassification Adjustment for Losses Included in Net Earnings

 

 
0.2

 

OTHER COMPREHENSIVE LOSS
(26.4
)
 
(5.0
)
 
(98.6
)
 
(54.9
)
 
 
 
 
 
 
 
 
COMPREHENSIVE INCOME
161.9

 
164.7

 
473.6

 
478.2

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

 
(3.8
)
 
4.0

 
(7.3
)
 
 
 
 
 
 
 
 
COMPREHENSIVE INCOME ATTRIBUTABLE TO SHAREHOLDERS
$
161.7

 
$
168.5

 
$
469.6

 
$
485.5

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

2



MEAD JOHNSON NUTRITION COMPANY
  
CONSOLIDATED BALANCE SHEETS
(Dollars and shares in millions, except per share data)
(UNAUDITED) 
 
September 30, 2014
 
December 31, 2013
ASSETS
 

 
 

CURRENT ASSETS:
 

 
 

Cash and Cash Equivalents
$
1,195.2

 
$
1,050.8

Receivables – net of allowances of $11.5 and $6.5, respectively
412.1

 
384.4

Inventories
559.1

 
534.8

Deferred Income Taxes – net of valuation allowance
87.1

 
75.3

Income Taxes Receivable
15.2

 
15.9

Prepaid Expenses and Other Assets
68.1

 
56.9

Total Current Assets
2,336.8

 
2,118.1

Property, Plant and Equipment – net
897.4

 
867.5

Goodwill
170.5

 
196.8

Other Intangible Assets – net
77.8

 
97.5

Deferred Income Taxes – net of valuation allowance
58.9

 
37.0

Other Assets
150.4

 
157.2

TOTAL
$
3,691.8

 
$
3,474.1

LIABILITIES AND EQUITY
 

 
 

CURRENT LIABILITIES:
 

 
 

Short-term Borrowings
$
1.2

 
$
2.0

Accounts Payable
519.4

 
566.8

Dividends Payable
76.5

 
69.3

Current Portion of Long-Term Debt

 
505.6

Accrued Expenses
219.4

 
220.0

Accrued Rebates and Returns
343.8

 
314.9

Deferred Income – current
13.9

 
46.6

Income Taxes – payable and deferred
62.9

 
56.1

Total Current Liabilities
1,237.1

 
1,781.3

Long-Term Debt
1,496.8

 
1,009.1

Deferred Income Taxes – noncurrent
13.5

 
15.3

Pension and Other Post-employment Liabilities
174.1

 
161.8

Other Liabilities
185.4

 
156.4

Total Liabilities
3,106.9

 
3,123.9

COMMITMENTS AND CONTINGENCIES


 


 
 
 
 
REDEEMABLE NONCONTROLLING INTEREST
61.1

 
49.7

 
 
 
 
EQUITY
 

 
 

Shareholders’ Equity
 

 
 

Common Stock, $0.01 par value: 3,000 authorized, 207.6 and 206.8 issued, respectively
2.1

 
2.1

Additional Paid-in/(Distributed) Capital
(671.7
)
 
(721.5
)
Retained Earnings
1,748.2

 
1,432.3

Treasury Stock – at cost
(408.3
)
 
(351.9
)
Accumulated Other Comprehensive Loss
(161.0
)
 
(69.2
)
Total Shareholders’ Equity
509.3

 
291.8

Noncontrolling Interests
14.5

 
8.7

Total Equity
523.8

 
300.5

TOTAL
$
3,691.8

 
$
3,474.1

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

3



MEAD JOHNSON NUTRITION COMPANY
 
CONSOLIDATED STATEMENTS OF EQUITY AND REDEEMABLE NONCONTROLLING INTEREST
(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, 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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of January 1, 2013
$
2.1

 
$
(772.8
)
 
$
1,052.4

 
$
(244.6
)
 
$
(18.4
)
 
$
10.3

 
$
29.0

 
$
36.3

Stock-based Compensation Awards
 
 
45.9

 
 

 
(17.9
)
 
 

 
 

 
28.0

 
 

Treasury Stock Acquired
 
 


 
 

 
(76.6
)
 
 

 
 

 
(76.6
)
 
 

Distributions to Noncontrolling Interests
 
 


 
 

 
 

 
 

 
(3.7
)
 
(3.7
)
 
(1.2
)
Cash Dividends Declared
 
 


 
(206.9
)
 
 

 
 

 
 

 
(206.9
)
 
 

Net Earnings
 
 


 
531.3

 
 

 
 

 
1.3

 
532.6

 
0.5

Redeemable Noncontrolling Interest Accretion
 
 
 
 
(21.6
)
 
 
 
 
 
 
 
(21.6
)
 
21.6

Other Comprehensive Income/(Loss)
 
 


 
 

 
 

 
(45.8
)
 
2.0

 
(43.8
)
 
(11.1
)
Balance as of September 30, 2013
$
2.1

 
$
(726.9
)
 
$
1,355.2

 
$
(339.1
)
 
$
(64.2
)
 
$
9.9

 
$
237.0

 
$
46.1

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

4



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

 
Nine Months Ended September 30,
 
2014
 
2013
CASH FLOWS FROM OPERATING ACTIVITIES:
 

 
 

Net Earnings
$
572.2

 
$
533.1

Adjustments to Reconcile Net Earnings to Net Cash Provided by Operating Activities:
 
 
 
Depreciation and Amortization
67.8

 
62.1

Other
30.2

 
29.9

Changes in Assets and Liabilities
(56.4
)
 
(27.0
)
Payments for Settlement of Interest Rate Forward Swaps
(45.0
)
 

Pension and Other Post-employment Benefits Contributions
(4.2
)
 
(6.1
)
Net Cash Provided by Operating Activities
564.6

 
592.0

CASH FLOWS FROM INVESTING ACTIVITIES:
 

 
 

Payments for Capital Expenditures
(144.0
)
 
(177.3
)
Proceeds from Sale of Property, Plant and Equipment
0.2

 
2.0

Proceeds from/(Investment in) Other Companies
4.0

 
(2.7
)
Net Cash Used in Investing Activities
(139.8
)
 
(178.0
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 

 
 

Proceeds from Short-term Borrowings
3.2

 
6.8

Repayments of Short-term Borrowings
(3.5
)
 
(165.0
)
Repayments of Notes Payable
(500.0
)
 
(27.6
)
Payments of Dividends
(220.7
)
 
(198.9
)
Stock-based-compensation-related Proceeds and Excess Tax Benefits
27.3

 
19.8

Purchases of Treasury Stock
(57.6
)
 
(92.5
)
Long-term Debt Borrowings, net of original issue discount and expenses paid
492.3

 

Distributions to Noncontrolling Interests
(4.4
)
 
(4.9
)
Net Cash Used in Financing Activities
(263.4
)
 
(462.3
)
Effects of Changes in Exchange Rates on Cash and Cash Equivalents
(17.0
)
 
(8.6
)
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS
144.4

 
(56.9
)
CASH AND CASH EQUIVALENTS:
 

 
 

Beginning of Period
1,050.8

 
1,042.1

End of Period
$
1,195.2

 
$
985.2

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

5



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 nutrition and other nutritional products. MJN has a broad product portfolio, which extends across routine and specialty infant formulas, children’s milks and milk modifiers, dietary supplements for pregnant and breastfeeding mothers, pediatric vitamins, and products for pediatric metabolic disorders. These products are generally sold to wholesalers, retailers and distributors 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 (“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 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, 2014 and December 31, 2013, results of operations and cash flows for the nine months ended September 30, 2014 and 2013. 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, 2013 (“2013 Form 10-K”) with the exception of the Company’s pension accounting policy which is discussed below under “Change in Accounting Principles.” 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 Current Report on Form 8-K filed with the SEC on April 24, 2014 which revised and superseded the corresponding portions of the 2013 Form 10-K.

Recently Adopted Accounting Standards—In March 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-05, Foreign Currency Matters (Topic 830), clarifying the applicable guidance for the release of the cumulative translation adjustment. ASU 2013-05 was effective for the Company in the period beginning January 1, 2014. The adoption of this update did not have a material impact on the consolidated financial statements.   

In July 2013, the FASB issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or Tax Credit Carryforward Exists. ASU 2013-11 requires that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, with certain exceptions. ASU 2013-11 was effective for the Company beginning January 1, 2014 and the adoption of this standard did not have a material impact on the 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. Early adoption is not permitted. The updated standard becomes effective for MJN in the first quarter of 2017. The Company is currently evaluating the effect, if any, that the updated standard will have on its consolidated financial statements and related disclosures.

Change in Accounting Principles—During the first quarter of 2014, the Company changed its accounting principles for the recognition of actuarial gains and losses for all of its defined benefit pension and other post-employment benefit plans and the calculation of expected return on pension plan assets.  Historically, the Company recognized actuarial gains and losses as a component of accumulated other comprehensive loss in its Consolidated Balance Sheets and amortized them into the Consolidated Statements of Earnings over the average future service period of the active employees of these plans to the extent such gains and losses were outside of a corridor.  Starting in the first quarter of 2014, the Company elected to immediately recognize actuarial gains and losses in its Consolidated Statements of Earnings on the basis that it is preferable to accelerate the

6



recognition of such gains and losses into earnings rather than to delay them over time.  Additionally, for purposes of calculating the expected return on pension plan assets, the Company previously used a calculated value for the market-related valuation of pension plan assets. With this change in accounting principle, the Company now uses the actual fair value of pension plan assets. These changes improve transparency in operating results by immediately recognizing the effects of external conditions on plan obligations, investments and assumptions. 

Under these changes in accounting principles, actuarial gains and losses from these plans are recognized upon plan remeasurement in the fourth quarter of each year, or more frequently if a remeasurement occurs. The remaining components of net periodic benefit cost, primarily interest on projected benefit obligation and the expected return on pension plan assets, continue to be recorded on a quarterly basis. Actuarial gains and losses are recognized within Corporate and Other and the remaining components of net periodic benefit costs are recognized in the respective reportable segments.

The Company has applied both of these accounting changes, immediate recognition of actuarial gains or losses and use of actual fair value to calculate expected return on pension plan assets, retrospectively to all periods presented.  The cumulative effect of these changes on additional-paid-in/(distributed) capital and retained earnings on the Company’s opening balance sheet as of January 1, 2013 was a decrease of $96.2 million and an increase of $72.4 million, respectively, with an offsetting adjustment to accumulated other comprehensive loss. These changes had no impact on cash flows for the interim periods presented.  The following tables present the effects of retrospectively applying these accounting changes for the periods presented: 

 
Three Months Ended September 30, 2013
 
Nine Months Ended September 30, 2013
 
Previously Reported
 
Impact of Change
 
Recast
 
Previously Reported
 
Impact of Change
 
Recast
(in millions except per share data)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated Statements of Earnings
 
 
 
 
 
 
 
 
 
 
 
Cost of Products Sold
$
365.5

 
$
(3.2
)
 
$
362.3

 
$
1,140.8

 
$
(11.5
)
 
$
1,129.3

Selling, General and Administrative
222.6

 
(5.3
)
 
217.3

 
666.8

 
$
(19.0
)
 
647.8

Research and Development
24.8

 
(1.0
)
 
23.8

 
74.5

 
$
(3.4
)
 
71.1

Other (Income)/Expenses – net
31.4

 
(2.5
)
 
28.9

 
62.6

 
$
(17.7
)
 
44.9

EARNINGS BEFORE INTEREST AND INCOME TAXES
238.7

 
12.0

 
250.7

 
719.4

 
$
51.6

 
771.0

EARNINGS BEFORE INCOME TAXES
226.4

 
12.0

 
238.4

 
680.5

 
$
51.6

 
732.1

Provision for Income Taxes
66.4

 
2.3

 
68.7

 
182.4

 
$
16.6

 
199.0

NET EARNINGS
160.0

 
9.7

 
169.7

 
498.1

 
$
35.0

 
533.1

NET EARNINGS ATTRIBUTABLE TO SHAREHOLDERS
161.6

 
9.7

 
171.3

 
496.3

 
$
35.0

 
531.3

Earnings per Share – Basic
$
0.80

 
$
0.05

 
$
0.85

 
$
2.45

 
$
0.17

 
$
2.62

Earnings per Share – Diluted
$
0.79

 
$
0.05

 
$
0.84

 
$
2.44

 
$
0.17

 
$
2.61

 
 
 
 
 
 
 
 
 
 
 
 
Consolidated Statements of Comprehensive Income
 
 
 
 
 
 
 
 
 
 
 
Deferred Gains on Pension and Other Post-employment Benefits
$

 

 
$

 
$
0.8

 
(0.8
)
 
$

Reclassification Adjustment for Losses Included in Net Earnings
4.5

 
(4.5
)
 

 
23.9

 
(23.9
)
 

Tax Benefit/(Expense)
0.5

 
(0.5
)
 

 
(6.6
)
 
6.6

 


7



 
 
December 31, 2013
 
 
Previously Reported
 
Impact of Change
 
Recast
(in millions)
 
 
 
 
 
 
 
 
 
Consolidated Balance Sheets
 
 
 
 
 
 
Additional Paid-in/(Distributed) Capital
 
$
(625.3
)

$
(96.2
)
 
$
(721.5
)
Retained Earnings
 
1,470.4


(38.1
)
 
1,432.3

Accumulated Other Comprehensive Loss
 
(203.5
)

134.3

 
(69.2
)

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 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)
 
2014
 
2013
 
2014
 
2013
Basic earnings per share:
 
 

 
 

 
 

 
 

Weighted-average shares outstanding
 
202.2

 
202.3

 
202.1

 
202.5

Net earnings attributable to shareholders
 
$
187.6

 
$
171.3

 
$
561.4

 
$
531.3

Dividends and undistributed earnings attributable to unvested shares
 
(0.3
)
 
(0.3
)
 
(1.0
)
 
(1.1
)
Net earnings attributable to shareholders used for basic earnings per share calculation
 
$
187.3

 
$
171.0

 
$
560.4

 
$
530.2

Net earnings attributable to shareholders per share
 
$
0.93

 
$
0.85

 
$
2.77

 
$
2.62

Diluted earnings per share:
 
 

 
 

 
 

 
 

Weighted-average shares outstanding
 
202.2

 
202.3

 
202.1

 
202.5

Incremental shares outstanding assuming the exercise/vesting of dilutive stock options/performance shares
 
0.5

 
0.5

 
0.5

 
0.6

Weighted-average shares — diluted
 
202.7

 
202.8

 
202.6

 
203.1

Net earnings attributable to shareholders
 
$
187.6

 
$
171.3

 
$
561.4

 
$
531.3

Dividends and undistributed earnings attributable to unvested shares
 
(0.3
)
 
(0.3
)
 
(1.0
)
 
(1.1
)
Net earnings attributable to shareholders used for diluted earnings per share calculation
 
$
187.3

 
$
171.0

 
$
560.4

 
$
530.2

Net earnings attributable to shareholders per share
 
$
0.92

 
$
0.84

 
$
2.77

 
$
2.61


Potential shares outstanding from all stock-based awards were 2.8 million and 2.9 million as of September 30, 2014 and 2013, respectively. Of these shares, 2.3 million and 2.4 million were not included in the diluted earnings per share calculation for the three months ended September 30, 2014 and 2013, respectively, and 2.3 million were not included in the diluted earnings per share calculation for the nine months ended September 30, 2014 and 2013, respectively. 

4.                                      INCOME TAXES
 
For the three months ended September 30, 2014, the effective tax rate (“ETR”) was 16.0% compared with 28.8% for the same period in 2013. This decrease 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 third quarter of 2014, and the third quarter 2013 administrative penalty in China which was non-deductible for tax purposes.

For the nine months ended September 30, 2014, the ETR was 21.9% compared with 27.2% for the same period in 2013. This decrease was primarily due to the running of the statute of limitations as noted above, favorable geographic earnings mix, and the non-deductible third quarter 2013 administrative penalty in China.



8



The Company’s gross reserve for uncertain tax positions, including penalties and interest, as of September 30, 2014 and December 31, 2013, was $137.2 million and $117.4 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 adjustments to the balance of 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 $9.5 million and $8.9 million as of September 30, 2014 and December 31, 2013 respectively.

5.                                      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 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.

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 ongoing operations and affect the comparability of the operating segments’ results.
 
During the first quarter of 2014, the Company changed its accounting principles for the recognition of actuarial gains and losses for all of its defined benefit pension and other post-employment plans and the calculation of expected return on pension plan assets (See Note 2 for a discussion of the change in accounting principles). The Company has applied these accounting changes retrospectively to all periods presented and to all reportable segments as well as Corporate and Other.

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)
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
Asia
 
$
561.5

 
$
546.7

 
$
186.2

 
$
199.6

 
$
1,729.8

 
$
1,635.1

 
$
623.4

 
$
613.2

Latin America
 
222.9

 
221.3

 
52.6

 
62.5

 
659.7

 
645.6

 
152.6

 
157.1

North America/Europe
 
306.3

 
278.8

 
66.8

 
64.7

 
925.6

 
859.3

 
200.9

 
192.6

Total reportable segments
 
1,090.7

 
1,046.8

 
305.6

 
326.8

 
3,315.1

 
3,140.0

 
976.9

 
962.9

Corporate and Other
 

 

 
(63.0
)
 
(76.1
)
 

 

 
(198.2
)
 
(191.9
)
Total
 
$
1,090.7

 
$
1,046.8

 
$
242.6

 
$
250.7

 
$
3,315.1

 
$
3,140.0

 
$
778.7

 
$
771.0


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)
 
2014
 
2013
 
2014
 
2013
Stock options
 
$
1.8

 
$
1.6

 
$
5.3

 
$
4.9

Performance share awards
 
2.9

 
3.5

 
9.7

 
12.9

Restricted stock units
 
2.8

 
2.2

 
7.8

 
7.9

Total pre-tax stock-based compensation expense
 
$
7.5

 
$
7.3

 
$
22.8

 
$
25.7

Net tax benefit related to stock-based compensation expense
 
$
(2.5
)
 
$
(2.6
)
 
$
(7.8
)
 
$
(8.8
)
 


9



During the nine months ended September 30, 2014, the Company granted the following awards: 
(Shares in millions)
 
Shares Granted
 
Weighted-
Average Grant
Date Fair Value
Stock options
 
0.4

 
$
17.59

Performance share awards
 
0.2

 
$
78.67

Restricted stock units
 
0.2

 
$
83.13


As of September 30, 2014, the Company had the following award expense yet to be recognized: 
(Dollars and shares in millions)
 
Unrecognized
Compensation
Expense
 
Expected
Weighted-Average
Period to be
Recognized
(years)
Stock options
 
$
9.5

 
1.9
Performance share awards
 
$
10.9

 
1.4
Restricted stock units
 
$
22.5

 
2.5
 
7.                                      PENSION AND OTHER POST-EMPLOYMENT BENEFIT PLANS
 
During the first quarter of 2014, the Company changed its accounting principles for the recognition of actuarial gains and losses for all of its defined benefit pension and other post-employment benefit plans and the calculation of expected return on pension plan assets.  Historically, the Company recognized actuarial gains and losses as a component of accumulated other comprehensive loss in its Consolidated Balance Sheets and amortized them into its Consolidated Statements of Earnings over the average future service period of the active employees of these plans to the extent that such gains and losses were outside of a corridor.  The Company elected to immediately recognize actuarial gains and losses in its Consolidated Statements of Earnings on the basis that it is preferable to accelerate the recognition of such gains and losses into earnings rather than to delay them over time.  Additionally, for purposes of calculating the expected return on pension plan assets, the Company previously used a calculated value for the market-related valuation of pension plan assets. With this change in accounting, the Company now uses the actual fair value of pension plan assets.  These changes improve transparency in operating results by immediately recognizing the effects of external conditions on plan obligations, investments and assumptions.  Under the changes in accounting principle, actuarial gains and losses from these plans are recognized upon plan remeasurement in the fourth quarter of each year, or more frequently if a remeasurement occurs.  The Company has applied these changes retrospectively, adjusting the comparative periods presented (see Note 2 for discussion of the change in accounting principles).

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)
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
Service cost – benefits earned during the period
 
$
0.8

 
$
1.3

 
$
0.2

 
$
0.3

 
$
3.6

 
$
3.9

 
$
0.6

 
$
0.8

Interest cost on projected benefit obligations
 
3.6

 
3.6

 
0.4

 
0.4

 
11.2

 
10.8

 
1.2

 
1.0

Amortization of transition cost
 

 

 

 

 
0.2

 

 

 

Expected return on plan assets
 
(3.8
)
 
(4.3
)
 

 

 
(11.6
)
 
(12.8
)
 

 

Amortization of prior service benefit
 

 

 

 
(0.1
)
 

 

 

 
(0.1
)
  Net periodic benefit cost
 
$
0.6

 
$
0.6

 
$
0.6

 
$
0.6

 
$
3.4

 
$
1.9

 
$
1.8

 
$
1.7

Curtailments
 
(5.4
)
 

 

 

 
(5.4
)
 

 

 

Net Actuarial (Gains)/Losses
 
9.3

 
(7.3
)
 

 

 
16.4

 
(27.2
)
 

 

Total net periodic benefit cost
 
$
4.5

 
$
(6.7
)
 
$
0.6

 
$
0.6

 
$
14.4

 
$
(25.3
)
 
$
1.8

 
$
1.7

 
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 as well as at year-end.  Because aggregate lump sum settlements exceeded anticipated interest costs for 2014 during the second quarter, the Company remeasured its U.S. pension plan in both the second and third quarter of 2014. 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.


10



In addition, in the second quarter of 2014, MJN changed the yield curve used in the determination of its discount rate for purposes of measuring the obligation related to the Company’s U.S. pension plan. This change results in a better, more refined estimate of the pension obligation. The change in the yield curve resulted in an approximate $8 million gain which was offset by the remeasurement of the U.S. pension plan.

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.

For the nine months ended September 30, 2014 and 2013, the Company contributed $4.2 million and $6.1 million, respectively, to pension plans, primarily outside the U.S.

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)
 
2014
 
2013
 
2014
 
2013
Foreign exchange (gains)/losses - net
 
$
(8.2
)
 
$
2.1

 
$
(6.0
)
 
$
6.9

Administrative penalty (China)
 

 
26.0

 

 
33.4

Gain on sale of investment
 

 

 
(4.0
)
 

Pension curtailment gain
 
(5.4
)
 

 
(5.4
)
 

Other - net
 
(4.0
)
 
0.8

 
(5.7
)
 
4.6

Other (income)/expenses - net
 
$
(17.6
)
 
$
28.9

 
$
(21.1
)
 
$
44.9


Foreign exchange (gains)/losses - net for the three and nine months ended September 30, 2014 includes gains in the amount of $5.1 million and $13.7 million, respectively, as a result of the Company’s exchange of Bolivares Fuertes for U.S. dollars through a Venezuela government exchange at a rate more favorable than the rate used to remeasure net monetary assets of its Venezuelan subsidiary. In addition, for the nine months ended September 30, 2014, foreign exchange (gains)/losses - net includes 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 18 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. 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 has 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 para el Conosur S.A. The Put Right is exercisable from September 15, 2015 to September 15, 2018 and the decision to exercise is not within the control of MJN. The price paid upon exercise will be determined based on established multiples of sales and earnings of the acquired business and is currently estimated to equate to fair value at the earliest exercise date. As a result of the Put Right, the noncontrolling interest is presented as redeemable noncontrolling interest outside of equity on the balance sheet. Accretion to the redemption value of the Put Right is being recognized through equity using an interest method over the period from March 15, 2012 to September 15, 2015.

10.                                      NET EARNINGS ATTRIBUTABLE TO NONCONTROLLING INTERESTS
 
Net earnings attributable to noncontrolling interests consists of a 20%, 11% and 10% interest held by third parties in operating entities in Argentina, China and Indonesia, respectively. 


11



11.                               INVENTORIES
 
The major categories of inventories were as follows:
(In millions)
 
September 30, 2014
 
December 31, 2013
Finished goods
 
$
290.6

 
$
312.7

Work in process
 
100.1

 
82.5

Raw and packaging materials
 
168.4

 
139.6

Inventories
 
$
559.1

 
$
534.8


12.                               PROPERTY, PLANT AND EQUIPMENT
 
The major categories of property, plant and equipment were as follows: 
(In millions)
 
September 30, 2014
 
December 31, 2013
Land
 
$
12.6

 
$
12.6

Buildings
 
725.6

 
550.8

Machinery, equipment and fixtures
 
736.1

 
650.3

Construction in progress
 
69.8

 
260.9

Accumulated depreciation
 
(646.7
)
 
(607.1
)
Property, plant and equipment — net
 
$
897.4

 
$
867.5


For the nine months ended September 30, 2014, buildings and machinery, equipment and fixtures increased primarily due to the in-service placement of the Company’s new manufacturing and technology center in Singapore.

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 2014 and concluded that no impairment existed.
For the nine months ended September 30, 2013, the change in the carrying amount of goodwill by reportable segment was primarily driven by the cumulative impact of a correction in the currency denomination of the goodwill related to two reporting units. The revision had the impact of decreasing the Company’s total value of goodwill and decreasing the total currency translation adjustment included in the accumulated other comprehensive loss section of shareholders’ equity and other comprehensive income.

For the nine months ended September 30, 2014 and 2013, 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, 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

 
 
 
 
 
 
 
 
Balance as of January 1, 2013
$

 
$
253.6

 
$
17.0

 
$
270.6

Redenomination

 
(42.5
)
 
2.0

 
(40.5
)
Translation adjustments

 
(20.8
)
 

 
(20.8
)
Balance as of September 30, 2013
$

 
$
190.3

 
$
19.0

 
$
209.3

 
As of September 30, 2014, the Company had no accumulated impairment loss.

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 2014 and concluded that no impairment existed.

12



The gross carrying value and accumulated amortization by class of intangible assets as of September 30, 2014 and December 31, 2013 were as follows: 
 
 
As of September 30, 2014
 
As of December 31, 2013
(In millions)
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Book
Value
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Book
Value
Indefinite-lived intangible assets:
 
 

 
 

 
 

 
 

 
 

 
 

Trademark(1) .
 
$
26.4

 
$

 
$
26.4

 
$
34.5

 
$

 
$
34.5

Non-compete agreement(1) .
 
5.2

 

 
5.2

 
6.8

 

 
6.8

Sub-total
 
31.6

 

 
31.6

 
41.3

 

 
41.3

Amortizable intangible assets:
 
 

 
 

 
 

 
 

 
 

 
 

Computer software
 
128.2

 
(83.9
)
 
44.3

 
132.8

 
(79.3
)
 
53.5

Distributor-customer relationship(1) .
 
2.5

 
(0.6
)
 
1.9

 
3.3

 
(0.6
)
 
2.7

Sub-total
 
130.7

 
(84.5
)
 
46.2

 
136.1

 
(79.9
)
 
56.2

Total other intangible assets
 
$
162.3

 
$
(84.5
)
 
$
77.8

 
$
177.4

 
$
(79.9
)
 
$
97.5

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


15.                               DEBT
 
Short-Term Borrowings and Five-Year Revolving Credit Facility Agreement
 
As of September 30, 2014 and December 31, 2013 the Company’s short-term borrowings were $1.2 million and $2.0 million, respectively, which consisted of borrowings made by the Company’s subsidiary in Argentina. These short-term borrowings had a weighted-average interest rate of 30% as of September 30, 2014. The Company intends to repay these borrowings within 12 months and has the ability to do so.

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 covenants as of September 30, 2014. Borrowings from the Company’s credit facility are used for working capital and other general corporate purposes. As of September 30, 2014, the Company had $750.0 million available under this facility.

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.
 












13



Long-Term Debt
 
The components of long-term debt were as follows: 
(Dollars in millions)
 
September 30, 2014
 
December 31, 2013
Principal Value:
 
 

 
 

3.50% Notes due 2014
 
$

 
$
500.0

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

 

Sub-total
 
1,500.0

 
1,500.0

Adjustments to Principal Value:
 
 

 
 

Unamortized basis adjustment for settled interest rate swaps
 
9.3

 
16.7

Unamortized bond discount
 
(4.1
)
 
(2.0
)
   Fair value interest rate swaps
 
(8.4
)
 

Less amount due within one year
 

 
505.6

Long-term debt
 
$
1,496.8

 
$
1,009.1


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. These swaps have resulted in a fair value adjustment of $8.4 million to reduce long-term debt, which is offset by a long-term derivative liability. 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 $1,640.0 million (Level 2) as of September 30, 2014.

The components of interest expense-net were as follows: 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In millions)
 
2014
 
2013
 
2014
 
2013
Interest expense
 
$
20.6

 
$
14.5

 
$
53.2

 
$
45.3

Interest income
 
(2.3
)
 
(2.2
)
 
(7.2
)
 
(6.4
)
Interest expense-net
 
$
18.3

 
$
12.3

 
$
46.0

 
$
38.9


Net interest expense increased compared to the prior year period primarily as a result of the incremental and higher interest expense on the 2044 Notes, cost related to the redemption of the 2014 Notes and the nonrecurrence of the prior year period’s capitalization of interest cost associated with the Company’s new spray dryer and technology center in Singapore. These expenses were partially offset by gains related to the fixed to floating rate fair value hedges on the 2019 Notes and the unamortized benefit from settled interest swaps on the 2014 Notes.


14



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 were classified as Level 2 in the fair value hierarchy at September 30, 2014 and December 31, 2013, and there were no transfers between levels in the fair value hierarchy during the periods then ended.

The following table summarizes the fair value of the Company's outstanding derivatives:
(In millions)
Hedge Designation
 
Balance Sheet 
Location
 
September 30, 2014
 
December 31, 2013
Foreign exchange contracts
Cash Flow
 
Other assets
 
$
3.0

 
$
4.2

Interest rate forward swaps
Cash Flow
 
Other assets
 

 
19.9

Commodity contracts
Cash Flow
 
Other assets
 

 

Foreign exchange contracts
Cash Flow
 
Accrued expenses
 
(0.2
)
 
(0.5
)
Commodity contracts
Cash Flow
 
Accrued expenses
 
(0.4
)
 

Interest rate swaps
Fair Value
 
Other Liabilities
 
(8.4
)
 

Net asset/(liability) position of derivatives designated as hedging instruments
 
$
(6.0
)
 
$
23.6


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, 2014 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 security to be furnished by the counterparties to its derivative financial instruments.
 
Cash Flow Hedges
 
As of September 30, 2014 and December 31, 2013, 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, 2014 and 2013, 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 intercompany purchases anticipated in the next 18 months and designates these derivative instruments as foreign currency cash flow hedges when appropriate. When the underlying intercompany purchases impact the Company’s consolidated earnings, the effective portion of the hedge is recognized within cost of products sold. The impact of ineffectiveness related to the Company’s foreign exchange hedges on earnings was insignificant for the three months ended September 30, 2014 and 2013. The impact of ineffectiveness related to the Company’s foreign exchange hedges on earnings was $0.8 million for each of the nine months ended September 30, 2014 and 2013.

As of September 30, 2014, the notional value of the Company’s outstanding foreign exchange forward contracts designated as hedging instruments was $252.6 million, with a fair value of $2.8 million in net assets. As of December 31, 2013, the notional value of the Company’s outstanding foreign exchange forward contracts designated as hedging instruments was $201.4 million, with a fair value of $3.7 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.

15



 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)
 
2014
 
2013
Balance—January 1
 
$
3.2

 
$
(4.1
)
Derivatives qualifying as cash flow hedges deferred in other comprehensive income
 
(0.1
)
 
5.2

Derivatives qualifying as cash flow hedges reclassified to cost of products sold (effective portion)
 
(3.3
)
 
5.7

Change in deferred taxes
 
0.9

 
(3.0
)
Balance—September 30
 
$
0.7

 
$
3.8

 
At September 30, 2014, 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 $0.7 million, $0.2 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 interest rate 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 the 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 the nine months ended September 30, 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 income (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 three months and nine months ended September 30, 2014, $0.4 million and $0.5 million of amortization of the settlement amount was recognized within interest expense, respectively.

Commodity Hedges
During the fourth quarter of 2013, the Company began utilizing 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, 2014, there were commodity contracts outstanding which committed the Company to approximately$6 million of forecasted non-fat dry milk purchases, representing approximately 24% of the Company’s total forecasted volume, where pricing is not established through supply agreements, over the next 12 months. The effective portion of the hedges, which was recorded at fair value as a component of accumulated other comprehensive income, and the ineffective portion recognized within other (income)/expenses-net were both insignificant as of September 30, 2014 and for the three and nine month periods then ended.

Fair Value Hedges
 
Interest Rate Swaps

In November 2009, the Company entered into 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 settled $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 settled 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 for the remaining life of the debt instruments. Because the 2014 Notes were redeemed during the three months ended September 30, 2014, the Company recognized an additional $1.6 million reduction in interest expense during the period, which represented the unamortized portion of the settled 2009 swaps related to the 2014 Notes.

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

16



from fixed to floating rate debt for the remainder of their term. These interest rate swaps were outstanding at September 30, 2014.
The following table summarizes the interest rate swaps outstanding as of September 30, 2014, all of which have a hedge inception date of May 2014 and a maturity date of November 2019:
(In millions)
 
Notional Amount of Underlying
 
Fixed Rate Received
 
Variable Rate Paid
(U.S. 3 Month LIBOR +)
 
Fair Value
Swaps associated with the 2019 Notes
 
$
700.0

 
4.9
%
 
3.14
%
 
$
(8.4
)

See Note 15 for discussion of 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 $346.6 million and $447.8 million as of September 30, 2014 and December 31, 2013, 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.

17.                               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, 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

 
 
 
 
 
 
 
Balance as of January 1, 2013
 
206.0

 
3.5

 
$
244.6

Stock-based compensation
 
0.7

 
0.2

 
17.9

Treasury stock purchases
 

 
1.0

 
76.6

Balance as of September 30, 2013
 
206.7

 
4.7

 
$
339.1

 
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. As of September 30, 2014, the Company had $441.9 million remaining available under this authorization.
















17



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, 2014
 
$
(83.6
)
 
$
15.4

 
$
(1.0
)
 
$
(69.2