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



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

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







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



PART I — FINANCIAL INFORMATION
 
ITEM 1.      FINANCIAL STATEMENTS.

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

 
$
1,090.7

 
$
3,104.3

 
$
3,315.1

Cost of Products Sold
346.8

 
437.9

 
1,096.7

 
1,270.4

GROSS PROFIT
630.7

 
652.8

 
2,007.6

 
2,044.7

Operating Expenses:
 

 
 

 
 

 
 

Selling, General and Administrative
216.1

 
240.2

 
679.5

 
715.4

Advertising and Promotion
156.1

 
158.9

 
490.7

 
489.2

Research and Development
26.3

 
28.7

 
79.9

 
82.5

Other (Income)/Expenses – net
6.2

 
(17.6
)
 
17.1

 
(21.1
)
EARNINGS BEFORE INTEREST AND INCOME TAXES
226.0

 
242.6

 
740.4

 
778.7

 
 
 
 
 
 
 
 
Interest Expense – net
14.8

 
18.3

 
42.5

 
46.0

EARNINGS BEFORE INCOME TAXES
211.2

 
224.3

 
697.9

 
732.7

 
 
 
 
 
 
 
 
Provision for Income Taxes
56.6

 
36.0

 
173.6

 
160.5

NET EARNINGS
154.6

 
188.3

 
524.3

 
572.2

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

 
(1.2
)
 
10.8

NET EARNINGS ATTRIBUTABLE TO SHAREHOLDERS
$
155.2

 
$
187.6

 
$
525.5

 
$
561.4

Earnings per Share – Basic
 

 
 

 
 
 
 
Net Earnings Attributable to Shareholders
$
0.77

 
$
0.93

 
$
2.59

 
$
2.77

Earnings per Share – Diluted
 

 
 

 
 
 
 
Net Earnings Attributable to Shareholders
$
0.77

 
$
0.92

 
$
2.59

 
$
2.77

 
 
 
 
 
 
 
 
Weighted Average Shares - Basic
201.4

 
202.2

 
202.2

 
202.1

Weighted Average Shares – Diluted
201.7

 
202.7

 
202.6

 
202.6

Dividends Declared per Share
$
0.4125

 
$
0.3750

 
$
1.2375

 
$
1.1250

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



1


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



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

 
$
188.3

 
$
524.3

 
$
572.2

 
 
 
 
 
 
 
 
OTHER COMPREHENSIVE INCOME/(LOSS)
 

 
 

 
 
 
 
Foreign Currency Translation Adjustments
 

 
 

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

 
(2.4
)
 
0.7

 
0.3

Deferred Gains/(Losses) on Derivatives Qualifying as Hedges
 

 
 

 
 

 
 

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

 
6.0

 
22.0

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

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

Pension and Other Post-employment Benefits
 

 
 

 
 

 
 

Reclassification Adjustment for Losses Included in Net Earnings

 

 

 
0.2

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

 
161.9

 
428.0

 
473.6

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

 
9.3

 
4.0

 
 
 
 
 
 
 
 
COMPREHENSIVE INCOME ATTRIBUTABLE TO SHAREHOLDERS
$
105.5

 
$
161.7

 
$
418.7

 
$
469.6

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

2


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

 
 

CURRENT ASSETS:
 

 
 

Cash and Cash Equivalents
$
1,363.5

 
$
1,297.7

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

 
387.8

Inventories
518.6

 
555.5

Deferred Income Taxes – net of valuation allowance
77.9

 
86.8

Income Taxes Receivable
37.2

 
7.7

Prepaid Expenses and Other Assets
69.1

 
82.6

Total Current Assets
2,435.2

 
2,418.1

Property, Plant and Equipment – net
933.2

 
912.7

Goodwill
147.0

 
162.7

Other Intangible Assets – net
65.0

 
75.4

Deferred Income Taxes – net of valuation allowance
47.9

 
65.1

Other Assets
149.6

 
142.5

TOTAL
$
3,777.9

 
$
3,776.5

LIABILITIES AND EQUITY
 

 
 

CURRENT LIABILITIES:
 

 
 

Short-term Borrowings
$
1.5

 
$
4.1

Accounts Payable
450.1

 
512.3

Dividends Payable
83.0

 
76.6

Accrued Expenses and Other Liabilities
198.1

 
203.7

Accrued Rebates and Returns
368.8

 
329.1

Deferred Income – current
20.9

 
34.3

Income Taxes – payable and deferred
71.2

 
46.4

Total Current Liabilities
1,193.6

 
1,206.5

Long-Term Debt
1,839.3

 
1,503.9

Deferred Income Taxes – noncurrent
10.3

 
12.4

Pension and Other Post-employment Liabilities
136.5

 
211.1

Other Liabilities – noncurrent
206.0

 
192.8

Total Liabilities
3,385.7

 
3,126.7

COMMITMENTS AND CONTINGENCIES


 


 
 
 
 
REDEEMABLE NONCONTROLLING INTEREST

 
66.0

 
 
 
 
EQUITY
 

 
 

Shareholders’ Equity
 

 
 

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

 
2.1

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

 
1,775.0

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

 
574.3

Noncontrolling Interests
40.7

 
9.5

Total Equity
392.2

 
583.8

TOTAL
$
3,777.9

 
$
3,776.5

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

3


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

 
$
(641.3
)
 
$
1,775.0

 
$
(362.6
)
 
$
(198.9
)
 
$
9.5

 
$
583.8

 
$
66.0

Stock-based Compensation Awards
 

 
43.5

 
(11.3
)
 
 
 
 

 
 

 
32.2

 
 

Treasury Stock Acquired
 

 
 

 
 

 
(437.0
)
 
 

 
 

 
(437.0
)
 
 

Distributions to Noncontrolling Interests
 

 
 

 
 

 
 

 
 

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

 
 

 
(250.0
)
 
 

 
 

 
 

 
(250.0
)
 
 

Net Earnings
 

 
 

 
525.5

 
 

 
 

 
(1.7
)
 
523.8

 
0.5

Redeemable Noncontrolling Interest Accretion
 

 
 

 
(12.8
)
 
 

 
 

 
 

 
(12.8
)
 
12.8

Other Comprehensive Income/(Loss)
 

 
0

 
 

 
 

 
(95.4
)
 
0.4

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

 
 
 
 
 
(10.8
)
 
38.6

 
53.3

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

 
$
(572.3
)
 
$
2,026.4

 
$
(799.6
)
 
$
(305.1
)
 
$
40.7

 
$
392.2

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of January 1, 2014
$
2.1

 
$
(721.5
)
 
$
1,432.3

 
$
(351.9
)
 
$
(69.2
)
 
$
8.7

 
$
300.5

 
$
49.7

Stock-based Compensation Awards
 
 
49.8

 
 

 
(7.9
)
 
 

 
 

 
41.9

 
 

Treasury Stock Acquired
 
 


 
 

 
(48.5
)
 
 

 
 

 
(48.5
)
 
 

Distributions to Noncontrolling Interests
 
 


 
 

 
 

 
 

 
(4.4
)
 
(4.4
)
 
 
Cash Dividends Declared
 
 


 
(227.9
)
 
 

 
 

 
 

 
(227.9
)
 
 

Net Earnings
 
 


 
561.4

 
 

 
 

 
10.2

 
571.6

 
0.6

Redeemable Noncontrolling Interest Accretion
 
 
 
 
(17.6
)
 
 
 
 
 
 
 
(17.6
)
 
17.6

Other Comprehensive Loss
 
 


 
 

 
 

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

 
$
(671.7
)
 
$
1,748.2

 
$
(408.3
)
 
$
(161.0
)
 
$
14.5

 
$
523.8

 
$
61.1

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

4


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

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

 
 

Net Earnings
$
524.3

 
$
572.2

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

 
 

Depreciation and Amortization
73.4

 
67.8

Other
63.1

 
30.2

Changes in Assets and Liabilities
34.7

 
(56.4
)
Payments for Settlement of Interest Rate Forward Swaps

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

 
564.6

CASH FLOWS FROM INVESTING ACTIVITIES:
 

 
 

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

 
0.2

Proceeds from/(Investment in) Other Companies

 
4.0

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

 
 

Proceeds from Short-term Borrowings
1.5

 
3.2

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

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

 
492.3

Long-term Revolver Borrowings
322.0

 

Stock-based Compensation related Proceeds and Excess Tax Benefits
24.0

 
27.3

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

Sale of Trading Securities
21.7

 

Purchase of Redeemable Shares
(24.2
)
 

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

 
144.4

CASH AND CASH EQUIVALENTS:
 

 
 

Beginning of Period
1,297.7

 
1,050.8

End of Period
$
1,363.5

 
$
1,195.2

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

5


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

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

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

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

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

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


6



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

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

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

 
 

 
 

 
 

Weighted-average shares outstanding
 
201.4

 
202.2

 
202.2

 
202.1

Net earnings attributable to shareholders
 
$
155.2

 
$
187.6

 
$
525.5

 
$
561.4

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

 
$
187.3

 
$
524.1

 
$
560.4

Net earnings attributable to shareholders per share
 
$
0.77

 
$
0.93

 
$
2.59

 
$
2.77

Diluted earnings per share:
 
 

 
 

 
 

 
 

Weighted-average shares outstanding
 
201.4

 
202.2

 
202.2

 
202.1

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

 
0.5

 
0.4

 
0.5

Weighted-average shares — diluted
 
201.7

 
202.7

 
202.6

 
202.6

Net earnings attributable to shareholders
 
$
155.2

 
$
187.6

 
$
525.5

 
$
561.4

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

 
$
187.3

 
$
524.1

 
$
560.4

Net earnings attributable to shareholders per share
 
$
0.77

 
$
0.92

 
$
2.59

 
$
2.77


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

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


7



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

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

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

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

 
$
561.5

 
$
154.2

 
$
186.2

 
$
1,571.0

 
$
1,729.8

 
$
542.1

 
$
623.4

Latin America
 
184.5

 
222.9

 
38.9

 
52.6

 
587.3

 
659.7

 
141.0

 
152.6

North America/Europe
 
316.2

 
306.3

 
101.3

 
66.8

 
946.0

 
925.6

 
264.9

 
200.9

Total reportable segments
 
977.5

 
1,090.7

 
294.4

 
305.6

 
3,104.3

 
3,315.1

 
948.0

 
976.9

Corporate and Other
 

 

 
(68.4
)
 
(63.0
)
 

 

 
(207.6
)
 
(198.2
)
Total
 
$
977.5

 
$
1,090.7

 
$
226.0

 
$
242.6

 
$
3,104.3

 
$
3,315.1

 
$
740.4

 
$
778.7


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

 
$
1.8

 
$
5.7

 
$
5.3

Performance share awards
 
(1.1
)
 
2.9

 
4.4

 
9.7

Restricted stock units
 
3.4

 
2.8

 
9.5

 
7.8

Total pre-tax stock-based compensation expense
 
$
4.1

 
$
7.5

 
$
19.6

 
$
22.8

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






8



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

 
$
20.24

Performance share awards
 
0.2

 
$
98.74

Restricted stock units
 
0.2

 
$
101.18

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

 
1.8
Performance share awards
 
$
2.7

 
0.9
Restricted stock units
 
$
28.8

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

 
$
0.8

 
$
0.3

 
$
0.2

 
$
2.1

 
$
3.6

 
$
0.9

 
$
0.6

Interest cost on projected benefit obligations
 
2.6

 
3.6

 
0.5

 
0.4

 
10.0

 
11.2

 
1.5

 
1.2

Amortization of transition cost
 

 

 

 

 

 
0.2

 

 

Expected return on plan assets
 
(3.4
)
 
(3.8
)
 

 

 
(10.3
)
 
(11.6
)
 

 

  Net periodic benefit cost
 
$
(0.2
)
 
$
0.6

 
$
0.8

 
$
0.6

 
$
1.8

 
$
3.4

 
$
2.4

 
$
1.8

Curtailments
 

 
(5.4
)
 

 

 

 
(5.4
)
 

 

Net Actuarial (Gains)/Losses
 
11.4

 
9.3

 

 

 
9.9

 
16.4

 

 

Total net periodic expense/(benefit)
 
$
11.2

 
$
4.5

 
$
0.8

 
$
0.6

 
$
11.7

 
$
14.4

 
$
2.4

 
$
1.8

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

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

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


9


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


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

 
$

 
$
12.0

 
$

Foreign exchange (gains)/losses - net
 
4.9

 
(8.2
)
 
6.8

 
(6.0
)
Severance and other costs
 
0.6

 

 
4.3

 

Gain on sale of investment
 

 

 

 
(4.0
)
Marketable securities (gain)/loss
 
0.8

 

 
(5.6
)
 

Pension curtailment gain
 

 
(5.4
)
 

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

 
$
(17.6
)
 
$
17.1

 
$
(21.1
)

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

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

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

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

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

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




10.                                      NET EARNINGS ATTRIBUTABLE TO NONCONTROLLING INTERESTS

10


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

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

 
$
286.9

Work in process
 
84.9

 
88.9

Raw and packaging materials
 
163.7

 
179.7

Inventories
 
$
518.6

 
$
555.5


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

 
$
12.5

Buildings and Improvements
 
722.5

 
719.8

Machinery, equipment and fixtures
 
761.8

 
736.6

Construction in progress
 
121.4

 
93.3

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

 
$
912.7


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

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

 
$
143.7

 
$
19.0

 
$
162.7

Translation adjustments

 
(15.7
)
 

 
(15.7
)
Balance as of September 30, 2015
$

 
$
128.0

 
$
19.0

 
$
147.0

 
 
 
 
 
 
 
 
Balance as of January 1, 2014
$

 
$
177.8

 
$
19.0

 
$
196.8

Translation adjustments

 
(26.3
)
 

 
(26.3
)
Balance as of September 30, 2014
$

 
$
151.5

 
$
19.0

 
$
170.5

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


11


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

 
 

 
 

 
 

 
 

 
 

Trademark(1) .
 
$
23.6

 
$

 
$
23.6

 
$
26.0

 
$

 
$
26.0

Non-compete agreement(1) .
 
4.7

 

 
4.7

 
5.1

 

 
5.1

Sub-total
 
28.3

 

 
28.3

 
31.1

 

 
31.1

Amortizable intangible assets:
 
 

 
 

 
 

 
 

 
 

 
 

Computer software
 
134.8

 
(99.5
)
 
35.3

 
130.3

 
(87.8
)
 
42.5

Distributor-customer relationship(1) .
 
2.2

 
(0.8
)
 
1.4

 
2.5

 
(0.7
)
 
1.8

Sub-total
 
137.0

 
(100.3
)
 
36.7

 
132.8

 
(88.5
)
 
44.3

Total other intangible assets
 
$
165.3

 
$
(100.3
)
 
$
65.0

 
$
163.9

 
$
(88.5
)
 
$
75.4

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

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

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

 
 

Revolver Borrowings
 
$
322.0

 
$

4.90% Notes due 2019
 
700.0

 
700.0

5.90% Notes due 2039
 
300.0

 
300.0

   4.60% Notes due 2044
 
500.0

 
500.0

Sub-total
 
1,822.0

 
1,500.0

Adjustments to Principal Value:
 
 

 
 

Unamortized basis adjustment for settled interest rate swaps
 
7.4

 
8.8

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

 
(0.9
)
Long-term debt
 
$
1,839.3

 
$
1,503.9


Revolver Borrowings

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


12


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

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

Long-Term Notes

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

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

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

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

 
$
20.6

 
$
49.7

 
$
53.2

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

 
$
18.3

 
$
42.5

 
$
46.0


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


13


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

 
$
13.0

Interest rate forward swaps
Fair Value
Other assets
 
13.7

 

Commodity contracts
Cash Flow
Prepaid expenses and other assets
 
0.7

 

Foreign exchange contracts
Cash Flow
Accrued expenses
 

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

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

 
$
11.1


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

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

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

Foreign Exchange Contracts

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

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








14


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

 
$
3.2

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

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

Balance—September 30
 
$
17.8

 
$
0.7

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

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

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

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

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

15


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

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

 
4.9
%
 
3.14
%
 
$
13.7



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

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

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

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

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

 
4.9

 
$
362.6

Stock-based compensation
 
0.5

 

 

Treasury stock purchases
 

 
5.7

 
437.0

Balance as of September 30, 2015
 
207.7

 
10.6

 
$
799.6

 
 
 
 
 
 
 
Balance as of January 1, 2014
 
206.8

 
4.8

 
$
351.9

Stock-based compensation
 
0.8

 
0.1

 
7.9

Treasury stock purchases
 

 
0.6

 
48.5

Balance as of September 30, 2014
 
207.6

 
5.5

 
$
408.3

 

16


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

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

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

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

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

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

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

 
$
(1.0
)
 
$
(69.2
)
 
$
1.9

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


 
(114.0
)
 


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


 
(2.8
)
 
0.2

 
(2.6
)
 


 


 
  Tax Benefit/(Expense)
 
0.3

 
24.5

 


 
24.8

 


 


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

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






17


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

 
$

 
$
(0.5
)
 
$
0.1

 
$
5.7

 
$
0.1

  Commodity Contracts
(0.6
)
 
$

 
0.2

 
$

 
(0.4