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EX-31.2 - EXHIBIT 31.2 - Mead Johnson Nutrition Coexhibit312-cfocertificatio.htm
EX-32.2 - EXHIBIT 32.2 - Mead Johnson Nutrition Coexhibit322-cfocertificatio.htm
EX-32.1 - EXHIBIT 32.1 - Mead Johnson Nutrition Coexhibit321-ceocertificatio.htm
EX-31.1 - EXHIBIT 31.1 - Mead Johnson Nutrition Coexhibit311-ceocertificatio.htm
EX-10.1 - EXHIBIT 10.1 - Mead Johnson Nutrition Coexhibit101-formofnonqualif.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 March 31, 2016
 
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 April 25, 2016, there were 186,663,922 shares of the registrant’s common stock outstanding.







MEAD JOHNSON NUTRITION COMPANY
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2016
 
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 March 31,
 
2016
 
2015
NET SALES
$
962.1

 
$
1,094.4

Cost of Products Sold
347.6

 
393.5

GROSS PROFIT
614.5

 
700.9

Operating Expenses:
 

 
 

Selling, General and Administrative
198.9

 
233.2

Advertising and Promotion
151.8

 
144.4

Research and Development
25.4

 
25.9

Other (Income)/Expenses—net
88.3

 
12.2

EARNINGS BEFORE INTEREST AND INCOME TAXES
150.1

 
285.2

 
 
 
 
Interest Expense—net
26.2

 
13.8

EARNINGS BEFORE INCOME TAXES
123.9

 
271.4

 
 
 
 
Provision for Income Taxes
47.2

 
64.3

NET EARNINGS
76.7

 
207.1

Less Net Earnings/(Loss) Attributable to Noncontrolling Interests
4.0

 
(0.3
)
NET EARNINGS ATTRIBUTABLE TO SHAREHOLDERS
$
72.7

 
$
207.4

Earnings per Share—Basic
 
 
 
Net Earnings Attributable to Shareholders
$
0.39

 
$
1.02

Earnings per Share—Diluted
 
 
 
Net Earnings Attributable to Shareholders
$
0.39

 
$
1.02

 
 
 
 
Weighted Average Shares—Basic
186.6

 
202.4

Weighted Average Shares—Diluted
186.7

 
202.9

Dividends Declared per Share
$
0.4125

 
$
0.4125

 
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 March 31,
 
 
2016
 
2015
NET EARNINGS
 
$
76.7

 
$
207.1

 
 
 
 
 
OTHER COMPREHENSIVE INCOME/(LOSS)
 
 
 
 
Foreign Currency Translation Adjustments
 
 
 
 
Translation Adjustments
 
5.9

 
(37.7
)
Tax Effect on Foreign Currency Translation Adjustments
 
0.2

 
0.2

Deferred Gains/(Losses) on Derivatives Qualifying as Hedges
 
 

 
 

Deferred Gains/(Losses) on Derivatives Qualifying as Hedges for the Period
 
(11.6
)
 
7.4

Reclassification Adjustment for (Gains)/Losses Included in Net Earnings
 
(5.5
)
 
(1.9
)
Tax Effect on Deferred Gains/(Losses) on Derivatives Qualifying as Hedges
 
3.8

 
(1.5
)
OTHER COMPREHENSIVE LOSS
 
(7.2
)
 
(33.5
)
 
 
 
 
 
COMPREHENSIVE INCOME
 
69.5

 
173.6

 
 
 
 
 
Less Comprehensive Income/(Loss) Attributable to Noncontrolling Interests
 
3.2

 
(0.9
)
 
 
 
 
 
COMPREHENSIVE INCOME ATTRIBUTABLE TO SHAREHOLDERS
 
$
66.3

 
$
174.5

 
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) 
 
March 31, 2016
 
December 31, 2015
ASSETS
 

 
 

CURRENT ASSETS:
 

 
 

Cash and Cash Equivalents
$
1,702.3

 
$
1,701.4

Receivables—net of allowances of $5.2 and $5.4, respectively
368.2

 
342.5

Inventories
486.9

 
484.9

Income Taxes Receivable
10.2

 
13.2

Prepaid Expenses and Other Assets
66.8

 
60.4

Total Current Assets
2,634.4

 
2,602.4

Property, Plant and Equipment – net
927.0

 
964.0

Goodwill
120.0

 
126.0

Other Intangible Assets – net
50.5

 
54.9

Deferred Income Taxes – net of valuation allowance
124.1

 
118.5

Other Assets
160.8

 
132.3

TOTAL
$
4,016.8

 
$
3,998.1

LIABILITIES AND EQUITY
 

 
 

CURRENT LIABILITIES:
 

 
 

Short-term Borrowings
$
3.1

 
$
3.0

Accounts Payable
473.9

 
481.5

Dividends Payable
77.7

 
77.8

Accrued Expenses
224.8

 
213.0

Accrued Rebates and Returns
378.1

 
376.8

Deferred Income
13.4

 
35.5

Income Taxes Payable
71.3

 
65.7

Total Current Liabilities
1,242.3

 
1,253.3

Long-Term Debt
3,012.6

 
2,981.0

Deferred Income Taxes
6.6

 
8.7

Pension and Other Post-employment Liabilities
138.3

 
132.4

Other Liabilities
209.4

 
215.2

Total Liabilities
4,609.2

 
4,590.6

COMMITMENTS AND CONTINGENCIES


 


 
 
 
 
EQUITY
 

 
 

Shareholders’ Equity
 

 
 

Common Stock, $0.01 par value: 3,000 authorized, 191.6 and 191.4 issued, respectively
1.9

 
1.9

Additional Paid-in/(Distributed) Capital
(552.8
)
 
(564.2
)
Retained Earnings
632.3

 
640.4

Treasury Stock – at cost
(362.6
)
 
(362.6
)
Accumulated Other Comprehensive Loss
(354.2
)
 
(347.8
)
Total Shareholders’ Equity/(Deficit)
(635.4
)
 
(632.3
)
Noncontrolling Interests
43.0

 
39.8

Total Equity/(Deficit)
(592.4
)
 
(592.5
)
TOTAL
$
4,016.8

 
$
3,998.1

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

3


MEAD JOHNSON NUTRITION COMPANY
 
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY/(DEFICIT)
(Dollars in millions, except per share data)
(UNAUDITED)
 
 
Common
Stock
 
Additional
Paid-in
(Distributed)
Capital
 
Retained
Earnings
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Loss
 
Non-
controlling
Interests
 
Total 
Equity/(Deficit)
 
Redeemable
Non-
controlling
Interest
Balance as of January 1, 2016
$
1.9

 
$
(564.2
)
 
$
640.4

 
$
(362.6
)
 
$
(347.8
)
 
$
39.8

 
$
(592.5
)
 
$

Stock-based Compensation Awards (includes tax shortfalls of $0.3)
 
 
11.4

 
(3.5
)
 
 
 
 

 
 

 
7.9

 
 

Cash Dividends Declared ($0.4125 per share)
 
 


 
(77.3
)
 
 

 
 

 
 

 
(77.3
)
 
 

Net Earnings
 
 


 
72.7

 
 

 
 

 
4.0

 
76.7

 
 
Other Comprehensive Loss
 
 


 
 

 
 

 
(6.4
)
 
(0.8
)
 
(7.2
)
 
 
Balance as of March 31, 2016
$
1.9

 
$
(552.8
)
 
$
632.3

 
$
(362.6
)
 
$
(354.2
)
 
$
43.0

 
$
(592.4
)
 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 (includes excess tax benefits of $3.0)
 

 
15.8

 
(7.2
)
 
 
 
 

 
 

 
8.6

 
 

Cash Dividends Declared ($0.4125 per share)
 

 
 

 
(83.8
)
 
 

 
 

 
 

 
(83.8
)
 
 
Net Earnings
 

 
 

 
207.4

 
 

 
 

 
(0.6
)
 
206.8

 
0.3

Redeemable Noncontrolling Interest Accretion
 

 
 

 
(6.1
)
 
 

 
 

 
 

 
(6.1
)
 
6.1

Other Comprehensive Loss
 

 
0

 
 
 
 

 
(32.9
)
 
 
 
(32.9
)
 
(0.6
)
Balance as of March 31, 2015
$
2.1


$
(625.5
)

$
1,885.3


$
(362.6
)

$
(231.8
)

$
8.9


$
676.4


$
71.8

 
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)

 
Three Months Ended March 31,
 
2016
 
2015
CASH FLOWS FROM OPERATING ACTIVITIES:
 

 
 

Net Earnings
$
76.7

 
$
207.1

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

 
 

Depreciation and Amortization
24.9

 
24.1

Impairment of Long-Lived Assets
45.9

 

Other
36.0

 
22.9

Changes in Assets and Liabilities
(23.4
)
 
22.1

Pension and Other Post-employment Benefit Contributions

 
(1.7
)
Net Cash Provided by Operating Activities
160.1

 
274.5

CASH FLOWS FROM INVESTING ACTIVITIES:
 

 
 

Payments for Capital Expenditures
(55.6
)
 
(46.1
)
Proceeds from Sale of Property, Plant and Equipment
0.1

 
0.2

Net Cash Used in Investing Activities
(55.5
)
 
(45.9
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 

 
 

Proceeds from Short-term Borrowings
0.4

 

Repayments of Short-term Borrowings
(0.1
)
 
(4.0
)
Debt Issuance Costs
(0.1
)
 

Payments of Dividends
(77.4
)
 
(76.0
)
Stock-based Compensation-related Proceeds and Excess Tax Benefits
3.7

 
6.9

Stock-based Compensation Tax Withholdings
(3.5
)
 
(7.2
)
Net Cash Used in Financing Activities
(77.0
)
 
(80.3
)
Effects of Changes in Exchange Rates on Cash and Cash Equivalents
(26.7
)
 
(12.1
)
NET INCREASE IN CASH AND CASH EQUIVALENTS
0.9

 
136.2

CASH AND CASH EQUIVALENTS:
 

 
 

Beginning of Period
1,701.4

 
1,297.7

End of Period
$
1,702.3

 
$
1,433.9

 
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” or the “Company”) manufactures, distributes and sells infant formula, 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 distributors and retailers and are promoted to healthcare professionals, and, where permitted by regulation and policy, directly to consumers. 

2.                                      ACCOUNTING POLICIES
 
Basis of Presentation—The Company prepared the accompanying unaudited 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 March 31, 2016 and December 31, 2015, and results of operations and cash flows for the three months ended March 31, 2016 and 2015. 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, 2015 (“2015 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 2015 Form 10-K.

Recently Issued Accounting Standards—In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This update simplifies several aspects of the accounting for share-based compensation arrangements, including accounting for income taxes, forfeitures and statutory tax withholding requirements as well as classification of related amounts on the statement of cash flows. The ASU is effective for fiscal years beginning after December 15, 2016, with early adoption permitted. The Company is currently evaluating the effect that the updated standard will have on its consolidated financial statements and related disclosures.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The updated standard requires most leases to be reflected on the balance sheet. It also aligns many of the underlying principles of the new lessor model with those of ASC No. 606, Revenue from Contracts with Customers. The updated standard becomes effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the effect that the updated standard will have on its consolidated financial statements and related disclosures.

In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory (Topic 330). This update simplifies the guidance on the subsequent measurement of inventory. GAAP currently requires an entity to measure inventory at the lower of cost or market. Previously, market could be replacement cost, net realizable value or net realizable value less an approximate normal profit margin. Under the new standard, inventory should be valued at the lower of cost or net realizable value. The ASU is effective for fiscal years beginning after December 15, 2016, with early adoption permitted. The Company is currently evaluating the effect, if any, that the updated standard will have on its consolidated financial statements and related disclosures.

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. The updated standard becomes effective for MJN in the first quarter of 2018. The Company is currently evaluating the impact that the updated standard will have on its consolidated financial statements and related disclosures.


6


3.                                      EARNINGS PER SHARE
 
The Company uses the two-class method to calculate 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 number of 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 March 31,
(Dollars and shares in millions, except per share data)
 
2016
 
2015
Basic earnings per share:
 
 

 
 

Weighted-average shares outstanding
 
186.6

 
202.4

Net earnings attributable to shareholders
 
$
72.7

 
$
207.4

Dividends and undistributed earnings attributable to unvested shares
 
(0.3
)
 
(0.4
)
Net earnings attributable to shareholders used for basic earnings per share calculation
 
$
72.4

 
$
207.0

Net earnings attributable to shareholders per share
 
$
0.39

 
$
1.02

Diluted earnings per share:
 
 

 
 

Weighted-average shares outstanding
 
186.6

 
202.4

Incremental shares outstanding assuming the exercise/vesting of dilutive stock options/performance shares
 
0.1

 
0.5

Weighted-average shares — diluted
 
186.7

 
202.9

Net earnings attributable to shareholders
 
$
72.7

 
$
207.4

Dividends and undistributed earnings attributable to unvested shares
 
(0.3
)
 
(0.4
)
Net earnings attributable to shareholders used for diluted earnings per share calculation
 
$
72.4

 
$
207.0

Net earnings attributable to shareholders per share
 
$
0.39

 
$
1.02


Potential shares outstanding from all stock-based awards were 3.6 million and 2.9 million as of March 31, 2016 and 2015, respectively, of which 3.5 million and 2.4 million were not included in the diluted earnings per share calculation for the three months ended March 31, 2016 and 2015, respectively.

4.                           INCOME TAXES
 
For the three months ended March 31, 2016 and 2015, the effective tax rate (“ETR”) was 38.1% and 23.7%, respectively. The ETR increase was primarily due to the Company’s Venezuelan subsidiary which incurred a remeasurement loss on its monetary assets and an impairment charge on its long-lived assets in 2016, both of which provided no tax benefit. See Note 17 for additional information.

The Company’s gross reserve for uncertain tax positions including penalties and interest, as of March 31, 2016 and December 31, 2015, was $182.8 million and $167.0 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 its two largest businesses in the United States and China. 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. BMS has an obligation to the Company related to uncertain tax positions, including penalties and interest, of $11.2 million and $11.1 million as of March 31, 2016 and December 31, 2015, 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

7


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, 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 March 31,
 
 
Net Sales
 
Earnings Before Interest and Income Taxes
(Dollars in millions)
 
2016
 
2015
 
2016
 
2015
Asia
 
$
500.6

 
$
581.0

 
$
169.1

 
$
231.5

Latin America
 
160.3

 
204.4

 
40.8

 
57.3

North America/Europe
 
301.2

 
309.0

 
82.0

 
78.3

Total reportable segments
 
962.1

 
1,094.4

 
291.9

 
367.1

Corporate and Other
 

 

 
(141.8
)
 
(81.9
)
Total
 
$
962.1

 
$
1,094.4

 
$
150.1

 
$
285.2


6. RESTRUCTURING
During the third quarter of 2015, the Company approved a plan to implement a business productivity program referred to as “Fuel for Growth,” which is anticipated to be implemented over a three-year period. Fuel for Growth is designed to improve operating efficiencies and reduce costs. Fuel for Growth is expected to improve profitability and create additional investments behind brand building and growth initiatives. Fuel for Growth focuses on the optimization of resources within various operating functions and certain third party costs across the business.

A summary of restructuring charges incurred during the three months ended March 31, 2016 and related reserves associated with Fuel for Growth as of March 31, 2016 is as follows:
Restructuring Charges
 
Three Months Ended
(Dollars in millions) 
 
March 31, 2016
Other (Income)/Expenses- net
 
 
Severance and Employee Benefits
 
$
8.2

Other Exist Costs
 
0.6

Asset Write-off
 
0.3

 
 
$
9.1


Restructuring Reserves
 
Severance and Employee Benefits(1)
 
Contract Termination(2)
 
Other Exist Costs
(Dollars in millions) 
 
 
 
 
 
 
Balance at December 31, 2015
 
$
9.5

 
$
10.3

 
$

Charges
 
8.2

 

 
0.6

Cash Payments
 
(6.9
)
 

 
(0.6
)
Balance at March 31, 2016
 
$
10.8

 
$
10.3

 
$

(1) Included in accrued expenses on the balance sheet.
(2) Included in accrued expenses and other liabilities on the balance sheet.

Restructuring charges are included in Corporate and Other, and the remainder of severance pay and benefits will be paid out during the next twelve months. The contract termination costs will be paid over a period from 2017 to 2019.





8



7.                                      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 March 31,
(Dollars in millions)
 
2016
 
2015
Stock options
 
$
2.1

 
$
1.9

Performance share awards
 
2.3

 
4.4

Restricted stock units
 
3.4

 
2.7

Total pre-tax stock-based compensation expense
 
$
7.8

 
$
9.0

Net tax benefit related to stock-based compensation expense
 
$
(2.7
)
 
$
(3.1
)
 
During the three months ended March 31, 2016, the Company granted the following awards: 
(Shares in millions)
 
Options/Shares Granted
 
Weighted-
Average Grant
Date Fair Value
Stock options
 
1.1

 
$
13.87

Performance share awards
 
0.2

 
$
70.48

Restricted stock units
 
0.3

 
$
73.76

 
As of March 31, 2016, 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
 
$
20.3

 
2.1
Performance share awards
 
10.6

 
1.5
Restricted stock units
 
45.5

 
2.8
 
 
$
76.4

 
 
 
8.                                    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 March 31,
 
 
Pension Benefits
 
Other Benefits
(Dollars in millions)
 
2016
 
2015
 
2016
 
2015
Service cost – benefits earned during the period
 
$
0.7

 
$
0.8

 
$
0.3

 
$
0.3

Interest cost on projected benefit obligations
 
3.0

 
3.7

 
0.4

 
0.5

Expected return on plan assets
 
(4.1
)
 
(3.5
)
 

 

  Net periodic benefit cost
 
$
(0.4
)
 
$
1.0

 
$
0.7

 
$
0.8

Net Actuarial (Gains)/Losses
 
6.1

 

 

 

Total net periodic expense/(benefit)
 
$
5.7

 
$
1.0

 
$
0.7

 
$
0.8

 
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. During the first quarter of 2016, aggregate lump sum settlements exceeded anticipated annual interest costs for 2016. As such, the Company remeasured its U.S. pension plan in the first quarter of 2016. During the three months ended March 31, 2016, the Company recognized a net actuarial loss of $6.1 million. During the three months ended March 31, 2015, there was no remeasurement, and therefore no actuarial gain or loss was recognized.

For the three months ended March 31, 2016, the Company made no contributions to pension plans. For the three months ended March 31, 2015, the Company made contributions of $1.7 million, primarily to U.S. pension plans.


9



9.                              OTHER (INCOME)/EXPENSES - NET
 
The components of other (income)/expenses - net were:
 
 
Three Months Ended March 31,
(Dollars in millions)
 
2016
 
2015
Venezuela long-lived asset impairments
 
$
45.9

 
$

Foreign exchange (gains)/losses - net
 
33.7

 
(2.8
)
Restructuring, severance and other related costs
 
9.3

 
2.6

Legal settlements and other - net
 
(0.6
)
 
12.4

Other (income)/expenses - net
 
$
88.3

 
$
12.2


During the three months ended March 31, 2016, the Company recognized an impairment charge of $45.9 million on long-lived assets of its Venezuelan subsidiary. See Note 17 for additional information.

Foreign exchange (gains)/losses - net for the three months ended March 31, 2016 included a $32.3 million loss related to the change in exchange rate used for remeasuring the monetary assets and liabilities of its Venezuelan subsidiary. See Note 17 for additional information. Foreign exchange (gains)/losses - net for the three months ended March 31, 2015 included a gain of $1.8 million as a result of the Company’s exchange of Bolivares Fuertes for U.S. dollars through a Venezuelan government exchange at a rate more favorable than the rate used to remeasure net monetary assets of its Venezuelan subsidiary.

During the three months ended March 31, 2016, restructuring, severance and other related costs included $9.1 million of restructuring costs in association with the Fuel for Growth program. See Note 6 for additional information. During the three months ended March 31, 2015, legal settlements and other - net primarily included an accrual made in connection with the SEC settlement disclosed by the Company in July 2015.

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

11.                               INVENTORIES
 
The major categories of inventories were as follows:
(Dollars in millions)
 
March 31, 2016
 
December 31, 2015
Finished goods
 
$
234.0

 
$
251.7

Work in process
 
73.7

 
70.3

Raw and packaging materials
 
179.2

 
162.9

Inventories
 
$
486.9

 
$
484.9


12.                               LONG-LIVED ASSETS
 
Property, Plant and Equipment - net

The major categories of property, plant and equipment were as follows: 
(Dollars in millions)
 
March 31, 2016
 
December 31, 2015
Land
 
$
8.3

 
$
12.3

Buildings and improvements
 
724.2

 
729.6

Machinery, equipment and fixtures
 
797.8

 
786.5

Construction in progress
 
102.2

 
123.6

Accumulated depreciation
 
(705.5
)
 
(688.0
)
Property, plant and equipment — net
 
$
927.0

 
$
964.0

                   


10


During the three months ended March 31, 2016, the Company recognized an impairment charge of $45.9 million on long-lived assets of its Venezuelan subsidiary. See Note 17 for additional information.

Other Intangible Assets - net
 
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. No events have occurred through March 31, 2016 that would require the Company to review intangible assets not subject to amortization for impairment subsequent to the review performed in the third quarter of 2015.
The gross carrying value and accumulated amortization by class of intangible assets as of March 31, 2016 and December 31, 2015 were as follows: 
 
 
As of March 31, 2016
 
As of December 31, 2015
(Dollars in millions)
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Book
Value
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Book
Value
Indefinite-lived intangible assets:
 
 

 
 

 
 

 
 

 
 

 
 

Trademark(1) .
 
$
15.3

 
$

 
$
15.3

 
$
16.9

 
$

 
$
16.9

Non-compete agreement(1) .
 
3.0

 

 
3.0

 
3.3

 

 
3.3

Sub-total
 
18.3

 

 
18.3

 
20.2

 

 
20.2

Amortizable intangible assets:
 
 

 
 

 
 

 
 

 
 

 
 

Computer software
 
138.1

 
(106.8
)
 
31.3

 
136.7

 
(103.0
)
 
33.7

Distributor-customer relationship(2).
 
1.5

 
(0.6
)
 
0.9

 
1.6

 
(0.6
)
 
1.0

Sub-total
 
139.6

 
(107.4
)
 
32.2

 
138.3

 
(103.6
)
 
34.7

Total other intangible assets
 
$
157.9

 
$
(107.4
)
 
$
50.5

 
$
158.5

 
$
(103.6
)
 
$
54.9

(1) Changes in balances result from currency translation.
(2) Changes in balances result from currency translation and amortization (10 year life).

Non-Cash Activity

The decrease in capital expenditures not paid was $38.4 million and $26.8 million for the three months ended March 31, 2016 and 2015, respectively.

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. No events have occurred through March 31, 2016 that would require the Company to review goodwill for impairment subsequent to the review performed in the third quarter of 2015.
For the three months ended March 31, 2016 and 2015, the change in the carrying amount of goodwill by reportable segment was as follows:
(Dollars in millions)
Asia
 

Latin America
 
North America/
Europe
 
Total
Balance as of January 1, 2016
$

 
$
107.0

 
$
19.0

 
$
126.0

Translation adjustments

 
(6.0
)
 

 
(6.0
)
Balance as of March 31, 2016
$

 
$
101.0

 
$
19.0

 
$
120.0

 
 
 
 
 
 
 
 
Balance as of January 1, 2015
$

 
$
143.7

 
$
19.0

 
$
162.7

Translation adjustments

 
(3.4
)
 

 
(3.4
)
Balance as of March 31, 2015
$

 
$
140.3

 
$
19.0

 
$
159.3

 
As of March 31, 2016, the Company had no accumulated impairment loss.


11


14.                               DEBT
 
Short-Term Borrowings
 
As of March 31, 2016 and December 31, 2015, the Company’s short-term borrowings were $3.1 million and $3.0 million, respectively, and consisted of borrowings made by the Company’s subsidiary in Argentina. The short-term borrowings in Argentina had a weighted-average interest rate of 39.0% as of March 31, 2016.

Revolving Credit Facility

As of March 31, 2016 and December 31, 2015, the Company had no borrowings from its $750.0 million revolving credit facility, and the Company had $750.0 million available at March 31, 2016. The revolving credit facility contains financial covenants and the Company was in compliance with these financial covenants as of March 31, 2016. Any borrowings under the facility are repayable at maturity in June 2019.

Long-Term Debt
 
The components of long-term debt were as follows: 
(Dollars in millions)
 
March 31, 2016
 
December 31, 2015
Principal Value:
 
 

 
 

4.900% Notes due 2019 (“2019 Notes”)
 
$
700.0

 
$
700.0

3.000% Notes due 2020 (“2020 Notes”)
 
750.0

 
750.0

4.125% Notes due 2025 (“2025 Notes”)
 
750.0

 
750.0

5.900% Notes due 2039 (“2039 Notes”)
 
300.0

 
300.0

4.600% Notes due 2044 (“2044 Notes”)
 
500.0

 
500.0

Sub-total
 
3,000.0

 
3,000.0

Adjustments to Principal Value:
 
 

 
 

Unamortized basis adjustment for settled interest rate swaps
 
6.6

 
7.0

Unamortized bond discount
 
(4.7
)
 
(4.8
)
Unamortized debt issuance costs
 
(21.1
)
 
(21.6
)
Fair-value interest rate swaps
 
31.8

 
0.4

Long-term debt
 
$
3,012.6

 
$
2,981.0


Using quoted prices in markets that are not active, long-term debt is classified as Level 2 in the fair value hierarchy. The Company determined that the fair value of its long-term debt was $3,201.3 million as of March 31, 2016.
 
The components of interest expense-net were as follows: 
 
 
Three Months Ended March 31,
(Dollars in millions)
 
2016
 
2015
Interest expense
 
$
29.0

 
$
16.4

Interest income
 
(2.8
)
 
(2.6
)
Interest expense-net
 
$
26.2

 
$
13.8


The increase in interest expense-net was driven by interest expense on the November 2015 issuance of the 2020 Notes and the 2025 Notes.

15.                               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. Using quoted prices in markets that are not active, these financial instruments are classified as Level 2 in the fair value hierarchy at March 31, 2016 and December 31, 2015, and there were no transfers between levels in the fair value hierarchy during the periods then ended.


12


The following table summarizes the fair value of the Company's outstanding derivatives:
(Dollars in millions)
Hedge Designation
Balance Sheet Location
 
March 31, 2016
 
December 31, 2015
Foreign exchange contracts
Cash Flow
Prepaid expenses and other assets
 
$
1.8

 
$
6.4

Interest rate swaps
Fair Value
Other assets
 
31.8

 
3.9

Foreign exchange contracts
Cash Flow
Accrued expenses
 
(11.2
)
 
(0.9
)
Interest rate swaps
Fair Value
Other liabilities
 

 
(3.5
)
Commodity contracts
Cash Flow
Accrued expenses
 
(0.1
)
 
(0.2
)
Net asset/(liability) of derivatives designated as hedging items
 
 
 
$
22.3

 
$
5.7


While certain derivatives are subject to netting arrangements with the Company’s counterparties, the Company does not offset derivative assets and liabilities within the condensed consolidated balance sheets presented herein.   
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 at hedge inception 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 March 31, 2016 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 March 31, 2016 and December 31, 2015, 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 months ended March 31, 2016 and 2015, 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 15 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. Ineffectiveness related to the Company’s foreign exchange hedges on earnings was $1.3 million and $0.8 million for the three months ended March 31, 2016 and 2015, respectively.

As of March 31, 2016, the notional value of the Company’s outstanding foreign exchange forward contracts designated as hedging instruments was $208.4 million, with a net fair value of $9.4 million in a net liability position. As of December 31, 2015, the notional value of the Company’s outstanding foreign exchange forward contracts designated as hedging instruments was $174.8 million, with a fair value of $5.5 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.
 





13


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: 
(Dollars in millions)
 
2016
 
2015
Balance—January 1
 
$
10.1

 
$
10.4

Derivatives qualifying as cash flow hedges deferred in other comprehensive income
 
(11.9
)
 
8.0

Derivatives qualifying as cash flow hedges reclassified to cost of products sold (effective portion)
 
(6.3
)
 
(2.4
)
Change in deferred taxes
 
4.2

 
(1.5
)
Balance—March 31
 
$
(3.9
)
 
$
14.5

 
At March 31, 2016, 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 loss was $3.9 million, $2.6 million of which is expected to be reclassified into earnings within the next 12 months.

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 March 31, 2016, the Company had commodity contracts outstanding which committed the Company to approximately $0.2 million of forecasted non-fat dry milk purchases. The ineffective portion recognized within other (income)/expenses - net was insignificant for the three months ended March 31, 2016 and 2015. Commodity derivatives qualifying as cash flow hedges deferred in accumulated other comprehensive loss at March 31, 2016 and December 31, 2015 was $0.5 million and $0.7 million, respectively.

 
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 months ended March 31, 2016 and 2015, the amortization of the settled swaps related to the 2019 Notes resulted in a $0.5 million reduction in interest expense. Because the Company redeemed the 3.50% Notes due in 2014 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 months ended March 31, 2016.
During the second quarter of 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 March 31, 2016, and the conversion of fixed to floating rate resulted in a reduction in interest expense of $2.0 million for the three months ended March 31, 2016. During the three months ended March 31, 2015, the conversion of fixed to floating rate resulted in a reduction in interest expense of $2.7 million.

In the fourth quarter of 2015, the Company entered into six interest rate swaps with multiple counterparties to mitigate interest rate exposure associated with the 2020 Notes. The swaps have an aggregate notional amount of $750.0 million of outstanding principal. This series of swaps effectively converts the $750.0 million of 2020 Notes from fixed to floating rate debt for the remainder of their term. These interest rate swaps were outstanding as of March 31, 2016, and the conversion of fixed to floating rate resulted in a reduction in interest expense of $2.1 million for the three months ended March 31, 2016. As the Company entered into the swaps during the fourth quarter of 2015, there was no impact to interest expense for the three months ended March 31, 2015.

14



The following table summarizes the interest rate swaps outstanding as of March 31, 2016. The interest rate swaps for the 2019 Notes have a hedge inception date of May 2014, and the interest rate swaps for the 2020 Notes have an inception date of November 2015. The expiration dates of the interest rate swaps are equal to the stated maturity dates of the underlying debt.
(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
%
 
$
16.5

Swaps associated with the 2020 Notes
 
$
750.0

 
3.0
%
 
1.38
%
 
$
15.3



See Note 14 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 $737.0 million and $510.1 million as of March 31, 2016 and December 31, 2015, 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 equivalent to par.

16.                               EQUITY
 
Changes in common shares and treasury stock were as follows: 
(Dollars and shares in millions)
 
Common Shares
Issued
 
Treasury Stock
 
Cost of Treasury
Stock
Balance as of January 1, 2016
 
191.4

 
4.9

 
$
362.6

Stock-based compensation
 
0.2

 

 

Balance as of March 31, 2016
 
191.6

 
4.9

 
$
362.6

 
 
 
 
 
 
 
Balance as of January 1, 2015
 
207.2

 
4.9

 
$
362.6

Stock-based compensation
 
0.3

 

 

Balance as of March 31, 2015
 
207.5

 
4.9

 
$
362.6

 
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”). The authorization does not have an expiration date. During the first quarter of 2016, the Company did not repurchase any shares pursuant to the 2013 Authorization.

On October 20, 2015, MJN’s board of directors approved a new share repurchase authorization of an additional $1,500.0 million of the Company’s common stock (the “2015 Authorization”). On October 22, 2015, the Company entered into an accelerated share repurchase agreement (the “ASR Agreement”) with Goldman, Sachs & Co. (“Goldman”) to repurchase $1,000.0 million (the “Repurchase Price”) of the Company’s common stock. Under the terms of the ASR Agreement, 10,725,552 shares of common stock were received and retired by the Company on October 27, 2015 (which shares are equivalent to 85% of the number of shares of Company common stock that could be purchased with an amount of cash equal to the Repurchase Price based on the closing price of the Company’s common stock on October 22, 2015). The payments to Goldman were recorded as a reduction to shareholders’ equity consisting of a $1,000.0 million reduction to retained earnings, reflecting the value of the 10,725,552 shares received upon initial settlement and a $150.0 million decrease reflecting the value of the stock held back by Goldman pending final settlement of the ASR Agreement. At final settlement, which will occur during the second quarter of 2016, Goldman may be required to deliver additional shares of common stock to the Company, or, under certain circumstances, the Company may be required to deliver shares of its common stock or may elect to make a cash payment to Goldman, based on the average of the daily volume-weighted average prices of the Company’s common stock during the term of the ASR Agreement, subject, in part, to certain maximum and minimum prices. The ASR Agreement was primarily funded by the 2020 Notes and 2025 Notes issuance. See Note 14 for discussion on the Company’s debt.

15



The Company had a redeemable noncontrolling interest related to its subsidiary in Argentina from March 2012 through June 2015. On June 30, 2015, the noncontrolling partner exercised its single trigger put option and MJN acquired an additional 10% of the outstanding capital stock of the local entity, thereby increasing MJN’s ownership interest to 90%. At that time, the remaining noncontrolling interest was recharacterized from redeemable noncontrolling interest outside of equity to noncontrolling interests within equity on the balance sheet.

Changes in accumulated other comprehensive loss by component were as follows:
(Dollars 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, 2016
 
$
(329.8
)
 
$
(17.2
)
 
$
(0.8
)
 
$
(347.8
)
 
$
(12.7
)
 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
  Deferred Gains/(Losses)
 
6.7

 
(11.6
)
 


 
(4.9
)
 
(0.8
)
(1
)


Reclassification Adjustment for (Gains)/Losses Included in Net Earnings
 
 
 
(5.5
)
 


 
(5.5
)
 
 
 
 
  Tax Benefit/(Expense)
 
0.2

 
3.8

 


 
4.0

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of March 31, 2016
 
$
(322.9
)
 
$
(30.5
)
 
$
(0.8
)
 
$
(354.2
)
 
$
(13.5
)
 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of January 1, 2015
 
$
(180.4
)
 
$
(17.8
)
 
$
(0.7
)
 
$
(198.9
)
 
$
1.9

 
$
(21.6
)
 
 
 
 
 
 
 
 
 
 
 
 
 
  Deferred Gains/(Losses)
 
(37.1
)
 
7.4

(2)


 
(29.7
)
 


(1
)
(0.6
)
Reclassification Adjustment for (Gains)/Losses Included in Net Earnings
 


 
(1.9
)
 


 
(1.9
)
 


 


  Tax Benefit/(Expense)
 
0.2

 
(1.5
)
 


 
(1.3
)
 


 


 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of March 31, 2015
 
$
(217.3
)
 
$
(13.8
)
 
$
(0.7
)
 
$
(231.8
)
 
$
1.9

 
$
(22.2
)
(1)Represents foreign currency translation adjustments.
(2) See Note 15 for additional information related to interest rate forward swaps.


Reclassification adjustments out of accumulated other comprehensive loss were as follows:
 
Three Months Ended March 31,
 
Affected Statement of Earnings Lines
 
 
 
 
(Dollars in millions)
Cost of Products Sold
 
Tax Benefit/(Expense)
 
Net
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
Deferred Gains/(Losses) on Derivatives Qualifying as Hedges:
 
 
 
 
 
 
 
 
 
 
 
  Forward Exchange Contracts
$
6.3

 
$
2.4

 
$
(0.6
)
 
$
(0.6
)
 
$
5.7

 
$
1.8

  Commodity Contracts
(0.4
)
 
(0.1
)
 
0.2

 
0.1

 
(0.2
)
 

  Interest Rate Forward Swap
(0.4
)
 
(0.4
)
 
0.1

 
0.1

 
(0.3
)
 
(0.3
)
Total Reclassifications
$
5.5

 
$
1.9

 
$
(0.3
)
 
$
(0.4
)
 
$
5.2

 
$
1.5

 
 
 
 
 
 
 
 
 
 
 
 

17.                               VENEZUELA MATTERS
Discussion of Venezuela Exchange Rates

In January 2014, the Venezuelan government enacted changes affecting the country’s currency exchange and other controls, and established a new foreign currency administration, the National Center for Foreign Commerce (“CENCOEX”). CENCOEX

16


assumed control of the sale and purchase of foreign currency in Venezuela, and established the official exchange rate (“Official Rate”) of 6.3 Bolivares Fuertes (“VEF”) to 1.0 U.S. dollar (“USD”). Additionally, the government expanded the types of transactions that may be subject to the weekly auction mechanism under the Complimentary Currency Administration System (“SICAD I”). For a period of time, the Venezuelan government announced plans for the Alternative Foreign Exchange System, also known as SICAD II, which was intended to more closely resemble a market-driven exchange.
    
In February 2015, the Venezuelan government combined the SICAD I and SICAD II (“SICAD”) exchange rate mechanisms and created a new market based SIMADI rate, which was based on supply and demand. The changes created a three tiered system. As of December 31, 2015, CENCOEX traded at 6.3 VEF to 1.0 USD, the SICAD auction markets traded at 13.5 VEF to 1.0 USD and the SIMADI traded at 198.7 VEF to 1.0 USD.

In March 2016, the Venezuelan government devalued its currency and reduced its existing three tiered system to a two tiered system by eliminating the intermediary SICAD rate. The CENCOEX Official Rate, which continues to be used for purchases of certain essential goods, was changed to 10.0 VEF to 1.0 USD and is now referred to as DIPRO. Additionally, the SIMADI rate was replaced by a new market based rate known as DICOM, which governs all transactions not covered by DIPRO. As of March 31, 2016, DIPRO traded at 10.0 VEF to 1.0 USD and DICOM traded at 272.9 VEF to 1.0 USD.

Effect on the Company’s Results

Due to the elimination of the SICAD rate in March 2016, the Company adopted the DICOM rate for purposes of remeasuring the monetary assets and liabilities of its Venezuela subsidiary effective March 10, 2016 because the Company believes the DICOM rate would now be used to settle future intercompany dividend remittances. The remeasurement impact of this adoption was a loss of $32.3 million, which was recognized as a component of other (income)/expenses - net.

As a result of the change in the Venezuelan exchange rates, the Company concluded that an impairment indicator existed at March 31, 2016 and evaluated the carrying value of the long-lived assets of its Venezuelan subsidiary for impairment, which includes administrative office space, land and a partially completed distribution warehouse facility. Based on this evaluation, the Company concluded that the carrying value of the long-lived assets was no longer recoverable and recorded an impairment charge of $45.9 million to write down the carrying value of the assets to their fair value, which was recognized during the three months ended March 31, 2016 as a component of other (income)/expenses - net. The fair value measurements were based on market quotes from local real estate broker service firms as well as internal assessments of the best information available about the local business conditions and the political environment, including the risks associated with the local currency that would be indicative of what the assets could be sold for and are considered to be Level 3 measurements.

For the three months ended March 31, 2016, the Venezuelan subsidiary’s net sales were negligible as a percentage of total Company net sales. For the three months ended March 31, 2015, the Venezuelan subsidiary’s net sales were 2.5% of total Company net sales. The Venezuelan subsidiary’s earnings were not a material component of MJN consolidated results during the three months ended March 31, 2016 and 2015.

Remaining Asset Exposures

The following sets forth selected information of our Venezuelan subsidiary as of March 31, 2016:    

Net Monetary Assets:    $1.1 million (300.2 million Venezuelan Bolivares; DICOM of 272.9 VEF to 1.0 USD)
Net Non-Monetary Assets:    $8.1 million (2,210.5 million Venezuelan Bolivares; based on a DICOM rate of 272.9 VEF to 1.0 USD)
MJN Intercompany Payables:    $52.0 million (U.S Dollar denominated)

The intercompany payable represents amounts owed by our Venezuelan subsidiary to our subsidiaries in Mexico and the U.S. for purchases of inventory.




17


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

The Company records accruals for contingencies when it is probable that a liability will be incurred and the loss can be reasonably estimated. Although the Company cannot predict with certainty the final resolution of lawsuits, investigations and claims asserted against the Company, MJN does not believe any currently pending legal proceeding to which the Company is a party will have a material impact on the Company’s business or financial condition, results of operations or cash flows.


18


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

Business Overview
 
We are a global leader in pediatric nutrition. We are committed to being the world’s leading nutrition company for infants and children and to helping nourish the world’s children for the best start in life. Our comprehensive product portfolio addresses a broad range of nutritional needs for infants, children and expectant and breastfeeding mothers. We have over 100 years of innovation experience during which we have developed or improved many breakthrough or category-defining products across our product portfolio. We operate in four geographies which represent our operating segments: Asia, North America, Latin America and Europe. Due to similarities between North America and Europe, we 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.

Executive Summary
 
Our financial performance for the quarter ended March 31, 2016 reflects diluted earnings per share of $0.39 compared to diluted earnings per share of $1.02 for the quarter ended March 31, 2015.  This period-over-period change is attributable to the following factors:
The following charges, which are not indicative of ongoing results:  foreign exchange losses and long-lived asset impairment charges in Venezuela ($78.2 million), a restructuring charge related to Fuel for Growth ($9.1 million) and pension mark-to-market re-measurement ($6.1 million);
Lower sales in Venezuela due to intentionally reduced shipments;
Lower sales in China due to fast growing consumer demand for imported products and a shift in preference toward digital and baby store purchasing channels in 2015.  As noted below, the Company has launched both imported and most recently super high premium product offerings in China in response to such demand; and
The impact of adverse foreign currency exchange across a broad band of markets.
Despite the year-on-year comparison, the Company made good progress in the quarter on key strategic initiatives and delivered sequential growth, as planned.  Highlights include:
Sequential improvement from the fourth quarter of 2015 in sales in Asia, Latin America and for the consolidated Company, excluding the impact of foreign exchange. Sales in North America/Europe were lower than the fourth quarter of 2015;
In China, we saw improved sales momentum from our fully imported product line which also drove channel expansion in the market. At the end of the first quarter of 2016, we announced the launch of a super high premium product;
Operational expense savings from Fuel for Growth which were reinvested in advertising and promotion; and
Earnings per share benefits following share repurchases made in the third and fourth quarters of 2015.



















19


Three Months Results of Operations

Below is a summary of comparative results of operations for the three months ended March 31, 2016 and 2015
 
 
Three Months Ended March 31,
 
 
 
% of Net Sales
(Dollars in millions, except per share data)
 
2016
 
2015
 
% Change
 
2016
 
2015
Net Sales
 
$
962.1

 
$
1,094.4

 
(12
)%
 
 
 
 
Gross Profit
 
614.5

 
700.9

 
(12
)%
 
64
%
 
64
 %
Operating Expenses
 
464.4

 
415.7

 
12
 %
 
48
%
 
38
 %
Earnings before Interest and Income Taxes
 
150.1

 
285.2

 
(47
)%
 
16
%
 
26
 %
Interest Expense—net
 
26.2

 
13.8

 
90
 %
 
3
%
 
1
 %
Earnings before Income Taxes
 
123.9

 
271.4

 
(54
)%
 
13
%
 
25
 %
Provision for Income Taxes
 
47.2

 
64.3

 
(27
)%
 
5
%
 
6
 %
    Effective Tax Rate
 
38.1
%
 
23.7
%
 
 
 
 
 
 
Net Earnings
 
76.7

 
207.1

 
(63
)%
 
8
%
 
19
 %
Less: Net Earnings/(Loss) Attributable to Noncontrolling Interests
 
4.0

 
(0.3
)
 
n/m

 
%
 
 %
Net Earnings Attributable to Shareholders
 
$
72.7

 
$
207.4

 
(65
)%
 
8
%
 
19
 %
Weighted-Average Common Shares— Diluted
 
186.7

 
202.9

 
 
 
 
 
 
Earnings per Common Share—Diluted
 
$
0.39

 
$
1.02

 
(62
)%
 
 
 
 

The results for the three months ended March 31, 2016 and 2015 include several items that affect the comparability of our results. These items include significant expenses/(income) not indicative of on-going results (“Specified Items”) and are listed in the table below.
 
 
Three Months Ended March 31,
(Dollars in millions)
 
2016
 
2015
Venezuela foreign exchange losses and long-lived asset impairments
 
$
78.2

 
$

Restructuring, severance and other related costs
 
9.9

 
2.3

Pension and other post-employment adjustments
 
6.1

 

Legal settlements and related costs
 

 
12.7

Specified Items expense/(income)
 
94.2

 
15.0

Tax matters and the income tax impact on Specified Items
 
(3.5
)
 
(0.2
)
  Specified Items attributable to Noncontrolling Interests
 
(0.1
)
 

Specified Items after taxes
 
$
90.6

 
$
14.8


For the three months ended March 31, 2016, Specified Items included foreign exchange losses and long-lived asset impairment charges in Venezuela (see “Item 1. Financial Statements - Note 17. Venezuela Matters” for additional information). Additionally, these Specified Items included a restructuring charge related to the Company’s ongoing Fuel for Growth initiative (see “Item 1. Financial Statements - Note 6. Restructuring” for further information). During the three months ended March 31, 2015, Specified Items included an accrual made in connection with the SEC settlement disclosed by the Company in July 2015.

When incurred, gains and losses related to the remeasurement of defined benefit pension and post-employment benefit plans are classified as Specified Items. Such remeasurement reflects changes in the pension assets and liabilities above what was estimated and included in periodic costs. Factors beyond our control such as changes in discount rates, market volatility and mortality assumptions drive the remeasurement amount. Additionally, the majority of our pension and post-employment plans are frozen, and therefore the benefit provided to such employees is not related to our underlying operations. During the three months ended March 31, 2016, the remeasurement loss was driven by decreases in the discount rate used to estimate interest costs associated with the U.S. pension plan liability. During the three months ended March 31, 2015, there was no pension plan remeasurement. See “Item 1. Financial Statements - Note 8. Pension and Other Post-Employment Benefit Plans” for further additional information.

Net Sales 

We recognize revenue net of various sales adjustments to arrive at net sales as reported on the statements of earnings. These adjustments are referred to as gross-to-net sales adjustments. The reconciliation of gross sales to net sales is as follows: 

20


 
 
Three Months Ended March 31,
 
% of Gross Sales
(Dollars in millions)
 
2016
 
2015
 
2016
 
2015
Gross Sales
 
$
1,293.5

 
$
1,414.8

 
100
%
 
100
%
Gross-to-Net Sales Adjustments
 
 

 
 

 
 

 
 

Women, Infant and Children (“WIC”) Rebates
 
183.2

 
193.6

 
14
%
 
14
%
Sales Discounts
 
85.7

 
63.8

 
7
%
 
4
%
Returns
 
20.9

 
21.7

 
2
%
 
2
%
Other (including Cash Discounts, Coupons)
 
41.6

 
41.3

 
3
%
 
3
%
Total Gross-to-Net Sales Adjustments
 
331.4

 
320.4

 
26
%
 
23
%
Total Net Sales
 
$
962.1

 
$
1,094.4

 
74
%
 
77
%

The total gross-to-net sales adjustments increased as a percentage of gross sales in 2016 compared to 2015, largely due to increased price-based promotional activity in China. WIC rebates declined in 2016 due to slightly lower participation rates in the U.S. WIC program. WIC participation guidelines are determined on a state-by-state basis and actual participation is driven by individual economic factors.

Net sales by reportable segments are shown in the table below:
 
 
Three Months Ended March 31,
 
 
 
% Change Due to
(Dollars in millions)
 
2016
 
2015
 
% Change
 
Volume
 
Price/Mix
 
Foreign
Exchange
Asia
 
$
500.6

 
$
581.0

 
(14
)%
 
(9
)%
 
%
 
(5
)%
Latin America
 
160.3

 
204.4

 
(22
)%
 
(13
)%
 
7
%
 
(16
)%
North America/Europe
 
301.2

 
309.0

 
(3
)%
 
(1
)%
 
%
 
(2
)%
Net Sales
 
$
962.1

 
$
1,094.4

 
(12
)%
 
(8
)%
 
2
%
 
(6
)%
 
Supplemental disclosure of net sales by product category are shown in the table below: 
 
 
Three Months Ended March 31,
 
 
(Dollars in millions)
 
2016
 
2015
 
% Change
Infant formula
 
$
562.9

 
$
639.2

 
(12
)%
Children’s nutrition
 
384.0

 
435.0

 
(12
)%
Other
 
15.2

 
20.2

 
(25
)%
Net Sales
 
$
962.1

 
$
1,094.4

 
(12
)%

Asia sales decreased 14% in 2016 compared to 2015 and accounted for 52% of total net sales. The region faced a different economic environment in the first quarter of 2016 than it did in the first quarter of 2015. During the 2015 fiscal year, China experienced a shift in consumer preference to digital and baby store purchasing channels and imported products, while the region as a whole saw increased price-based promotions and foreign currency depreciation. This led to lower sales in the first quarter of 2016 compared to a strong first quarter of 2015 as these factors did not impact results until after March 31, 2015 and gained momentum throughout the remainder of 2015. Despite this difficult quarter-over-quarter comparison, sequential growth in the region (excluding the impact of adverse foreign exchange) since the fourth quarter of 2015 indicates that some of the challenges noted above have begun to stabilize. During the second quarter of 2015, the Company launched a fully imported product line in China, available through multiple channels, which continued to show positive results in the first quarter of 2016. Higher prices on newly launched innovation, including our imported product in China, were offset by macroeconomic developments in combination with market share weakness and increased competitive price-based promotions in key markets.

Latin America sales decreased 22% in 2016 compared to 2015 and accounted for 17% of total net sales. Sales continued to be adversely impacted by the strengthening of the U.S. dollar compared to the first quarter of 2015, most notably in Mexico and Argentina. The first quarter of 2016 was impacted by a decision made by the Company in 2015 to slow shipments to distribution channels in Venezuela due to constraints placed by the Venezuelan government on the release of U.S. dollars to settle intercompany payables associated with product shipments. For the three months ended March 31, 2016, Venezuela sales were negligible as a percentage of our total segment sales. Excluding the impact of adverse foreign currency and sales in Venezuela, segment sales increased primarily due to price increases on premium products in Mexico and inflationary price increases in Argentina. Colombia and Central America also saw increased prices.

North America/Europe sales decreased 3% in 2016 compared to 2015 and accounted for 31% of total net sales. In the U.S., the Company has seen some market share pressure and increased competitive activities which adversely impacted sales. In

21


Canada, continued strong growth was driven by significant market share gains in both infant and children's products. Sales in Europe continue to increase driven by market share gains in a growing allergy business.

As discussed above, we continue to note exposure related to adverse foreign currency exchange rates similar to those highlighted in the Annual Report on Form 10-K for the year ended December 31, 2015. We remain cautious of the impact of such exchange rates on our net sales results because a substantial portion of our sales are outside of the U.S. and the U.S. dollar remains strong in relation to many relevant currencies. We have implemented certain measures to offset some of the impact that lower sales has on our margins. However, if the U.S. dollar continues to strengthen or does so at an accelerated pace, we may experience a greater impact to our business. Additionally, in March 2016, the Venezuelan government revised its currency exchange regime which resulted in a devaluation of our net monetary assets and triggered an impairment review of our long-lived assets within Venezuela. As discussed in “Item 1. Financial Statements - Note 17. Venezuela Matters,” during the three months ended March 31, 2016, the rate used by the Company for financial statement translation of our Venezuela business devalued significantly, such that any future sales will result in lower U.S. dollar equivalents.

Gross Profit
 
 
Three Months Ended March 31,
 
 
(Dollars in millions)
 
2016
 
2015
 
% Change
Net Sales
 
$
962.1

 
$
1,094.4

 
(12
)%
Cost of Products Sold
 
347.6

 
393.5

 
(12
)%
Gross Profit
 
$
614.5

 
$
700.9

 
(12
)%
Gross Margin Percentage
 
63.9
%
 
64.0
%
 
 


Gross margin percentage in 2016 was in-line with 2015. The benefit that the Company recognized from lower dairy costs was offset by increased manufacturing and other commodity costs.

Operating Expenses
 
 
Three Months Ended March 31,
 
 
 
% of Net Sales
(Dollars in millions)
 
2016
 
2015
 
% Change
 
2016
 
2015
Selling, General and Administrative
 
$
198.9

 
$
233.2

 
(15
)%