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EX-31.2 - EXHIBIT 31.2 - Mead Johnson Nutrition Coexhibit312-cfocertificatio.htm
EX-31.1 - EXHIBIT 31.1 - Mead Johnson Nutrition Coexhibit311-ceocertificatio.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, 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 o No x

As of October 24, 2016, there were 184,723,441 shares of the registrant’s common stock outstanding.







Mead Johnson Nutrition Company
Quarterly Report on Form 10-Q
For the Period Ended September 30, 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 September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
NET SALES
$
937.5

 
$
977.5

 
$
2,841.1

 
$
3,104.3

Cost of Products Sold
333.7

 
346.8

 
1,014.5

 
1,096.7

GROSS PROFIT
603.8

 
630.7

 
1,826.6

 
2,007.6

Operating Expenses:
 

 
 

 
 

 
 

Selling, General and Administrative
190.0

 
216.1

 
595.6

 
679.5

Advertising and Promotion
162.3

 
156.1

 
480.1

 
490.7

Research and Development
23.1

 
26.3

 
74.9

 
79.9

Other (Income)/Expenses—net
0.2

 
6.2

 
83.3

 
17.1

EARNINGS BEFORE INTEREST AND INCOME TAXES
228.2

 
226.0

 
592.7

 
740.4

 
 
 
 
 
 
 
 
Interest Expense—net
26.3

 
14.8

 
78.9

 
42.5

EARNINGS BEFORE INCOME TAXES
201.9

 
211.2

 
513.8

 
697.9

 
 
 
 
 
 
 
 
Provision for Income Taxes
53.3

 
56.6

 
132.7

 
173.6

NET EARNINGS
148.6

 
154.6

 
381.1

 
524.3

Less Net Earnings/(Loss) Attributable to Noncontrolling Interests
(0.7
)
 
(0.6
)
 
4.0

 
(1.2
)
NET EARNINGS ATTRIBUTABLE TO SHAREHOLDERS
$
149.3

 
$
155.2

 
$
377.1

 
$
525.5

Earnings per Share—Basic
 

 
 

 
 
 
 
Net Earnings Attributable to Shareholders
$
0.80

 
$
0.77

 
$
2.02

 
$
2.59

Earnings per Share—Diluted
 

 
 

 
 
 
 
Net Earnings Attributable to Shareholders
$
0.80

 
$
0.77

 
$
2.02

 
$
2.59

 
 
 
 
 
 
 
 
Weighted Average Shares—Basic
184.7

 
201.4

 
186.0

 
202.2

Weighted Average Shares—Diluted
185.0

 
201.7

 
186.3

 
202.6

Dividends Declared per Share
$
0.4125

 
$
0.4125

 
$
1.2375

 
$
1.2375

 
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,
 
2016
 
2015
 
2016
 
2015
NET EARNINGS
$
148.6

 
$
154.6

 
$
381.1

 
$
524.3

 
 
 
 
 
 
 
 
OTHER COMPREHENSIVE INCOME/(LOSS)
 

 
 

 
 
 
 
Foreign Currency Translation Adjustments
 

 
 

 
 
 
 
Translation Adjustments
(8.5
)
 
(55.5
)
 
(25.9
)
 
(105.1
)
Tax Effect on Foreign Currency Translation Adjustments
0.2

 
0.6

 
1.0

 
0.7

Deferred Gains/(Losses) on Derivatives Qualifying as Hedges
 

 
 

 
 

 
 

Deferred Gains/(Losses) on Derivatives Qualifying as Hedges for the Period
5.5

 
12.7

 
(0.6
)
 
22.0

Reclassification Adjustment for (Gains)/Losses Included in Net Earnings
1.6

 
(5.3
)
 
(5.0
)
 
(13.1
)
Tax Effect on Deferred Gains/(Losses) on Derivatives Qualifying as Hedges
(1.7
)
 
(1.9
)
 
0.4

 
(0.8
)
OTHER COMPREHENSIVE LOSS
(2.9
)
 
(49.4
)
 
(30.1
)
 
(96.3
)
 
 
 
 
 
 
 
 
COMPREHENSIVE INCOME
145.7

 
105.2

 
351.0

 
428.0

 
 
 
 
 
 
 
 
Less Comprehensive Income/(Loss) Attributable to Noncontrolling Interests
(0.7
)
 
(0.3
)
 
3.1

 
9.3

 
 
 
 
 
 
 
 
COMPREHENSIVE INCOME ATTRIBUTABLE TO SHAREHOLDERS
$
146.4

 
$
105.5

 
$
347.9

 
$
418.7

 
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, 2016
 
December 31, 2015
ASSETS
 

 
 

CURRENT ASSETS:
 

 
 

Cash and Cash Equivalents
$
1,843.2

 
$
1,701.4

Receivables—net of allowances of $4.9 and $5.4, respectively
397.2

 
342.5

Inventories
476.0

 
484.9

Income Taxes Receivable
29.2

 
13.2

Prepaid Expenses and Other Assets
60.1

 
60.4

Total Current Assets
2,805.7

 
2,602.4

Property, Plant and Equipment – net
929.6

 
964.0

Goodwill
112.8

 
126.0

Other Intangible Assets – net
47.2

 
54.9

Deferred Income Taxes – net of valuation allowance
131.4

 
118.5

Other Assets
167.0

 
132.3

TOTAL
$
4,193.7

 
$
3,998.1

LIABILITIES AND EQUITY
 

 
 

CURRENT LIABILITIES:
 

 
 

Short-term Borrowings
$
1.8

 
$
3.0

Accounts Payable
474.8

 
481.5

Dividends Payable
76.6

 
77.8

Accrued Expenses
230.9

 
213.0

Accrued Rebates and Returns
418.3

 
376.8

Deferred Income
19.0

 
35.5

Income Taxes Payable
28.6

 
65.7

Total Current Liabilities
1,250.0

 
1,253.3

Long-Term Debt
3,008.4

 
2,981.0

Deferred Income Taxes
5.6

 
8.7

Pension and Other Post-employment Liabilities
137.7

 
132.4

Other Liabilities
230.7

 
215.2

Total Liabilities
4,632.4

 
4,590.6

COMMITMENTS AND CONTINGENCIES


 


 
 
 
 
EQUITY
 

 
 

Shareholders’ Equity
 

 
 

Common Stock, $0.01 par value: 3,000 authorized, 189.7 and 191.4 issued, respectively
1.9

 
1.9

Additional Paid-in/(Distributed) Capital
(522.6
)
 
(564.2
)
Retained Earnings
782.2

 
640.4

Treasury Stock – at cost
(363.0
)
 
(362.6
)
Accumulated Other Comprehensive Loss
(377.0
)
 
(347.8
)
Total Shareholders’ Equity/(Deficit)
(478.5
)
 
(632.3
)
Noncontrolling Interests
39.8

 
39.8

Total Equity/(Deficit)
(438.7
)
 
(592.5
)
TOTAL
$
4,193.7

 
$
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 excess tax benefits of $0.1)

 
41.6

 
(4.2
)
 

 

 

 
37.4

 

Repurchase of Common Stock

 

 

 
(0.4
)
 

 

 
(0.4
)
 

Distributions to Noncontrolling Interests

 

 

 

 

 
(3.1
)
 
(3.1
)
 

Cash Dividends Declared ($1.2375 per share)

 

 
(231.1
)
 

 

 

 
(231.1
)
 

Net Earnings

 

 
377.1

 

 

 
4.0

 
381.1

 

Other Comprehensive Income/(Loss)

 

 

 

 
(29.2
)
 
(0.9
)
 
(30.1
)
 

Balance as of September 30, 2016
$
1.9

 
$
(522.6
)
 
$
782.2

 
$
(363.0
)
 
$
(377.0
)
 
$
39.8

 
$
(438.7
)
 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 $5.2)

 
43.5

 
(11.3
)
 

 

 

 
32.2

 

Repurchase of Common Stock

 

 

 
(437.0
)
 

 

 
(437.0
)
 

Distributions to Noncontrolling Interests

 

 

 

 

 
(6.1
)
 
(6.1
)
 
(0.8
)
Cash Dividends Declared ($1.2375 per share)

 

 
(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)

 

 

 

 
(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


$

 
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,
 
2016
 
2015
CASH FLOWS FROM OPERATING ACTIVITIES:
 

 
 

Net Earnings
$
381.1

 
$
524.3

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

 
 

Depreciation and Amortization
74.4

 
73.4

Impairment of Long-Lived Assets
45.9

 

Other
60.8

 
63.1

Changes in Assets and Liabilities
(34.5
)
 
34.7

Pension and Other Post-employment Benefit Contributions
(17.0
)
 
(86.6
)
Net Cash Provided by Operating Activities
510.7

 
608.9

CASH FLOWS FROM INVESTING ACTIVITIES:
 

 
 

Payments for Capital Expenditures
(110.2
)
 
(125.2
)
Proceeds from Sale of Property, Plant and Equipment
0.2

 
0.4

Net Cash Used in Investing Activities
(110.0
)
 
(124.8
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 

 
 

Proceeds from Short-term Borrowings

 
1.5

Repayments of Short-term Borrowings
(0.8
)
 
(4.0
)
Debt Issuance Costs
(0.1
)
 

Proceeds from Long-term Revolver Borrowings

 
322.0

Payments of Dividends
(232.3
)
 
(243.6
)
Stock-based Compensation related Proceeds and Excess Tax Benefits
15.0

 
24.0

Stock-based Compensation Tax Withholdings
(4.2
)
 
(11.3
)
Payments for Repurchase of Common Stock
(0.4
)
 
(437.0
)
Purchase of Noncontrolling Interest Redeemable Shares

 
(24.2
)
Purchase of Trading Securities

 
(16.2
)
Sale of Trading Securities

 
21.7

Distributions to Noncontrolling Interests
(3.1
)
 
(6.9
)
Net Cash Used in Financing Activities
(225.9
)
 
(374.0
)
Effects of Changes in Exchange Rates on Cash and Cash Equivalents
(33.0
)
 
(44.3
)
NET INCREASE IN CASH AND CASH EQUIVALENTS
141.8

 
65.8

CASH AND CASH EQUIVALENTS:
 

 
 

Beginning of Period
1,701.4

 
1,297.7

End of Period
$
1,843.2

 
$
1,363.5

 
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 September 30, 2016 and December 31, 2015, the results of operations for the three and nine months ended September 30, 2016 and 2015 and the cash flows for the nine months ended September 30, 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 August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This update is intended to reduce diversity in practice in the classification of certain cash receipts and payments in the statement of cash flows. The ASU is effective for fiscal years beginning after December 15, 2017, 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 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 that the updated standard will have on its consolidated financial statements and related disclosures.


6



In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The updated standard and related clarifications 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 effect that the updated standard will have on its consolidated financial statements and related disclosures.

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 September 30,
 
Nine Months Ended September 30,
(Dollars and shares in millions, except per share data)
 
2016
 
2015
 
2016
 
2015
Basic earnings per share:
 
 

 
 

 
 

 
 

Weighted-average shares outstanding
 
184.7

 
201.4

 
186.0

 
202.2

Net earnings attributable to shareholders
 
$
149.3

 
$
155.2

 
$
377.1

 
$
525.5

Dividends and undistributed earnings attributable to unvested shares
 
(0.6
)
 
(0.5
)
 
(1.4
)
 
(1.4
)
Net earnings attributable to shareholders used for basic earnings per share calculation
 
$
148.7

 
$
154.7

 
$
375.7

 
$
524.1

Net earnings attributable to shareholders per share
 
$
0.80

 
$
0.77

 
$
2.02

 
$
2.59

Diluted earnings per share:
 
 

 
 

 
 

 
 

Weighted-average shares outstanding
 
184.7

 
201.4

 
186.0

 
202.2

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

 
0.3

 
0.3

 
0.4

Weighted-average shares — diluted
 
185.0

 
201.7

 
186.3

 
202.6

Net earnings attributable to shareholders
 
$
149.3

 
$
155.2

 
$
377.1

 
$
525.5

Dividends and undistributed earnings attributable to unvested shares
 
(0.6
)
 
(0.5
)
 
(1.4
)
 
(1.4
)
Net earnings attributable to shareholders used for diluted earnings per share calculation
 
$
148.7

 
$
154.7

 
$
375.7

 
$
524.1

Net earnings attributable to shareholders per share
 
$
0.80

 
$
0.77

 
$
2.02

 
$
2.59


Potential shares outstanding from all stock-based awards were 3.4 million and 2.5 million as of September 30, 2016 and 2015, respectively, of which 3.1 million and 2.2 million were not included in the diluted earnings per share calculation for the three months ended September 30, 2016 and 2015, respectively, and 3.1 million and 2.1 million were not included in the diluted earnings per share calculation for the nine months ended September 30, 2016 and 2015, respectively.

4.                           INCOME TAXES
 
The Company’s effective tax rate (“ETR”) differs from the statutory tax rate predominantly due to the favorable impact of tax rulings and agreements in various foreign jurisdictions. The Company and the Dutch tax authorities previously agreed to the appropriate remuneration attributable to Dutch manufacturing activities through the year ending December 31, 2019. In addition, the Company negotiated a tax ruling effective from January 1, 2013, under which certain profits in Singapore are eligible for favorable taxation through the year ending December 31, 2027.

For the three and nine months ended September 30, 2016, the ETR was 26.4% and 25.8%, respectively, compared with 26.8% and 24.9% for the same periods in 2015. The ETR decrease for the three months ended September 30, 2016 was driven 6.5% by tax credits from the repatriation of foreign earnings to the United States, offset almost entirely by a change in valuation allowances associated with the Company’s Brazilian and Indonesian subsidiaries. The ETR increase for the nine months ended September 30, 2016 was driven 4.0% by 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 18

7



for additional information) and approximately 3% due to the establishment of a valuation allowance associated with the Company’s Brazilian subsidiary, offset 6.0% by tax credits from the repatriation of foreign earnings to the United States.

The Company’s gross reserve for uncertain tax positions including penalties and interest, as of September 30, 2016 and December 31, 2015, was $193.4 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. 

With respect to the United States examination, the Company is discussing various transfer pricing matters with the Internal Revenue Service as part of its routine audit. Within the next twelve months, it is reasonably possible that the Company’s reserve for uncertain tax positions could change following the closure of the audit. An estimate of the change cannot be made as of September 30, 2016.

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, 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
(Dollars in millions)
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
Asia
 
$
463.2

 
$
476.8

 
$
134.6

 
$
154.2

 
$
1,420.0

 
$
1,571.0

 
$
440.7

 
$
542.1

Latin America
 
160.6

 
184.5

 
40.1

 
38.9

 
487.4

 
587.3

 
117.1

 
141.0

North America/Europe
 
313.7

 
316.2

 
107.1

 
101.3

 
933.7

 
946.0

 
288.3

 
264.9

Total reportable segments
 
937.5

 
977.5

 
281.8

 
294.4

 
2,841.1

 
3,104.3

 
846.1

 
948.0

Corporate and Other
 

 

 
(53.6
)
 
(68.4
)
 

 

 
(253.4
)
 
(207.6
)
Total
 
$
937.5

 
$
977.5

 
$
228.2

 
$
226.0

 
$
2,841.1

 
$
3,104.3

 
$
592.7

 
$
740.4


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 recognized within other (income)/expenses - net during the three and nine months ended September 30, 2016 and related reserves associated with Fuel for Growth as of September 30, 2016 is as follows:

8


Restructuring Charges
 
Three Months Ended
Nine Months Ended
(Dollars in millions) 
 
September 30, 2016
September 30, 2016
Severance and Employee Benefits
 
$
7.2

$
16.7

Other Costs
 
0.1

1.4

Asset Write-off
 

0.3

 
 
$
7.3

$
18.4


Restructuring Reserves
 
Severance and Employee Benefits (1)
 
Contract Termination (2)
 
Other Costs (3)
(Dollars in millions) 
 
 
 
 
 
 
Balance as of December 31, 2015
 
$
9.5

 
$
10.3

 
$

Charges
 
16.7

 

 
1.4

Cash Payments
 
(14.4
)
 

 
(0.7
)
Balance as of September 30, 2016
 
$
11.8

 
$
10.3

 
$
0.7

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

Restructuring charges are included in Corporate and Other. Reserves related to severance and employee benefits and other costs will be paid out during the next twelve months. The contract termination costs will be paid over a period from 2017 to 2019.

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 September 30,
 
Nine Months Ended September 30,
(Dollars in millions)
 
2016
 
2015
 
2016
 
2015
Stock options
 
$
3.1

 
$
1.8

 
$
8.5

 
$
5.7

Performance share awards
 
1.7

 
(1.1
)
 
6.3

 
4.4

Restricted stock units
 
4.3

 
3.4

 
12.1

 
9.5

Total pre-tax stock-based compensation expense
 
$
9.1

 
$
4.1

 
$
26.9

 
$
19.6

Net tax benefit related to stock-based compensation expense
 
$
(3.1
)
 
$
(1.3
)
 
$
(9.1
)
 
$
(6.5
)
 
During the nine months ended September 30, 2016, the Company granted the following awards: 
(Shares in millions)
 
Options/Shares Granted
 
Weighted-
Average Grant
Date Fair Value
Stock options
 
1.1

 
$
13.88

Performance share awards
 
0.2

 
$
70.49

Restricted stock units
 
0.4

 
$
74.50

 
As of September 30, 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
 
$
13.2

 
1.8
Performance share awards
 
5.1

 
1.3
Restricted stock units
 
36.8

 
2.5
Total
 
$
55.1

 
 
 

9


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 September 30,
 
Nine Months Ended September 30,
 
 
Pension Benefits
 
Other Benefits
 
Pension Benefits
 
Other Benefits
(Dollars in millions)
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
Service cost – benefits earned during the period
 
$
0.7

 
$
0.6

 
$
0.3

 
$
0.3

 
$
2.1

 
$
2.1

 
$
0.8

 
$
0.9

Interest cost on projected benefit obligations
 
2.6

 
2.6

 
0.5

 
0.5

 
8.4

 
10.0

 
1.4

 
1.5

Expected return on plan assets
 
(4.2
)
 
(3.4
)
 

 

 
(12.4
)
 
(10.3
)
 

 

Amortization of transition cost
 
0.1

 

 

 

 
0.1

 

 

 

Amortization of prior service
 

 

 
(0.1
)
 

 

 

 
(0.1
)
 

  Net periodic benefit cost
 
$
(0.8
)
 
$
(0.2
)
 
$
0.7

 
$
0.8

 
$
(1.8
)
 
$
1.8

 
$
2.1

 
$
2.4

Net actuarial (gains)/losses
 
4.2

 
11.4

 

 

 
23.4

 
9.9

 

 

Total net periodic expense/(benefit)
 
$
3.4

 
$
11.2

 
$
0.7

 
$
0.8

 
$
21.6

 
$
11.7

 
$
2.1

 
$
2.4

 
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 annual interest costs for the respective year during the first quarter of 2016 and the second quarter of 2015, the Company remeasured its U.S. pension plan during the third quarter of both 2016 and 2015. During the three and nine months ended September 30, 2016, the Company recognized a net actuarial loss of $4.2 million and $23.4 million, respectively. The pension remeasurement loss was driven by decreases in the discount rate and lump sum interest rate associated with the U.S. pension plan liability. 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 nine months ended September 30, 2016 and 2015, the Company contributed $17.0 million and $86.6 million, respectively, primarily to U.S. pension plans.

A lump sum settlement window was offered to approximately 300 terminated, vested participants in the U.S. pension plan. This window expired on September 30, 2016 and approximately 40% of these participants accepted the offer. Payments to participants who accepted the offer are expected to be made in the fourth quarter of 2016. There will be no impact to the Company’s results of operations related to this settlement.


9.                              OTHER (INCOME)/EXPENSES - NET
 
The components of other (income)/expenses - net were:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(Dollars in millions)
 
2016
 
2015
 
2016
 
2015
Venezuela long-lived asset impairments
 
$

 
$

 
$
45.9

 
$

Foreign exchange (gains)/losses - net
 
(6.2
)
 
4.9

 
20.9

 
6.8

Restructuring, severance and other related costs
 
7.0

 
0.6

 
18.2

 
4.3

Marketable securities (gain)/loss
 

 
0.8

 

 
(5.6
)
Legal, settlements and other - net
 
(0.6
)
 
(0.1
)
 
(1.7
)
 
11.6

Other (income)/expenses - net
 
$
0.2

 
$
6.2

 
$
83.3

 
$
17.1


During the first quarter of 2016, the Company recognized impairment charges of $45.9 million on long-lived assets of its Venezuelan subsidiary. See Note 18 for additional information.

Foreign exchange (gains)/losses - net for the three and nine months ended September 30, 2016 included gains of $5.5 million and $9.9 million, respectively, related to the re-measurement of U.S. dollar denominated intercompany loans, payables, and royalties, and losses of $0.3 million and $32.8 million, respectively, related to the devaluation of the exchange rate used for remeasuring the monetary assets and liabilities of the Company’s Venezuelan subsidiary. See Note 18 for additional information. During the three and nine months ended September 30, 2016, restructuring, severance and other related costs included $7.3 million and $18.4 million, respectively, of restructuring costs associated with the Fuel for Growth program. See Note 6 for additional information.

10



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 fluctuation in fair value and foreign exchange. See Note 16 for additional information. During the nine months ended September 30, 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)
 
September 30, 2016
 
December 31, 2015
Finished goods
 
$
255.0

 
$
251.7

Work in process
 
78.9

 
70.3

Raw and packaging materials
 
142.1

 
162.9

Inventories
 
$
476.0

 
$
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)
 
September 30, 2016
 
December 31, 2015
Land
 
$
8.7

 
$
12.3

Buildings and improvements
 
741.9

 
729.6

Machinery, equipment and fixtures
 
823.2

 
786.5

Construction in progress
 
83.5

 
123.6

Accumulated depreciation
 
(727.7
)
 
(688.0
)
Property, plant and equipment — net
 
$
929.6

 
$
964.0

                   

During the first quarter of 2016, the Company recognized an impairment charge of $45.9 million on long-lived assets of its Venezuelan subsidiary. See Note 18 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. The Company completed its annual impairment test in the third quarter of 2016 and concluded that no impairment existed.
The gross carrying value and accumulated amortization by class of intangible assets as of September 30, 2016 and December 31, 2015 were as follows: 

11


 
 
As of September 30, 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) .
 
$
14.6

 
$

 
$
14.6

 
$
16.9

 
$

 
$
16.9

Non-compete agreement(1) .
 
2.9

 

 
2.9

 
3.3

 

 
3.3

Sub-total
 
17.5

 

 
17.5

 
20.2

 

 
20.2

Amortizable intangible assets:
 
 

 
 

 
 

 
 

 
 

 
 

Computer software
 
142.8

 
(113.9
)
 
28.9

 
136.7

 
(103.0
)
 
33.7

Distributor-customer relationship(2).
 
1.4

 
(0.6
)
 
0.8

 
1.6

 
(0.6
)
 
1.0

Sub-total
 
144.2

 
(114.5
)
 
29.7

 
138.3

 
(103.6
)
 
34.7

Total other intangible assets
 
$
161.7

 
$
(114.5
)
 
$
47.2

 
$
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
Capital expenditures and the cash outflow for capital expenditures were as follows:

(Dollars in millions)
 
Capital expenditures
 
Cash outflow for capital
expenditures
 
Increase/(Decrease) in capital expenditures not paid
Nine months ended September 30, 2016
 
$
78.8

 
$
110.2

 
$
(31.4
)
Nine months ended September 30, 2015
 
$
110.8

 
$
125.2

 
$
(14.4
)

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 2016 and concluded that no impairment existed.
For the nine months ended September 30, 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

 
(13.2
)
 

 
(13.2
)
Balance as of September 30, 2016
$

 
$
93.8

 
$
19.0

 
$
112.8

 
 
 
 
 
 
 
 
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

 
As of September 30, 2016, the Company had no accumulated impairment loss.

14.                               DEBT
 
Short-Term Borrowings
 
As of September 30, 2016 and December 31, 2015, the Company’s short-term borrowings were $1.8 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 33.0% as of September 30, 2016.


12


Revolving Credit Facility

As of September 30, 2016 and December 31, 2015, the Company had no borrowings against its $750.0 million revolving credit facility, and the Company had $750.0 million available at September 30, 2016. The revolving credit facility contains financial covenants and the Company was in compliance with these financial covenants as of September 30, 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)
 
September 30, 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
 
5.6

 
7.0

Unamortized bond discount
 
(4.4
)
 
(4.8
)
Unamortized debt issuance costs
 
(20.0
)
 
(21.6
)
Fair-value interest rate swaps
 
27.2

 
0.4

Long-term debt
 
$
3,008.4

 
$
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 $3,249.0 million as of September 30, 2016.
 
The components of interest expense-net were as follows: 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(Dollars in millions)
 
2016
 
2015
 
2016
 
2015
Interest expense
 
$
29.8

 
$
16.8

 
$
88.3

 
$
49.7

Interest income
 
(3.5
)
 
(2.0
)
 
(9.4
)
 
(7.2
)
Interest expense-net
 
$
26.3

 
$
14.8

 
$
78.9

 
$
42.5


The increase in interest expense-net was driven by interest expense on the November 2015 issuance of the 2020 Notes and the 2025 Notes, the proceeds of which were used primarily to fund an accelerated share repurchase agreement. See Note 17 for additional information.

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 September 30, 2016 and December 31, 2015, 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:
(Dollars in millions)
Hedge Designation
Balance Sheet Location
 
September 30, 2016
 
December 31, 2015
Foreign exchange contracts
Cash Flow
Prepaid expenses and other assets
 
$
5.9

 
$
6.4

Interest rate swaps
Fair Value
Other assets
 
27.2

 
3.9

Foreign exchange contracts
Cash Flow
Accrued expenses
 
(1.9
)
 
(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
 
 
 
$
31.1

 
$
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 September 30, 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 September 30, 2016 and December 31, 2015, the Company has cash flow hedges which qualify as hedges of forecasted cash flows, with the effective portion of changes in fair value 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, 2016, the Company discontinued cash flow hedge accounting for an insignificant number of hedges with a net impact to the income statement of less than $0.1 million as the underlying transaction was no longer probable. For the three and nine months ended September 30, 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, and ineffectiveness related to the Company’s foreign exchange hedges on earnings is recognized within other (income)/expenses - net. The ineffective portion of the hedges was $0.3 million and $0.7 million for the nine months ended September 30, 2016 and 2015, respectively.

As of September 30, 2016, the notional value of the Company’s outstanding foreign exchange forward contracts designated as hedging instruments was $229.7 million, with a net fair value of $4.0 million in a net asset 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 a net asset position. 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.
 
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: 

14


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

 
$
10.4

Derivatives qualifying as cash flow hedges deferred in other comprehensive income
 
(0.7
)
 
23.0

Derivatives qualifying as cash flow hedges reclassified to cost of products sold (effective portion)
 
(6.9
)
 
(15.4
)
Change in deferred taxes
 
1.1

 
(0.2
)
Balance—September 30
 
$
3.6

 
$
17.8

 
At September 30, 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 income was $3.6 million, $3.3 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 September 30, 2016, the Company had commodity contracts outstanding which committed the Company to approximately $1.1 million of forecasted non-fat dry milk purchases. The effective portion of commodity derivatives qualifying as cash flow hedges is deferred in accumulated other comprehensive income (loss), and the ineffective portion is recognized within other (income)/expenses - net. Both the effective and ineffective portions of the hedges were insignificant for the three and nine months ended September 30, 2016 and 2015
 
Fair Value Hedges
 
Interest Rate Swaps
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 September 30, 2016, and the conversion of fixed to floating rate resulted in a reduction in interest expense of $1.7 million and $5.7 million for the three and nine months ended September 30, 2016, respectively, compared to a $2.4 million and $7.6 million reduction for the same periods in 2015.

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 September 30, 2016, and the conversion of fixed to floating rate resulted in a reduction in interest expense of $1.6 million and $5.4 million for the three and nine months ended September 30, 2016, respectively. As the Company entered into the swaps during the fourth quarter of 2015, there was no impact to interest expense for the three and nine months ended September 30, 2015.

The following table summarizes the interest rate swaps outstanding as of September 30, 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
%
 
$
13.3

Swaps associated with the 2020 Notes
 
$
750.0

 
3.0
%
 
1.38
%
 
$
13.9


See Note 14 for additional information related to the Company’s long-term debt.


15


Other Financial Instruments
 
The Company does not hedge the interest rate risk associated with money market funds, which totaled $454.7 million and $510.1 million as of September 30, 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.                                      MARKETABLE SECURITIES
 
Debt securities have been classified as trading securities and are 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.

The Company sold its investments in debt securities during the third quarter of 2015 for $21.7 million. As of September 30, 2016 and December 31, 2015, the Company held no investments in debt securities. During the three months 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 fluctuation in fair value and foreign exchange.

17.                               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
 
0.4

 

 

Treasury stock purchases
 

 

 
0.4

Accelerated Share Repurchase
 
(2.1
)
 

 

Balance as of September 30, 2016
 
189.7

 
4.9

 
$
363.0

 
 
 
 
 
 
 
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

 
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.

Share Repurchase Authorizations and Accelerated Share Repurchase Agreement

In September 2013, the Company’s board of directors approved a share repurchase authorization of up to $500.0 million of the Company’s common stock (the “2013 Authorization”). The 2013 Authorization did not have an expiration date; however, during the third quarter of 2016, the Company repurchased $0.4 million of treasury shares which completed all purchases remaining under the 2013 Authorization. During the third quarter of 2015, the Company repurchased $437.0 million of treasury share under the 2013 Authorization.

In October 2015, the Company’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”). The 2015 Authorization does not have an expiration date.
On October 22, 2015, the Company entered into an accelerated share repurchase agreement (the “ASR Agreement”) with Goldman, Sachs & Co. (“Goldman”) pursuant to the 2015 Authorization to repurchase $1,000.0 million (the “Repurchase Price”) of our common stock. Under the terms of the ASR Agreement, the Company paid the Repurchase Price in advance in exchange for 10,725,552 shares of our common stock received by the Company on October 27, 2015 (which shares are equivalent to approximately 85% of the number of shares of our common stock that could have been purchased with an amount of cash equal to the Repurchase Price based on the closing price of our common stock on October 22, 2015). Upon final settlement of the ASR Agreement in June 2016, an additional 2,086,050 shares were delivered to the Company for no

16


additional consideration based generally on the daily volume-weighted average prices of our common stock over the term of the ASR Agreement. The total shares received and retired under the terms of the ASR Agreement was 12,811,602 shares with an average price paid per share of approximately $78.05. The par value of the retired shares were reflected as a reduction to common stock and the payment made to Goldman was recorded as a reduction to retained earnings within shareholders’ equity. During the third quarter of 2016, the Company did not repurchase any shares pursuant to the 2015 Authorization. As of September 30, 2016, the Company had $500.0 million remaining available under the 2015 Authorization.

The ASR Agreement was primarily funded by the issuance of the 2020 Notes and 2025 Notes. See Note 14 for discussion on the Company’s debt.

Redeemable Noncontrolling Interest

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%. 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.

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.

Accumulated Other Comprehensive Loss

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)
 
(24.9
)
 
(0.6
)
 

 
(25.5
)
 
(1.0
)
(1
)

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

 
(5.0
)
 

 
(5.0
)
 

 

  Tax Benefit/(Expense)
 
0.9

 
0.4

 

 
1.3

 
0.1

 

Balance as of September 30, 2016
 
$
(353.8
)
 
$
(22.4
)
 
$
(0.8
)
 
$
(377.0
)
 
$
(13.6
)
 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
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

(2)

 
(81.5
)
 
(0.3
)
(1
)
(1.3
)
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
)
 
$

(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:

17


 
Three Months Ended September 30,
 
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
$
(1.0
)