INCOME TAXES

12 Months Ended

Dec. 31, 2011

INCOME TAXES

INCOME TAXES

6. INCOME TAXES

        A new legal entity structure was created to facilitate the IPO. As such, adjustments have been made to the income tax accounts and equity (deficit) during the year ended December 31, 2009, to reflect the impact of this restructuring.

        In the pre-IPO period, with the exception of MJN-dedicated entities, the Company did not maintain taxes payable to or from BMS as the Company was deemed to settle the annual current tax balances immediately with the tax paying legal entities in the respective jurisdictions. These settlements were reflected as changes in equity (deficit).

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

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

        The components of earnings before income taxes were:

	Years Ended December 31,
(In millions)	2011		2010		2009
U.S.	$	153.7	$	108.4	$	134.0
Non-U.S.		568.2		525.9		453.0
	$	721.9	$	634.3	$	587.0

        The above amounts are categorized based on the location of the taxing authorities.

        The provision (benefit) for income taxes attributable to operations consisted of:

	Years Ended December 31,
(In millions)	2011			2010			2009
Current:
U.S. federal	$	81.3		$	38.0		$	79.2
U.S. states		10.7			4.0			13.5
Non-U.S.		144.2			114.9			104.2
		236.2			156.9			196.9
Deferred:
U.S. federal		(5.2	)		21.8			(12.2	)
U.S. states		(4.4	)		(0.8	)		(0.9	)
Non-U.S.		(23.7	)		(1.8	)		(7.4	)
		(33.3	)		19.2			(20.5	)
	$	202.9		$	176.1		$	176.4

        Effective Tax Rate—MJN's provision for income taxes in the years ended December 31, 2011, 2010 and 2009 was different from the amount computed by applying the statutory U.S. federal income tax rate to earnings before income taxes as a result of the following:

(Dollars in millions)	2011				2010				2009
U.S. statutory rate	$	252.6		35.0%	$	222.0		35.0%	$	205.4		35.0%
State and local taxes		3.7		0.5		1.5		0.2		8.9		1.5
Foreign income taxed at different rates		(42.1	)	(5.8)		(25.5	)	(4.0)		(49.9	)	(8.5)
Repatriation of foreign income		21.8		3.0		16.6		2.7		29.3		5.0
Tax rulings		(51.9	)	(7.2)		(42.1	)	(6.7)		(21.5	)	(3.7)
Other		18.8		2.6		3.6		0.6		4.2		0.8
Total provision / effective tax rate	$	202.9		28.1%	$	176.1		27.8%	$	176.4		30.1%

        The Company negotiated a tax ruling effective from January 1, 2010, under which certain profits in the Netherlands are exempt from taxation through the year ending December 31, 2019; this agreement succeeds a prior agreement which expired on December 31, 2009.

        Deferred Taxes and Valuation Allowance—The components of current and noncurrent deferred income tax assets (liabilities) were:

	December 31,
(In millions)	2011			2010
Deferred tax assets:
Accrued expenses	$	38.2		$	27.1
Accrued rebates and returns		43.9			43.9
Pension, post retirement and post employment liabilities		54.1			23.0
Stock-based compensation		16.3			8.6
Intercompany profit and other inventory items		39.6			24.6
Net operating loss carryforwards		14.2			4.6
Other—net		13.4			8.8
Valuation allowance		(7.0	)		(3.3	)
Total deferred tax assets		212.7			137.3
Deferred tax liabilities:
Depreciation and amortization		(64.5	)		(42.0	)
Un-repatriated earnings		(18.8	)		(26.6	)
Total deferred tax liabilities		(83.3	)		(68.6	)
Deferred tax assets—net	$	129.4		$	68.7
Recognized as:
Deferred income taxes—current—net	$	118.1		$	97.9
Deferred income taxes—noncurrent—net		11.3			(29.2	)
Total	$	129.4		$	68.7

        As of December 31, 2011, the Company had gross foreign net operating loss (NOL) carryforwards of $47.0 million. These NOL carryforwards will begin to expire in 2012. The valuation allowance recorded for these NOL carryforwards increased by $3.7 million during the year ended December 31, 2011. The valuation allowance relates to foreign NOL carryforwards incurred in the post-IPO period.

        Current and noncurrent deferred income tax assets totaled $129.4 million and $68.7 million as of December 31, 2011 and 2010, respectively. The change in the balance between periods is primarily driven by current year pension losses, increases in accrued expenses and an increase in the intercompany profit reserve.

        Income taxes paid were $174.3 million, $217.7 million, and $167.1 million in the years ended December 31, 2011, 2010, and 2009, respectively. The income taxes were paid to federal, state and foreign taxing authorities and pursuant to the terms of the tax matters agreement, as well as taxes deemed paid to BMS prior to the date of the IPO.

        As of December 31, 2011, U.S. taxes have not been provided on approximately $411 million of foreign earnings as these undistributed earnings have been or are expected to be permanently invested offshore. If, in the future, these earnings are repatriated to the U.S., or if such earnings are determined to be remitted in the foreseeable future, additional tax provisions would be required. If these earnings are repatriated to the United States in such a manner that the entire amount of foreign earnings would be subject to U.S. tax, and assuming there would be no U.S. tax relief for foreign taxes already paid, then such earnings would be taxed at the U.S. statutory tax rate in effect at the time of the repatriation, resulting in a U.S. tax liability of approximately $144 million estimated at the current U.S. tax rate of 35%. However, the Company has no plans to repatriate these foreign earnings.

        The Company's tax returns are routinely audited by federal, state and foreign tax authorities and these tax audits are at various stages of completion at any given time. The Internal Revenue Service has completed examinations of the Company's U.S. income tax filings through December 31, 2007. At December 31, 2011, tax years remaining open to examination outside the U.S. include 2003 and forward.

        A reconciliation of the Company's changes in gross uncertain tax positions is as follows:

	Years Ended December 31,
(In millions)	2011			2010			2009
Balance at January 1:	$	13.6		$	12.8		$	11.7
Increases based on current year tax positions		14.6			0.1			4.0
Decreases based on current year tax positions		—			—			—
Increases based on prior year tax positions		1.7			1.1			2.7
Decreases based on prior year tax positions		(0.3	)		(0.3	)		—
Settlements		(0.1	)		(0.4	)		—
Cumulative translation adjustment		0.2			0.3			—
Adjustments to opening balances pursuant to BMS tax matters agreement		—			—			(5.6	)
Balance at December 31:	$	29.7		$	13.6		$	12.8

        Uncertain tax positions have been recorded as part of other liabilities with no reversal expected in the next twelve months. The amounts of uncertain tax positions that, if recognized, would impact the effective tax rate were $10.9 million, $3.0 million, and $2.4 million as of December 31, 2011, 2010 and 2009, respectively.

        Interest and penalties related to uncertain tax positions were $8.2 million, $6.2 million, and $4.1 million for the years ended December 31, 2011, 2010 and 2009, respectively, and are included as a component of other liabilities. The Company classifies interest and penalties related to uncertain tax positions as a component of provision for income taxes. The amount of interest and penalties included as a component of provision for income taxes was $0.6 million and $0.3 million for the years ended December 31, 2011 and 2010, respectively. No interest or penalties were included as a component of provision for income taxes for the year ended December 31, 2009 pursuant to the Amended and Restated Tax Matters Agreement.

        The Company believes that it has provided adequately for all uncertain tax positions. Pursuant to the Amended and Restated Tax Matters Agreement, BMS maintains responsibility for all uncertain tax positions which may exist in the pre-IPO period or which may exist as a result of the IPO transaction. Pursuant to the Amended and Restated Tax Matters Agreement, the Company continues to maintain responsibility for all uncertain tax positions which may exist in the post-IPO period. It is reasonably possible that new issues may be raised by tax authorities and that these issues may require increases in the balance of uncertain tax positions.