424B4 1 d424b4.htm FINAL PROSPECTUS Final Prospectus
Table of Contents

Filed Pursuant to Rule 424(b)(4)
Registration No. 333-156298

PROSPECTUS

30,000,000 Shares

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MEAD JOHNSON NUTRITION COMPANY

Class A Common Stock

$24.00 per share

 

 

This is an initial public offering of shares of Class A common stock of Mead Johnson Nutrition Company. We are selling shares of our Class A common stock in this offering. We will use the net proceeds of this offering to satisfy certain of our obligations owed to BMS and its affiliates in connection with our corporate separation transactions. See “Use of Proceeds” and “Certain Relationships and Related Party Transactions”.

Prior to this offering, there has been no public market for shares of our Class A common stock. Our Class A common stock has been approved for listing on The New York Stock Exchange under the symbol “MJN”.

We have granted to the underwriters an option to purchase up to an additional 4,500,000 shares of Class A common stock to cover over-allotments at the initial public offering price, less underwriting discounts and commissions, within 30 days from the date of this prospectus.

Following this offering, we will have two classes of authorized common stock, Class A common stock and Class B common stock. The rights of the holders of the shares of Class A common stock and Class B common stock are identical, except with respect to voting and conversion. Each share of Class A common stock is entitled to one vote per share. Each share of Class B common stock is entitled to ten votes per share and is convertible at any time at the election of the holder into one share of Class A common stock. The Class B common stock also will automatically convert into shares of Class A common stock in certain circumstances.

 

 

Investing in our Class A common stock involves risks. See “Risk Factors” beginning on page 14.

 

 

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

 

     Per Share    Total

Initial public offering price

   $ 24.00    $ 720,000,000

Underwriting discounts and commissions

   $ 1.20    $ 36,000,000

Proceeds before expenses to us

   $ 22.80    $ 684,000,000

 

 

The underwriters expect to deliver the shares of Class A common stock to purchasers on or about February 17, 2009.

 

 

 

Citi       Morgan Stanley
Banc of America Securities LLC   Credit Suisse   J.P. Morgan

Lazard Capital Markets

   
  RBC Capital Markets
    UBS Investment Bank

 

 

 

The date of this prospectus is February 10, 2009

 

 


Table of Contents

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Table of Contents

TABLE OF CONTENTS

 

     Page

Prospectus Summary

   1

Risk Factors

   14

Forward-Looking Statements

   32

Use of Proceeds

   33

Dividend Policy

   34

Capitalization

   35

Dilution

   36

Selected Historical Financial and Operating Data

   37

Unaudited Pro Forma Condensed Financial Information

   39

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   47

Business

   68

Management

   89

Executive Compensation

   94

Certain Relationships and Related Party Transactions

   138

Security Ownership of Certain Beneficial Owners

   147

Description of Indebtedness

   148

Description of Capital Stock

   150

Shares Eligible for Future Sale

   155

Certain Material U.S. Federal Income and Estate Tax Considerations for Non-U.S. Stockholders

   157

Underwriting

   160

Legal Matters

   166

Experts

   166

Where You Can Find More Information

   166

Index to Financial Statements

   F-1

 

 

You should rely only on the information contained in this document or any free writing prospectus prepared by or on behalf of us. We have not authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell these securities. The information in this document may only be accurate on the date of this document.

 

 

Dealer Prospectus Delivery Obligation

Until March 7, 2009 (the 25th day after the date of this prospectus), all dealers that effect transactions in our common shares, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions.

 

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INDUSTRY AND MARKET DATA

Unless otherwise indicated, information contained in this prospectus concerning our industry and the markets in which we operate, including our general expectations and market position, market opportunity and non-U.S. market share is based on information from independent industry organizations, such as Euromonitor International (“Euromonitor”), The Nielsen Company (US), Inc. (“Nielsen”), ERC Group Ltd. (“ERC”) and other third-party sources (including industry publications, surveys and forecasts), and management estimates.

As used in this prospectus, “U.S. market share” means the share of the U.S. infant formula market estimated by us based on retail sales in the retail channels in which the Enfamil® family of brands competes using a combination of data from multiple sources, including Nielsen, our factory shipment data and our internally-developed, proprietary analytical modeling system. U.S. market share is estimated by us based on a geographically-balanced, nationally projectable survey of over 100,000 mothers of infants. This survey assesses the share of servings of infant formula from each manufacturer. In estimating U.S. market share, we include infant formula sold in grocery stores, drug stores, mass merchandisers, club stores and baby super centers. U.S. market share data is not publicly available industry information and is not used by our competitors in analyzing their businesses.

Unless otherwise indicated, management estimates are derived from publicly available information released by independent industry analysts and third-party sources, as well as data from our internal research, and are based on assumptions made by us based on such data and our knowledge of such industry and markets, which we believe to be reasonable. Our internal research has not been verified by any independent source, and we have not independently verified any third-party information. While we believe the market position, market opportunity and market share information included in this prospectus is generally reliable, such information is inherently imprecise. In addition, projections, assumptions and estimates of our future performance and the future performance of the industries in which we operate are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors”. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

Retail sales for purposes of market position and market share information are based on retail sales in U.S. dollars.

 

 

We use “Mead Johnson” and the Mead Johnson logo as our trademarks. Product names and company programs appearing throughout in italics are trademarks of Mead Johnson Nutrition Company, Bristol-Myers Squibb Company or their subsidiaries. This prospectus also may refer to brand names, trademarks, service marks and trade names of other companies and organizations, and these brand names, trademarks, service marks and trade names are the property of their respective owners.

 

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PROSPECTUS SUMMARY

This summary highlights certain information contained elsewhere in this prospectus. This summary is not complete and does not contain all of the information that you should consider before investing in our Class A common stock. You should read this entire prospectus carefully, including the risks discussed under “Risk Factors” and the financial statements and notes thereto included elsewhere in this prospectus. Some of the statements in this summary constitute forward-looking statements. See “Forward-Looking Statements”.

Except where the context otherwise requires or where otherwise indicated, (1) all references to “BMS” refer to Bristol-Myers Squibb Company, our parent company, and its consolidated subsidiaries, and (2) all references to “Mead Johnson”, “MJN”, the “company”, “we”, “us” and “our” refer to Mead Johnson Nutrition Company and its subsidiaries. Unless otherwise indicated, the information contained in this prospectus assumes the completion of the corporate separation transactions we expect to consummate with BMS as described in this prospectus under “Certain Relationships and Related Party Transactions” prior to the consummation of this offering and that the underwriters will not exercise their over-allotment option.

Our Company

We are a global leader in pediatric nutrition with approximately $2.6 billion in net sales for the year ended December 31, 2007. We are committed to creating trusted nutritional brands and products which help improve the health and development of infants and children around the world and provide them with the best start in life. Our Enfa family of brands, including Enfamil® infant formula, is the world’s leading brand franchise in pediatric nutrition, based on retail sales. Our comprehensive product portfolio addresses a broad range of nutritional needs for infants, children and expectant and nursing mothers. We have 100 years of innovation experience, during which we have developed or improved many breakthrough or industry-defining products across each of our product categories. Our singular focus on pediatric nutrition and our implementation of a business model that integrates nutritional science with health care and consumer marketing expertise differentiate us from many of our competitors.

We strive to be the world’s premier pediatric nutrition company. We market our portfolio of more than 70 products to mothers, health care professionals and retailers in more than 50 countries in North America, Europe, Asia and Latin America. Our two reportable segments are North America/Europe and Asia/Latin America, which comprised 52.4% and 47.6%, respectively, of our net sales for the year ended December 31, 2007. Our broad geographic footprint allows us to take advantage of both the largest and most rapidly growing markets.

The two principal product categories in which we operate are infant formula and children’s nutrition.

Infant Formula:

 

   

We are a global leader in infant formula, based on retail sales.

 

   

We are a leader in infant formula in the United States, the world’s largest infant formula market, based on U.S. market share.

 

   

We are a leader in infant formula in Asia, the fastest growing region in the pediatric nutrition industry, based on retail sales.

 

   

Infant formula products represented 67.2% and 69.4% of our net sales for the nine months ended September 30, 2008 and the year ended December 31, 2007, respectively, and our net sales of infant formula products have grown at a compound annual growth rate (“CAGR”) of 8.5% from 2004 to 2007.

 

 

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Children’s Nutrition:

 

   

We are a global leader in children’s nutrition, based on retail sales.

 

   

We are a leader in China, the Philippines, Thailand, Malaysia and Mexico, five of the six largest children’s nutrition markets, based on retail sales, accounting for approximately 56% of total children’s nutrition sales in 2007.

 

   

Children’s nutrition products represented 29.5% and 27.0% of our net sales for the nine months ended September 30, 2008 and the year ended December 31, 2007, respectively, and our net sales of children’s nutrition products have grown at a CAGR of 14.2% from 2004 to 2007.

Our business model integrates nutritional science with marketing expertise. During the course of our history, we have made several advances in pediatric nutrition, including the following:

 

 

 

In 2008, we launched Nutramigen AA®, an amino acid infant formula for infants with severe protein allergies;

 

 

 

In 2005, we developed and launched Enfamil Gentlease LIPIL® in the United States, a unique partially hydrolyzed, reduced-lactose infant formula that is better tolerated by infants with gas and fussiness;

 

 

 

In 2004, we added prebiotics to our Enfalac® infant formula in Asia, providing improved digestive health for infants;

 

 

 

In 2003, we introduced Nutramigen® with LGG in Europe, the first broadly distributed extensively hydrolyzed infant formula with a probiotic shown to reflect a reduced incidence of atopic dermatitis in infants allergic to protein in cow’s milk; and

 

 

 

In 2002, we developed Enfamil LIPIL®, the first infant formula in the United States to include the nutrients docasahexaenoic acid (“DHA”) and arachidonic acid (“ARA”), which are important nutrients in breast milk that have been clinically shown to promote infant brain and eye development.

We believe mothers and health care professionals associate the Mead Johnson name and the Enfa family of brands with quality, science-based pediatric nutrition products. We believe the strength of our brands allows us to create and maintain consumer loyalty across our product portfolio and stages of pediatric development. We market our products on a regional and local basis within a global strategic framework focused on both mothers and health care professionals. In general, a health care professional sales force and a retail sales organization are deployed in each of our regions. The health care professional sales force educates health care professionals about the benefits of our infant formula products with a focus on neonatal intensive care units, physicians and other health care professionals, hospital group purchasing organizations and other integrated buying organizations. The retail sales organization markets products to various retail channels including mass merchandisers, club stores, grocery stores, drug stores and, to a limited extent, convenience stores.

Sourcing, manufacturing and distribution are managed through our fully-integrated global supply chain. We operate in-house production facilities at seven different locations around the world and additionally utilize third-party manufacturers for a portion of our requirements. We generally enter into long-term supply agreements with our suppliers.

 

 

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Industry Overview

According to Euromonitor, the pediatric nutrition industry is an approximately $19 billion global industry that has grown at a CAGR of approximately 11% from 2002 to 2007. The industry is characterized by well-recognized global brands that generate strong loyalty among consumers and health care professionals. The pediatric nutrition industry is composed of two categories: infant formula and children’s nutrition. Infant formula products are designed to be the sole or primary source of nutrition in the first year of an infant’s life, while children’s nutrition products are nutritional supplements for children over the age of one, which are either milk-based or designed to be added to milk. Children’s nutrition products also are commonly referred to as growing-up milk or toddler milk. According to Euromonitor, infant formula comprised approximately 75% of global pediatric nutrition sales in 2007. The following diagram shows the categorization and size of the global pediatric nutrition industry:

Global Pediatric Nutrition Industry Categorization and Size

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Source: Euromonitor. Market data for 2007.

According to Euromonitor, infant formula is an approximately $14 billion category. Category sales have grown at a CAGR of approximately 9% from 2002 to 2007 and are projected to grow at a CAGR of approximately 7% from 2007 to 2012. Infant formula is further categorized into routine and specialty formulas. Routine formula, which comprises the majority of infant formula sold worldwide, is for use by full term, healthy infants and infants with minor intolerances such as mild spit-up, fussiness or gas. Specialty formula is for use by infants with special needs, including prematurity, milk protein intolerance and other allergies.

According to Euromonitor, children’s nutrition is an approximately $5 billion category. Category sales have grown at a CAGR of approximately 18% from 2002 to 2007 and are projected to grow at a CAGR of approximately 14% from 2007 to 2012. This robust growth is being driven by economic development, primarily in emerging markets, and by increased awareness and recognition of the benefits of nutritional supplements for young children.

We believe the growth of the global pediatric nutrition industry has been and will continue to be supported by several favorable trends, including:

 

   

favorable demographics;

 

   

increased consumer awareness of the importance of health and wellness;

 

   

enhanced nutritional insight;

 

   

innovation; and

 

   

consumer willingness to pay for premium and enhanced nutrition products.

 

 

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Our Competitive Strengths

We believe we possess the following competitive strengths that will enable us to expand our position as a global leader in pediatric nutrition:

 

   

Global Leader in Pediatric Nutrition. We are a global leader in pediatric nutrition with approximately $2.6 billion in net sales for the year ended December 31, 2007. We hold leading positions in both infant formula and children’s nutrition based on retail sales in 2007, according to data reported by Nielsen1 and ERC. Our global leadership position affords us several distinct competitive advantages, including manufacturing scale, the ability to support a world-class sales and marketing team and the ability to invest in research and development.

 

 

 

Powerful Global Brand Equity. The Mead Johnson name has been associated with science-based pediatric nutrition products for 100 years. Our Enfa family of brands, including Enfamil® infant formula, which accounted for 59.5% of our net sales for the year ended December 31, 2007, is the world’s leading brand franchise in pediatric nutrition. Total unaided awareness of Enfamil® exceeded 90% in the United States in 2007. We believe we also own some of the most well-known regional and local brands in the industry, including Alacta®, Cal-C-Tose®, ChocoMilk®, Lactum®, Nutramigen®, Poly-Vi-Sol® and Sustagen®.

 

   

Global Geographic Presence. We market our portfolio of more than 70 products to mothers, health care professionals and retailers in more than 50 countries in North America, Europe, Asia and Latin America. For the nine months ended September 30, 2008, 61.5% of our net sales were generated in countries outside of the United States. We believe our diversified operations are well-balanced between developed and emerging markets, positioning us to achieve growth in these regions.

 

 

 

Leader in New Product Innovation. We invest heavily in research and development to maintain our standing as one of the industry leaders in new product innovation. We have been a leader in innovation since 1911, when we launched Dextri-Maltose®, the first clinically-supported, physician-recommended infant formula. We believe our global research and development capabilities, together with the strength of our brands and our ability to convert advances in nutritional science into marketable products, will continue to allow us to develop new products and improve existing products across each of our product categories.

 

   

Extensive Product Portfolio. Together with the strength of our brands, our extensive line of pediatric nutrition products generates significant consumer retention and conversion advantages across both functional needs and stages of pediatric development. Our comprehensive infant product portfolio includes routine infant formulas, specialty infant formulas and solutions for infants with highly specialized medical needs. Our children’s nutrition products are tailored according to nutritional needs at each age. We also market a portfolio of products for expectant and nursing mothers that supplement the mothers’ diet.

 

   

Global Supply Chain Excellence and Continuous Improvements. We manage sourcing, manufacturing and distribution through a fully-integrated, global supply chain to optimize our costs and produce the highest quality products. We operate in-house production facilities at seven different locations around the world and additionally utilize third-party manufacturers for a percentage of our requirements. We outsource distribution to leverage third-party expertise to increase our efficiency and flexibility, contributing to higher operating margins than those of our primary competitors in 2007 and the first half of 2008, based on publicly available information.

 

 

1 As reported by Nielsen through its ScanTrack & Audit retail data service for the infant and children’s formula category for the years ended December 31, 2005, 2006 and 2007.

 

 

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Focus on Pediatric Nutrition. We believe our singular focus on pediatric nutrition differentiates us from many of our competitors, which are large, multinational packaged foods or pharmaceutical companies, whose pediatric nutrition products generally comprise a relatively minor proportion of their total product offerings and sales. We have 100 years of experience in integrating nutritional science with consumer marketing, allowing us to develop science-based clinically supported products that are precisely tailored to consumers’ needs.

 

   

Highly Dedicated Employees and Experienced Management Team. Our highly dedicated employees are committed to improving the health and development of infants and children around the world, while helping to build a growing business. Our senior management team has expertise from leading packaged goods, health care and other companies and is skilled in the integration of nutritional science and marketing.

 

   

Attractive Cash Flow Generation. Our strong operating margins and relatively low capital expenditures and working capital requirements result in attractive cash flow generation, allowing for reinvestment in research and development and additional growth opportunities for our company.

Our Growth Strategies

We are committed to improving the health and development of infants and children around the world. We intend to grow our business profitably through the following strategic initiatives:

 

   

Continued Leadership in Innovation. Innovation is fundamental to our long-term growth and profitability. From 2003 to 2007, we have increased our investment in research and development by 84% and established world-class professional capabilities in our research and development headquarters and regional labs. We believe our global research and development capabilities, the strength of our brands and our ability to convert advances in nutritional science into marketable product innovations will continue to allow us to successfully develop new products and improve existing products across each of our product categories.

 

   

Build on Our Leadership Position in Our Core Businesses. We intend to grow our business in our core countries and product categories by building loyal usage of our brands, introducing product innovations with speed and excellence and leveraging our expertise in marketing to consumers and health care professionals. In addition, we will continue to implement best practices and insights using our balance of local, regional and global capabilities to execute the most effective programs in all markets.

 

   

Expansion into New High-Growth Geographic Markets. Emerging markets in Asia, Eastern Europe and the Middle East are projected to experience rapid growth. We have established replicable business models and developed a deep understanding of business drivers in our core markets that we believe will lead to success in selected new high-growth markets.

 

   

Entering into Adjacent Product Categories. There is a global trend of mothers seeking increased nutritional reassurance, and mothers and health care professionals alike associate the Mead Johnson name and the Enfa family of brands with highest quality nutrition. We believe there are significant opportunities to extend our strong brand equities into select adjacent product categories through organic development, partnerships and acquisitions.

 

   

Continuously Improve Upon Our Manufacturing and Global Supply Chain Excellence. We seek to continuously improve the management and operation of our business by increasing efficiency in our operations at all stages of production, from sourcing of raw materials to manufacturing and distribution in local geographies.

 

 

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Corporate Separation Transactions

Currently, we are a wholly-owned subsidiary of BMS and all of our outstanding shares of common stock are owned by BMS. Following our separation and upon completion of this offering, we will be a stand-alone public company and BMS will own 58.5% of the outstanding shares of our Class A common stock, or 55.1% if the underwriters exercise their over-allotment option in full, and 100% of our outstanding Class B common stock, giving it 85.0% of the shares of our outstanding common stock and 97.8% of the combined voting power of our outstanding common stock, or 83.1% and 97.5%, respectively, if the underwriters exercise their over-allotment option in full. Any shares of Class A common stock issued pursuant to the underwriters’ over-allotment option will increase the total number of shares outstanding after this offering.

BMS has advised us that its current intent is to retain at least 80% of the equity interest in us following this offering for the foreseeable future. However, BMS is not subject to any contractual obligation to maintain its share ownership other than the 180-day lock-up period as described in “Underwriting”.

In connection with the separation, we and BMS will enter into an agreement that provides for the separation of our business from BMS. In addition, we and BMS will enter into a transitional services agreement governing the provision of various services on a transitional basis by BMS to us as well as by us to BMS and several ancillary agreements in connection with the separation. See “Certain Relationships and Related Party Transactions”.

The following are the principal steps in connection with the separation of our business from BMS:

 

   

BMS formed MJN Restructuring Holdco, Inc. (“MJN Restructuring”) on August 22, 2008.

 

   

On August 27, 2008, through a series of steps, Mead Johnson & Company, which directly or indirectly holds substantially all of our U.S. assets, became a wholly-owned subsidiary of MJN Restructuring.

 

   

During the fourth quarter of 2008, new entities were formed as direct and indirect subsidiaries of MJN Restructuring in numerous non-U.S. jurisdictions through which we intend to conduct our business in those jurisdictions in the future.

 

   

On December 17, 2008, BMS formed our company as an indirect wholly-owned subsidiary. We and MJN Restructuring have the same direct parent company, which is another wholly-owned subsidiary of BMS.

 

   

On January 31, 2009, we completed the transfers of our non-U.S. businesses from BMS to MJN Restructuring through a sale of shares, sale of assets and contributions of stock with some exceptions as described in more detail in “Certain Relationships and Related Party Transactions”. The consideration for these transfers was in the form of cash, which was contributed or otherwise provided by BMS, and the issuance by our subsidiaries of foreign intercompany notes (the “foreign intercompany notes”) to BMS subsidiaries related to the purchase of assets and shares in Indonesia, Malaysia, the Netherlands and the Philippines.

 

   

The terms of each of these foreign intercompany notes are substantially similar, except that the principal amount of each note varies by jurisdiction. The aggregate principal amount of the foreign intercompany notes is approximately $597 million and the rate of interest per annum on each note is equal to LIBOR plus 0.75%. These foreign intercompany notes will be repaid in full on the date this offering is completed with the net proceeds from this offering. These foreign intercompany notes will not be outstanding immediately following completion of this offering.

 

   

On the date of this prospectus, we merged with MJN Restructuring, with our company remaining the surviving entity. Therefore, we hold, following this step, all of the businesses acquired by MJN Restructuring.

 

 

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As described in greater detail below in “Unaudited Pro Forma Condensed Financial Information” and “Certain Relationships and Related Party Transactions”, the legal ownership of the principal assets or shares related to our business in Argentina, Brazil, China, India and Vietnam are not being transferred to us by BMS prior to or concurrently with this offering. In addition, in Mexico, all of our assets will be transferred, but our manufacturing facility and related assets in Mexico will be transferred to us by way of a capital lease. We and BMS are implementing alternative arrangements in these jurisdictions.

Specifically:

 

   

in Argentina, we expect to complete the business transfers within one year of this offering and we will market our products while BMS will distribute our products in this jurisdiction during the transitional period;

 

   

in Brazil, we expect to complete the business transfer within 24 to 36 months after this offering and we will market our products while BMS will distribute our products in this jurisdiction during the transitional period;

 

   

in India and Vietnam, we expect to complete the business transfers within one year of this offering and BMS will distribute our products in these jurisdictions during the transitional period; and

 

   

in China, we have entered into a services agreement with BMS that will result in the continued operation of our China business for our benefit.

In addition, while we have historically used BMS’s pharmaceutical operations to distribute our products in Europe, following this offering, we intend to distribute our products in Europe through third-party distributors with BMS acting as our initial distributor in most countries.

Historically BMS has provided, and, until our separation from BMS, BMS will continue to provide significant corporate and shared services functions to us. Our historical financial statements in this prospectus reflect an allocation of these costs within marketing, selling and administrative expenses. These allocations include costs related to corporate and shared services functions such as executive oversight, risk management, information technology, accounting, audit, legal, investor relations, human resources, tax, treasury, procurement and other services. Following our separation from BMS, we expect BMS to continue to provide us many of the services related to these functions on a transitional basis for a fee. The terms of these services and amounts to be paid by us to BMS are provided in the transitional services agreement described in “Certain Relationships and Related Party Transactions”. In addition to the cost for these services, we may incur other corporate and operational costs which may be greater than historically allocated levels, to replace some of these services or for additional services relating to our public reporting and compliance obligations as a public company.

Risks Affecting Our Business

Our business is subject to numerous risks, as discussed more fully in the section entitled “Risk Factors” beginning on page 14 of this prospectus. In particular:

 

   

Our success depends on sustaining the strength of our brands, particularly our Enfa family of brands.

 

   

We may experience liabilities or negative effects on our reputation as a result of real or perceived quality issues, including product recalls, injuries or other claims.

 

   

We are subject to numerous governmental regulations and it can be costly to comply with these regulations. Changes in governmental regulations could harm our business.

 

   

Commodity price increases will increase our operating costs and may reduce our profitability.

 

 

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Our profitability may suffer as a result of competition in our markets.

 

   

Economic downturns, such as the current downturn, could cause consumers to shift their purchases from our higher-priced premium products to lower-priced products, including private label or store brands, which could materially adversely affect our business.

 

   

Our operations face significant foreign currency exchange rate exposure, which could materially negatively impact our operating results.

 

   

BMS controls the direction of our business, and the concentrated ownership of our common stock and certain governance arrangements will prevent you and other stockholders from influencing significant decisions.

 

   

The transitional services that BMS will provide to us following the separation may not be sufficient to meet our needs, and we may have difficulty finding replacement services or be required to pay increased costs to replace these services after our transitional services agreement with BMS expires.

These risks, together with the other risks identified under “Risk Factors”, could prevent us from successfully executing our growth and business strategies and result in a material adverse effect on our business, prospects, financial condition, cash flows and results of operations.

Recent Developments

While we have not yet completed preparation of our financial statements for the year ended December 31, 2008, we estimate that our net sales for 2008 were $2,882 million.

BMS has previously disclosed and is expected to continue to disclose financial information about its Nutritionals segment, which consists of our business. BMS disclosure relating to its Nutritionals segment includes net sales, gross profit, gross margin and earnings before minority interest and income taxes. With the exception of net sales, this segment information does not reflect our results as a separate company and should not be relied upon as indicative of our performance. In particular, the BMS Nutritionals segment information does not include allocations of general corporate and shared service expenses, interest expense, intercompany foreign exchange hedges and other adjustments.

 

 

Principal Executive Offices

Mead Johnson Nutrition Company, a Delaware corporation, was incorporated on December 17, 2008. Upon completion of the corporate separation transactions described in this prospectus, Mead Johnson Nutrition Company will become a holding company for our pediatric nutrition operations. Our principal executive offices are located at 2400 West Lloyd Expressway, Evansville, Indiana 47721-0001, and our telephone number at this address is (812) 429-5000. Our website is www.meadjohnson.com. Information on, or accessible through, this website is not a part of, and is not incorporated into, this prospectus.

 

 

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About BMS

BMS (NYSE: BMY) is a global biopharmaceutical and related health care products company whose mission is to extend and enhance human life by providing the highest quality pharmaceutical and related health care products. BMS is engaged in the discovery, development, licensing, manufacturing, marketing, distribution and sale of pharmaceuticals and related health care products.

The Offering

 

Class A common stock offered by us

30,000,000 shares.

 

  34,500,000 shares if the underwriters exercise their over-allotment option in full.

Common stock to be outstanding immediately after this offering:

 

             Class A common stock

72,344,571 shares.

 

  76,844,571 shares if the underwriters exercise their over-allotment option in full.

 

             Class B common stock

127,655,429 shares.

 

  Any shares of Class A common stock issued pursuant to the underwriters’ over-allotment option will increase the total number of shares outstanding after this offering.

Common stock voting rights:

 

             Class A common stock

One vote per share, representing in aggregate approximately 5% of the combined voting power of our outstanding common stock.

 

             Class B common stock

Ten votes per share, representing in aggregate approximately 95% of the combined voting power of our outstanding common stock.

 

Use of proceeds

We estimate that our net proceeds from this offering, after deducting underwriting discounts, commissions and estimated offering expenses, will be approximately $679.7 million, or approximately $782.3 million if the underwriters exercise their over-allotment option in full. We intend to use the net proceeds from this offering to (i) repay in full approximately $597 million of the foreign intercompany notes payable to subsidiaries of BMS, and (ii) satisfy payables and other obligations owing to one or more subsidiaries of BMS that would have otherwise been forgiven or reduced in full. If the underwriters’ over-allotment option is exercised in full, we intend to use the net proceeds to repay in full an interest free obligation owed to a subsidiary of BMS that would have otherwise been forgiven or reduced in full. If the underwriters exercise their over-allotment

 

 

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option, we will receive no benefit from the issuance of any shares of Class A common stock subject to the over-allotment option. If the over-allotment option is not exercised or partly exercised, this obligation or the remaining part thereof will be forgiven or otherwise reduced in full.

 

Dividend policy

Following this offering, we intend to pay quarterly cash dividends on our Class A common stock and Class B common stock at an initial rate of $0.20 per share. We intend to pay the first dividend in July 2009, which will include the dividend for the second quarter and an amount on a pro-rated basis for the remainder of the first fiscal quarter ending after the closing of this offering and, thereafter, to pay dividends on a quarterly basis. The declaration and payment of future dividends to holders of our Class A common stock and Class B common stock will be at the discretion of our board of directors and will depend upon many factors, including our financial condition, earnings, legal requirements, restrictions in our debt agreements and other factors our board of directors deems relevant.

 

Risk factors

You should carefully read and consider the information set forth under “Risk Factors”, together with all of the other information set forth in this prospectus, before deciding to invest in shares of our Class A common stock.

 

The New York Stock Exchange listing

Our Class A common stock has been approved for listing on The New York Stock Exchange under the symbol “MJN”.

Unless we indicate otherwise, the number of shares to be outstanding after this offering:

 

   

excludes 25,000,000 shares of our Class A common stock reserved for issuance under our equity incentive plan, from which we expect to grant an aggregate of approximately 350,000 restricted stock units to certain of our employees in the form of founder’s awards upon the effectiveness of this offering, subject to the approval of our board of directors; and

 

   

assumes the underwriters will not exercise their over-allotment option.

 

 

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Summary Historical And Unaudited Pro Forma Condensed Financial Information

The following tables set forth our summary historical and unaudited pro forma condensed financial information for the periods indicated below. The summary historical statements of earnings data for the years ended December 31, 2005, 2006 and 2007, and the summary historical balance sheet data as of December 31, 2006 and 2007, have been derived from our audited financial statements, which are included elsewhere in this prospectus. The summary historical balance sheet data as of December 31, 2005, have been derived from our audited balance sheet as of December 31, 2005, which is not included in this prospectus. The summary historical financial information as of September 30, 2008 and for the nine months ended September 30, 2007 and 2008 are derived from our unaudited condensed interim financial statements, which are included elsewhere in this prospectus. The summary historical balance sheet data as of September 30, 2007, have been derived from our unaudited condensed balance sheet as of September 30, 2007, which is not included in this prospectus. We have prepared our unaudited condensed interim financial statements on the same basis as our audited financial statements and have included all adjustments, consisting of normal and recurring adjustments, that we consider necessary to present fairly our financial position and results of operations for the unaudited periods. The summary financial information as of and for the nine months ended September 30, 2008, is not necessarily indicative of the results that may be obtained for a full year.

Our financial statements include allocations of costs from certain corporate and shared services functions provided to us by BMS, including general corporate and shared services expenses. These allocations were made either based on specific identification or the proportionate percentage of our revenues and headcount to the respective total BMS revenues and headcount, and have been included in our financial statements.

The financial statements included in this prospectus may not necessarily reflect our financial position, results of operations and cash flows as if we had operated as a stand-alone public company during all periods presented. Accordingly, our historical results should not be relied upon as an indicator of our future performance.

The summary unaudited pro forma condensed financial information consists of unaudited pro forma condensed statements of earnings for the fiscal year ended December 31, 2007 and the nine months ended September 30, 2008, and an unaudited pro forma condensed balance sheet as of September 30, 2008. The summary unaudited pro forma condensed financial information has been derived by application of pro forma adjustments to our historical financial statements included elsewhere in this prospectus. The unaudited pro forma condensed statements of earnings give effect to the transactions described below as if they had occurred as of January 1, 2007. The unaudited pro forma condensed balance sheet gives effect to such transactions as if they had occurred as of September 30, 2008.

Our summary unaudited pro forma condensed financial information has been prepared to reflect adjustments to our historical financial information, which adjustments have been grouped into two categories: (1) those attributable to our separation activities from BMS and (2) those attributable to this offering, each as described in more detail elsewhere in this prospectus.

 

   

The adjustments attributable to our separation activities reflect changes that will take place to enable us to operate separately from BMS, including changes in our operating structure in Europe, Brazil and Mexico, the restructuring of related-party debt and the assumption of certain employee benefit liabilities.

 

   

The adjustments attributable to this offering reflect the formation of Mead Johnson Nutrition Company and the proposed related-party sales by BMS to us of the subsidiaries or the net assets that are primarily related to our pediatric nutrition business and the planned sale of shares of our Class A common stock.

 

 

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The pro forma adjustments are based upon available information and certain assumptions that we believe are reasonable. The summary unaudited pro forma condensed financial information is for illustrative and informational purposes only and does not purport to represent what the financial position or results of operations would have been if we had operated as a stand-alone public company during the periods presented or if the transactions described above had actually occurred as of the dates indicated, nor does it project the financial position at any future date or the results of operations or cash flows for any future period. The following table includes one financial measure, EBITDA, which we use in our business and is not calculated or presented in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”), but we believe such measure is useful to help investors understand our results of operations. We explain this measure and reconcile it to its most directly comparable financial measure calculated and presented in accordance with U.S. GAAP in note 1 to the following table.

The information presented below should be read in conjunction with “Use of Proceeds”, “Capitalization”, “Selected Historical Financial and Operating Data”, “Unaudited Pro Forma Condensed Financial Information”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “Certain Relationships and Related Party Transactions” and our audited and unaudited condensed financial statements and related notes, which are included elsewhere in this prospectus.

 

    Pro Forma     Historical  
    Nine Months
Ended
September 30,
    Fiscal Year
Ended
December 31,
    Nine Months Ended
September 30,
    Fiscal Year Ended
December 31,
 
    2008     2007     2008     2007     2007     2006     2005  
    (Dollars in millions, except per share data)  

Statement of Earnings Data:

             

Net Sales

  $ 2,140.9     $ 2,537.4     $ 2,174.7     $ 1,907.2     $ 2,576.4     $ 2,345.1     $ 2,201.8  

Expenses:

             

Costs of Products Sold

    800.8       936.9       812.0       693.8       948.7       850.4       781.3  

Marketing, Selling and Administrative

    456.6       565.6       465.0       424.1       575.2       504.3       464.5  

Advertising and Product Promotion

    271.0       314.4       276.3       235.2       318.5       290.6       284.4  

Research and Development

    51.1       66.7       51.5       48.5       67.2       62.0       50.8  

Interest Expense

    77.4       103.1       11.9       —         —         —         —    

Other Expenses—net

    9.1       3.6       9.1       7.1       3.6       3.0       2.4  
                                                       

Total Expenses

    1,666.0       1,990.3       1,625.8       1,408.7       1,913.2       1,710.3       1,583.4  

Earnings from Operations Before Minority Interest and Income Taxes

    474.9       547.1       548.9       498.5       663.2       634.8       618.4  

Provision for Income Taxes

    (167.3 )     (192.0 )     (195.1 )     (172.9 )     (233.6 )     (230.1 )     (222.5 )

Minority Interest Expense—net of tax

    (6.3 )     (7.1 )     (6.3 )     (5.6 )     (7.1 )     (6.5 )     (6.1 )
                                                       

Net Earnings

  $ 301.3     $ 348.0     $ 347.5     $ 320.0     $ 422.5     $ 398.2     $ 389.8  
                                                       

Earnings Per Share:

             

Basic

  $ 1.51     $ 1.74       N/A       N/A       N/A       N/A       N/A  

Diluted

  $ 1.51     $ 1.74       N/A       N/A       N/A       N/A       N/A  

Weighted-Average Shares Outstanding

             

Basic

    200,000,000       200,000,000       N/A       N/A       N/A       N/A       N/A  

Diluted

    200,000,000       200,000,000       N/A       N/A       N/A       N/A       N/A  

Other Operating Data:

             

EBITDA1

    N/A       N/A     $ 592.6     $ 529.8     $ 707.2     $ 677.9     $ 666.4  

Balance Sheet Data (end of period):

             

Working Capital (Deficit)2

  $ 378.9       N/A     $ (1,870.0 )   $ 69.5     $ 124.8     $ 94.2     $ (27.6 )

Total Assets

    1,621.6       N/A       1,372.0       1,268.0       1,301.9       1,204.3       1,123.5  

Total Liabilities

    2,546.2       N/A       2,718.1       691.9       664.1       611.9       658.7  

Minority Interest

    5.7       N/A       5.7       5.8       7.0       6.6       6.6  

Total Equity (Deficit)

    (930.3 )     N/A       (1,351.8 )     570.3       630.8       585.8       458.2  

 

 

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1

EBITDA is defined as net earnings before interest, taxes, depreciation and amortization. EBITDA is used by management as a performance measure for benchmarking against our peers and our competitors. We believe that EBITDA is useful to investors because it is frequently used by securities analysts, investors and other interested parties to evaluate companies in our industry. EBITDA is not a recognized term under U.S. GAAP. EBITDA should not be viewed in isolation and does not purport to be an alternative to net earnings as an indicator of operating performance or cash flows from operating activities as a measure of liquidity. EBITDA excludes some, but not all, items that affect net earnings, and these measures may vary among other companies. Therefore, EBITDA as presented below may not be comparable to similarly titled measures of other companies. The following is a reconciliation of net earnings to EBITDA:

 

     Nine Months Ended
September 30,
   Fiscal Year Ended December 31,
     2008    2007        2007            2006            2005    
                          
     (Dollars in millions)

Net Earnings

   $ 347.5    $ 320.0    $ 422.5    $ 398.2    $ 389.8

Interest Expense*

     11.9      0.1      0.1      0.1      0.3

Income Tax Expense

     195.1      172.9      233.6      230.1      222.5

Depreciation and Amortization

     38.1      36.8      51.0      49.5      53.8
                                  

EBITDA

   $ 592.6    $ 529.8    $ 707.2    $ 677.9    $ 666.4
                                  

 

  * Interest expense for the years ended December 31, 2007, 2006 and 2005 was included as part of Other Expenses—net.

2

Working Capital (Deficit) represents current assets less current liabilities. Working Capital (Deficit) as of September 30, 2008 includes a $2,000 million intercompany note issued as a dividend to E.R. Squibb & Sons, L.L.C., a wholly-owned subsidiary of BMS on August 26, 2008. The outstanding principal is payable on demand; therefore, this note has been classified as a current liability on our balance sheet. This note is being reduced and restructured into three notes as part of the separation transactions. At closing, these restructured notes will be a long-term liability. See “Unaudited Pro Forma Condensed Financial Information” and “Description of Indebtedness”.

 

 

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RISK FACTORS

An investment in our Class A common stock involves various risks. Before making an investment in our Class A common stock, you should carefully consider the following risks, as well as the other information contained in this prospectus. The risks described below are those which we believe are currently the material risks we face, but are not the only risks facing us and our business prospects. Any of the risk factors described below and elsewhere in this prospectus could materially adversely affect our business, prospects, financial condition, cash flows and results of operations. Additional risks and uncertainties not presently known to us or that we currently deem immaterial could materially adversely affect our business, prospects, financial condition, cash flows and results of operations in the future. As a result, the trading price of our Class A common stock could decline and you may lose part or all of your investment.

Risks Related to Our Business

Our success depends on sustaining the strength of our brands, particularly our Enfa family of brands.

The Enfa family of brands accounted for 59.5% of our net sales for the year ended December 31, 2007. The willingness of consumers to purchase our products depends upon our ability to offer attractive brand value propositions. This in turn depends in part on consumers attributing a higher value to our products than to alternatives. If the difference in the value attributed to our products as compared to those of our competitors narrows, or if there is a perception of such a narrowing, consumers may choose not to buy our products. If we fail to promote and maintain the brand equity of our products across each of our markets, then consumer perception of our products’ nutritional quality may be diminished and our business could be materially adversely affected. Our ability to maintain or improve our brand value propositions will impact whether these circumstances will result in decreased market share and profitability.

We may experience liabilities or negative effects on our reputation as a result of real or perceived quality issues, including product recalls, injuries or other claims.

Whether real or perceived, contamination, spoilage or other adulteration, product misbranding or product tampering could require us to recall products. From time to time we have experienced recalls of our products. While such recalls have not been material to our business on a global level in the past, we cannot assure you that such material product recalls will not occur in the future. We may also be subject to liability if our products or operations violate or are alleged to violate applicable laws or regulations or in the event our products cause, or are alleged to cause, injury, illness or death.

Powder milk products are not sterile. A substantial portion of our products must be prepared and maintained according to label instruction to retain their flavor and nutritional value and avoid contamination or deterioration. Depending on the specific type of product, a risk of contamination or deterioration may exist at each stage of the production cycle, including the purchase and delivery of raw food materials, the processing and packaging of food products and upon use and handling by health care professionals, hospital personnel and consumers. In the event that certain of our products are found, or are alleged, to have suffered contamination or deterioration, whether or not such products were under our control, our brand reputation and business could be materially adversely affected.

Whether real or perceived, reports or allegations of inadequate product quality control with respect to other manufacturers of pediatric nutrition products also could adversely impact sales of our products. For example, although the U.S. Food and Drug Administration (the “U.S. FDA”) currently permits the use of bisphenol-A (“BPA”) in food packaging materials, including polycarbonate baby bottles and some of our infant formula packaging, recent public reports and allegations regarding the potential health hazards of BPA, and several lawsuits against baby bottle manufacturers and infant formula manufacturers (including us) related to BPA content, could contribute to a perceived safety risk about our products and adversely impact sales or otherwise disrupt our business. Further, the U.S. FDA or other regulatory authorities could prohibit the use of BPA in the

 

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future. In addition, in November 2008 and December 2008, the U.S. FDA released test results that identified extremely low trace levels of melamine and cyanuric acid in infant formula produced by U.S. manufacturers. The U.S. FDA has found no melamine in our products and only a trace amount of cyanuric acid, which the U.S. FDA believes does not raise public health concerns, was found in a sampling of our products. Chinese authorities found significant levels of melamine in Chinese dairy used in certain infant formula products of other manufacturers, which led to the deaths of several infants in September 2008. We do not use dairy or protein-containing raw ingredients from China at any of our manufacturing sites and we have not been adversely impacted by these events in China thus far. Events such as these may create a perception of contamination risk among consumers with respect to all products in our industry.

In addition, we advertise our products and could be the target of claims relating to false or deceptive advertising under U.S. Federal and state laws as well as foreign laws, including consumer protection statutes of some states. A significant product liability or other legal claim or judgment against us or a widespread product recall may negatively impact our profitability. Even if a product liability or consumer fraud claim is unsuccessful or is not merited or fully pursued, the negative publicity surrounding such assertions regarding our products or processes could materially adversely affect our reputation and brand image and therefore our business.

We are subject to numerous governmental regulations and it can be costly to comply with these regulations. Changes in governmental regulations could harm our business.

As a producer of pediatric nutrition products, our activities are subject to extensive regulation by governmental authorities and international organizations, including rules and regulations with respect to the environment, employee health and safety, hygiene, quality control and tax laws. It can be costly to comply with these regulations and to develop compliant product processes. Our activities may also be subject to all kinds of barriers or sanctions imposed by countries or international organizations limiting international trade and increasingly dictating the specific content of our products and, with regard to the protection of consumer health and safety, limiting information and advertising about the health benefits of products that we market. In addition, regulatory changes or decisions that restrict the marketing, promotion and availability of our products, continued access to health care professionals, the ability to include genetically modified organisms in our products, as well as the manufacture and labeling of our products, could materially adversely affect our business. For example, regulations in the Philippines require governmental review of all advertisements for products intended for children under the age of two. In addition, certain activists, along with governmental and quasi-governmental entities, such as the United Nations Childrens’ Fund (“UNICEF”), have advocated against the marketing and sale of pediatric nutrition products. These efforts could result in increased regulatory restrictions on our activities in the future. Our activities could be materially adversely affected by any significant changes in such regulations or their enforcement. Our ability to anticipate and comply with evolving global standards requires significant investment in monitoring the global regulatory environment and we may be unable to comply with changes in regulation restricting our ability to continue to operate our business or manufacture, market or sell our products.

Commodity price increases will increase our operating costs and may reduce our profitability.

Commodity prices impact our business directly through the cost of raw materials used to make our products (such as skim milk powder, lactose and whey protein concentrate), the cost of inputs used to manufacture and ship our products (such as crude oil and energy) and the amount we pay to produce or purchase packaging for our products (such as cans, pouches, cardboard and plastic). Commodities such as these are susceptible to price volatility caused by conditions outside of our control, including fluctuations in commodities markets, currency fluctuations and changes in governmental agricultural programs. In 2007, our dairy costs were significantly higher than in 2006 and we expect our dairy costs in 2008 to be even higher. If, as a result of consumer sensitivity to pricing or otherwise, we are unable to increase our prices to offset the increased cost of commodities, we may experience lower profitability and we may be unable to maintain historical levels of productivity.

 

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Our business is particularly vulnerable to commodity price increases in Asia, the fastest growing region in the pediatric nutrition industry. Commodity price increases in Asia could reduce our sales and limit our ability to pursue our growth strategy in that region. We employ various purchasing and pricing contract techniques in an effort to minimize commodity price volatility. Generally, these techniques include setting fixed terms with suppliers with clauses such as unit pricing that is based on an average commodity price over a corresponding period of time. We do not generally make use of financial instruments to hedge commodity prices, partly because of these contract pricing techniques. If we fail to manage our commodity price exposure adequately, our business may be materially adversely affected.

Our profitability may suffer as a result of competition in our markets.

The pediatric nutrition industry is intensely competitive. Our primary competitors, including Nestlé S.A., Abbott Laboratories, Groupe Danone and Wyeth, all have substantial financial, marketing and other resources. We compete against large global companies, as well as regional and local companies, in each of the regions in which we operate. In most product categories, we compete not only with other widely advertised branded products, but also with private label, store and economy brand products that are generally sold at lower prices. Competition in our product categories is based on the following factors:

 

   

brand recognition and loyalty;

 

   

product quality;

 

   

effectiveness of marketing, promotional activity and the ability to identify and satisfy consumer preferences;

 

   

product innovation;

 

   

price; and

 

   

distribution and availability of products.

From time to time, in order to protect our existing market share or capture increased market share, we may need to improve our brand recognition and product value proposition, and increase our spending on marketing, advertising and new product innovation. The success of marketing, advertising and new product innovation is subject to risks, including uncertainties about trade and consumer acceptance. We may also need to reduce prices for some of our products in order to respond to competitive and customer pressures and to maintain our market share. Competitive and customer pressures may restrict our ability to increase prices, including in response to commodity and other cost increases. Our business will suffer if profit margins decrease, either as a result of a reduction in prices or an increase in costs with an inability to increase prices proportionally.

Economic downturns, such as the current downturn, could cause consumers to shift their purchases from our higher-priced premium products to lower-priced products, including private label or store brands, which could materially adversely affect our business.

The willingness of consumers to purchase premium brand pediatric nutrition products depends in part on local economic conditions. In periods of economic uncertainty, consumers tend to shift their purchases from our higher-priced premium products to lower-priced products, including private label and store brand products. We believe private label and store brand product manufacturers have continued to gain market share in the United States over the past 12 months.

Our operations face significant foreign currency exchange rate exposure, which could materially negatively impact our operating results.

We hold assets, incur liabilities, earn revenue and pay expenses in a variety of currencies other than the U.S. dollar, primarily the Chinese renminbi, the Mexican peso, the Philippine peso, the Hong Kong dollar and the Euro. Because our financial statements are presented in U.S. dollars, we must translate our assets, liabilities,

 

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revenue and expenses into U.S. dollars at the then-applicable exchange rates. Consequently, increases in the value of the U.S. dollar versus these other currencies may negatively affect the value of these items in our financial statements, even if their value has not changed in their original currency. While we intend to mitigate some of this risk with hedging and other activities, our business will nevertheless remain subject to substantial foreign exchange risk from foreign currency translation exposures that we will not be able to manage through effective hedging or the use of other financial instrument approaches.

The international nature of our business subjects us to additional business risks that could cause our revenue and profitability to decline.

We operate our business and market our products internationally in more than 50 countries. For the nine months ended September 30, 2008 and year ended December 31, 2007, 61.5% and 56.2%, respectively, of our net sales were generated in countries outside of the United States. The risks associated with our operations outside of the United States include:

 

   

multiple regulatory requirements that are subject to change and that could restrict our ability to manufacture, market or sell our products;

 

   

inflation, recession, fluctuations in foreign currency exchange and interest rates and discriminatory fiscal policies;

 

   

trade protection measures, including increased duties and taxes, and import or export licensing requirements;

 

   

price controls;

 

   

government health promotional programs intended to discourage the use of our products;

 

   

ownership regulations;

 

   

differing local product preferences and product requirements;

 

   

difficulty in establishing, staffing and managing operations;

 

   

differing labor regulations;

 

   

potentially negative consequences from changes in or interpretations of tax laws;

 

   

political and economic instability;

 

   

enforcement of remedies in various jurisdictions;

 

   

changes in foreign medical reimbursement policies and programs; and

 

   

diminished protection of intellectual property in some countries.

These and other risks could have a material adverse effect on our business.

Our international operations are subject to political and economic risks of developing countries, and special risks associated with doing business in corrupt environments.

We operate our business and market our products internationally in more than 50 countries, and we are focusing on increasing our sales and in some cases establishing new production facilities in regions, including Asia, Latin America, India and the Middle East, which are less developed, have less stability in legal systems and financial markets, and are generally recognized as potentially more corrupt business environments than the United States, and therefore present greater political, economic and operational risks. We have in place policies, procedures and certain ongoing training of employees with regard to business ethics and many key legal requirements, such as applicable anti-corruption laws, including the U.S. Foreign Corrupt Practices Act (“FCPA”), which make it illegal for us to give anything of value to foreign officials in order to obtain or retain any business or other advantages; however, there can be no assurance that our employees will adhere to our code of business ethics or any other of our policies, applicable anti-corruption laws, including the FCPA, or other legal

 

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requirements. If we fail to enforce our policies and procedures properly or maintain adequate record-keeping and internal accounting practices to accurately record our transactions, we may be subject to regulatory sanctions. In the event that we believe or have reason to believe that our employees have or may have violated applicable anti-corruption laws, including the FCPA, or other laws or regulations, we are required to investigate or have outside counsel investigate the relevant facts and circumstances, and if violations are found or suspected could face civil and criminal penalties, and significant costs for investigations, litigation, fees, settlements and judgments, which in turn could have a material adverse effect on our business.

Sales of our products are subject to changing consumer preferences, and our success depends upon our ability to predict, identify and interpret changes in consumer preferences and develop and offer new products rapidly enough to meet those changes.

Our success depends on our ability to predict, identify and interpret the tastes, dietary habits and nutritional needs of consumers and to offer products that appeal to those preferences. If we do not succeed in offering products that consumers want to buy, our sales and market share will decrease, resulting in reduced profitability. If we are unable to predict accurately which shifts in consumer preferences will be long lasting, or to introduce new and improved products to satisfy those preferences, our sales will decline. In addition, given the variety of cultures and backgrounds of consumers in our global consumer base, we must offer a sufficient array of products to satisfy the broad spectrum of consumer preferences. As such, we must be successful in developing innovative products across our product categories.

The consolidation of our retail customers may put pressures on our profitability.

Our retail customers, such as mass merchandisers, club stores, grocery stores, drug stores and convenience stores, have consolidated in recent years and consolidation is expected to continue throughout the United States, Europe and other major markets. This consolidation has produced large, sophisticated customers with increased buying power which are more capable of operating with reduced inventories, resisting price increases and demanding lower pricing, increased promotional programs and specifically tailored products. These customers also may use shelf space currently used for our products for their private label or store brand products. Meeting demands from these customers may adversely affect our margins and, if we fail to effectively respond to these demands, our sales could decline, each of which could materially adversely affect our profitability.

We rely on third parties to provide us with materials and services in connection with the manufacturing and distribution of our products.

Unaffiliated third-party suppliers provide us with materials necessary for commercial production of our products, including certain key raw materials (such as dairy, oil and agricultural products) and primary packaging materials (such as cans). In particular, Martek Biosciences Corporation (“Martek”) provides us with most of the supply of DHA and ARA that we use in our products. We may be unable to manufacture our products in a timely manner, or at all, if any of our third-party suppliers, including Martek, should cease or interrupt production or otherwise fail to supply us or if the supply agreements are suspended, terminated or otherwise expire without renewal. If these suppliers are not able to supply us with the quantities of materials we need or if these suppliers are not able to provide services in the required time period, this could have a material adverse effect on our business. We also utilize third parties in several countries throughout the world to distribute our products. If any of our third-party distributors fail to distribute our products in a timely manner, or at all, or if our distribution agreements are suspended, terminated or otherwise expire without renewal, our profitability could be materially adversely affected.

The manufacture of many of our products is a highly exacting and complex process, and if we or one of our suppliers should encounter problems manufacturing products, our business could suffer.

The manufacture of many of our products is a highly exacting and complex process, in part due to strict regulatory requirements. Problems may arise during the manufacturing process for a variety of reasons, including

 

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equipment malfunction, failure to follow specific protocols and procedures, problems with raw materials, maintenance of our manufacturing environment, natural disasters, various contagious diseases and process safety issues. If problems arise during the production of a batch of product, that batch of product may have to be discarded. This could, among other things, lead to increased costs, lost revenue, damage to customer relations, time and expenses being spent investigating the cause and, depending on the cause, similar losses with respect to other batches or products. If problems are not discovered before the affected product is released to the market, recall and product liability costs as well as reputational damage may also be incurred. To the extent that we or one of our suppliers experience significant manufacturing problems, this could have a material adverse effect on our business.

We may experience difficulties and delays inherent in the manufacturing and selling of our products.

We may experience difficulties and delays inherent in the manufacturing and selling of our products, such as: (1) seizure or recalls of products or forced closings of manufacturing plants; (2) the failure to obtain, the imposition of limitations on the use of, or loss of, patent, trademark or other intellectual property rights; (3) our failure, or the failure of any of our vendors or suppliers, to comply with current Good Manufacturing Practices and other applicable regulations and quality assurance guidelines that could lead to temporary manufacturing shutdowns, product shortages and delays in product manufacturing; (4) construction delays related to the construction of new facilities or the expansion of existing facilities, including those intended to support future demand for our products; (5) other manufacturing or distribution problems, including changes in manufacturing production sites and limits to manufacturing capability due to regulatory requirements, changes in types of products produced or physical limitations that could impact continuous supply; (6) availability of raw materials; and (7) restrictions associated with the transportation of goods in and out of foreign countries.

If we fail to increase our production and manufacturing capacity, we will be unable to continue to grow and our ability to produce new products, expand within our existing markets and enter into new markets will be limited.

Global growth and demand for our products has increased the utilization of our production and manufacturing facilities, including manufacturing capacity provided by third-party manufacturers and packaging capacity with respect to our products. If we are unable to successfully expand our production and manufacturing capacity, we will be unable to continue our growth and expand within our existing markets or enter into additional geographic markets or new product categories. In addition, failure to successfully expand our production and manufacturing capacity will limit our ability to introduce and distribute new products, including our existing pipeline of innovations and product improvements, or otherwise take advantage of opportunities in new and existing markets. Further, increasing our production and manufacturing facilities requires significant investment and build times. Delays in increasing capacity could also limit our ability to continue our growth and materially adversely affect our business.

Disruption of our global supply chain could materially adversely affect our business.

Our ability to manufacture, distribute and sell products is critical to our success. Damage or disruption to raw material supplies or our manufacturing or distribution capabilities due to weather, natural disaster, fire, terrorism, strikes, various contagious diseases or other reasons could impair our ability to manufacture or sell our products. Failure to take adequate steps to mitigate the likelihood or potential impact of such events, or to effectively manage such events if they occur, particularly when a product is sourced from a single location, could materially adversely affect our business.

We may not be successful in winning new contracts in the United States or maintaining current relationships pursuant to the Special Supplemental Nutrition Program for Women, Infants and Children (“WIC”), which could materially adversely affect our business.

The WIC program is a U.S. program created to provide nutritious foods, nutrition education and referrals to health care professionals and other social services to those considered to be at nutritional risk. We are an active

 

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participant in the WIC program and participation in the WIC program is an important part of our U.S. business based on the volume of infant formula sold under the program. As of September 30, 2008, we hold the contracts that supply approximately 41% of WIC births. As a result, our business strategy includes bidding for new WIC contracts and maintaining current WIC relationships. Our failure to win bids for new contracts pursuant to the WIC program or our inability to maintain current WIC relationships could have a material adverse effect on our business. In addition, any changes to how the WIC program is administered and any changes to the eligibility requirements and/or overall participation in the WIC program could also have a material adverse effect on our business.

Our business could be harmed by a failure of our information technology, administrative or outsourcing systems.

We rely on our information technology, administrative and outsourcing systems to effectively manage our business data, communications, supply chain, order entry and fulfillment and other business processes. The failure of our information technology, administrative or outsourcing systems to perform as we anticipate could disrupt our business and result in transaction errors, processing inefficiencies and the loss of sales and customers, causing our business to suffer. In addition, our information technology, administrative and outsourcing systems may be vulnerable to damage or interruption from circumstances beyond our control, including fire, natural disasters, systems failures, security breaches and viruses. Any such damage or interruption could have a material adverse effect on our business and prevent us from paying our suppliers or employees, receiving payments from our customers or performing other information technology, administrative or outsourcing services on a timely basis.

We may face difficulties as we expand our operations into countries in which we have no prior operating experience or as we expand our operations into new product categories.

We intend to continue to expand our global footprint in order to enter into new markets. This may involve expanding into countries other than those in which we currently operate. It may involve expanding into less developed countries, which may have less political, social or economic stability and less developed infrastructure and legal systems. We also intend to expand our product portfolio by adding new product categories. As we expand our business into new countries or product categories we may encounter regulatory, personnel, technological and other difficulties that increase our expenses or delay our ability to start up our operations or become profitable in such countries or product categories. This may affect our relationships with customers, suppliers and regulators and could have a material adverse effect on our business.

Resources devoted to research and development may not yield new products that achieve commercial success.

Our ability to develop new pediatric nutrition products depends on, among other factors, our ability to understand the composition and variation of breast milk. Analyzing breast milk requires significant investment in research and development and testing of new ingredients and new production processes. We devote significant resources to investment in research and development in order gain a deep understanding of the composite ingredients of breast milk. The research and development process is expensive, prolonged and entails considerable uncertainty. Development of a new product, from discovery through testing and registration to initial product launch, typically takes between five and seven years. Each of these periods varies considerably from product to product and country to country. Because of the complexities and uncertainties associated with research and development, products that we are currently developing may not complete the development process or obtain the regulatory approvals required for us to market such products successfully. The development of new products may take longer and cost more to develop and may be less successful than we currently anticipate as a result of:

 

   

products that may appear promising in development but fail to reach market within the expected or optimal time frame, or fail to ever reach market, for any number of reasons, including efficacy and the difficulty or excessive cost to manufacture;

 

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failure to enter into or successfully implement optimal alliances where appropriate for the discovery and commercialization of products, or otherwise to maintain a consistent scope and variety of promising late-stage pipeline products; or

 

   

failure of one or more of our products to achieve or maintain commercial viability.

We cannot assure you that any of our products currently in our development pipeline will be commercially successful.

We could incur substantial costs to comply with environmental, health, and safety laws and regulations and to address violations of or liabilities under these requirements.

Our facilities and operations are subject to various environmental, health, and safety laws and regulations in each of the jurisdictions in which we operate. Among other things, these requirements regulate the emission or discharge of materials into the environment, the use, management, treatment, storage and disposal of solid and hazardous substances and wastes, the control of combustible dust, the reduction of noise emissions and fire and explosion risks, the cleanup of contamination and the prevention of workplace exposures and injuries. Pollution controls and various permits and programs are required for many of our operations. We could incur or be subject to, among other things, substantial costs (including civil or criminal fines or penalties or clean-up costs), third party damage claims, requirements to install additional pollution control or safety control equipment and/or permit revocations in the event of violations by us of environmental, health, and safely requirements applicable to our facilities and operations or our failure to obtain, develop or comply with required environmental permits or programs. In addition, most of our facilities have a history of industrial operations, and contaminants have been detected at some of our facilities. We also have been named as a potentially responsible party with respect to three Superfund or state sites. We can be held responsible, in some cases without regard to knowledge, fault, or ownership at the time of the release, for the costs of investigating or remediating contamination of any real property we or our predecessors ever owned, operated, or used as a waste disposal site. In addition, we can be required to compensate public authorities or private owners for damages to natural resources or other real property, or to restore those properties, in the event of off-site migration of contamination. Changes in, or new interpretations of, existing laws, regulations or enforcement policies, could also cause us to incur additional or unexpected costs to achieve or maintain compliance. The assertion of claims relating to on- or off-site contamination, the discovery of previously unknown environmental liabilities or the imposition of unanticipated investigation or cleanup obligations, could result in potentially significant expenditures to address contamination or resolve claims or liabilities. Such costs and expenditures could have a material adverse effect on our business, financial condition or results of operations.

We may not be able to adequately protect our intellectual property rights.

Given the importance of brand recognition to our business, we have invested considerable effort in seeking trademark protection for our core brands, including the Enfa family of brands. However, we cannot be certain that the steps we have taken will be sufficient to protect our intellectual property rights in our brands adequately or that third parties will not infringe upon or misappropriate any such rights. Our trademark registrations and applications can potentially be challenged and cancelled or narrowed. Moreover, some of the countries in which we operate offer less protection for, and may subject these rights to higher risks, than is the case in Europe or North America. In addition, it is costly to litigate in order to protect any of our intellectual property rights. If we are unable to prevent third parties from infringing or misappropriating these rights in our core products or brands, including our Enfa family of brands, our future financial condition and our ability to develop our business could be materially adversely affected.

Other companies have from time to time taken, and may in the future take, actions that we believe violate our intellectual property rights and we may decide to enforce (and in some cases are currently enforcing) those rights against such actions. Uncertainties inherent in such litigation make the outcome and associated costs difficult to predict. If unsuccessful, the legal actions could result in the invalidation of some of our intellectual property rights, which could materially adversely affect our business.

 

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We rely upon a combination of security measures, confidentiality policies, contractual arrangements and trade secret laws to protect our proprietary formulae and other valuable trade secrets. We also rely upon patent, copyright and trademark laws to further protect our intellectual property rights. We cannot, however, be certain that the steps we take will prevent the development and marketing of similar, competing products and services by third parties. Our existing patents and any future patents that we obtain may not be sufficiently broad to protect us against third parties with similar products or to provide us with a competitive advantage. Moreover, our patents can potentially be challenged and narrowed or invalidated. Trade secrets are difficult to protect, and despite our efforts may become known to competitors or independently discovered. The confidentiality agreements we rely upon with our employees, customers, contractors and others may be breached, and we may not have adequate remedies for such breach. Failure to adequately protect our valuable intellectual property from being infringed or misappropriated could materially adversely affect our business.

We may be required to defend ourselves against intellectual property claims from third parties, which could harm our business.

Regardless of merit, there are third-party patents that may cover our products. Third parties may obtain patents in the future and claim that use of our technologies infringes upon these patents. If a third party asserts that our products or services are infringing upon its intellectual property, these claims could cause us to incur significant expenses and, if successfully asserted against us, could require that we pay substantial damages and/or prevent us from selling our products. Even if we were to prevail against such claims, any litigation regarding intellectual property could be costly and time-consuming and could divert the attention of our management and key personnel from our business operations. Furthermore, as a result of an intellectual property challenge, we may find it necessary to enter into royalty licenses or other costly agreements, and we may not be able to obtain such agreements at all or on terms acceptable to us.

Increases in costs of pension benefits and current and post-retirement medical and other employee health and welfare benefits may reduce our profitability.

With approximately 5,500 employees, our profitability is substantially affected by costs of pension benefits and current and post-retirement medical and other employee health and welfare benefits. These costs can vary substantially as a result of changes in health care costs, volatility in investment returns on pension plan assets and changes in discount rates used to calculate related liabilities. These factors may put upward pressure on the cost of providing pensions and medical benefits. We can provide no assurance that we will succeed in limiting future cost increases, and upward pressure would reduce our profitability.

Labor disputes may cause work stoppages, strikes and disruptions.

The workforce at our manufacturing facility in Delicias, Mexico is unionized and covered by a collective bargaining agreement, which becomes subject to salary and benefits review on March 31, 2009, and to total contract review on March 31, 2010. The manufacturing workforce and non-supervised sales force in Makati, Philippines are unionized and covered by a collective bargaining agreement, which expires on December 31, 2010. In addition, several of our workforces in Europe have works council representation. As a result, any labor disputes, including work stoppages, strikes and disruptions, could have a material adverse impact on our business.

Our success depends on attracting and retaining qualified personnel in a competitive environment.

Our business strategy and future success depends, in part, upon our ability to attract, hire and retain highly-skilled managerial, professional service, sales, development, marketing, accounting, administrative, information technology, science, research and infrastructure-related personnel in a competitive environment, who are critical to our business functions. The market for highly-skilled employees is competitive in the labor markets in which we operate. Our business could be materially adversely affected if we are unable to retain key employees or

 

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recruit qualified personnel in a timely fashion, or if we are required to incur unexpected increases in compensation costs to retain key employees or meet our hiring goals. If we are not able to retain and attract the personnel that we require, or we are not able to do so on a cost-effective basis, it could be more difficult for us to sell and develop our products and services and execute our business strategy.

We derive a significant percentage of our revenues from one customer. The loss of this customer could materially adversely affect our financial performance.

Our products are sold principally to the wholesale and retail trade, both nationally and internationally, and revenues from one customer, Wal-Mart Stores, Inc. (“Wal-Mart”), accounted for approximately 14% of our gross sales for the year ended December 31, 2007. If this customer ceases doing business with us or if we encounter any difficulties in our relationship with Wal-Mart, our business could be materially adversely affected.

An adverse change in favorable demographic and economic trends as well as a change in scientific opinion regarding our products in any of our largest markets could materially adversely affect our business and reduce our profitability.

Our growth plan relies on favorable demographic and economic trends in various markets, including: (1) rising incomes in emerging markets, (2) increasing number of working mothers and (3) increasing consumer spending on health care worldwide. If these demographic trends change in an adverse way, our business could be materially adversely affected. In addition, an adverse change in scientific opinion regarding our products, such as the health benefits of DHA and ARA, could materially adversely affect our business.

We have substantial debt, which could materially adversely affect our business and our ability to meet our obligations.

We expect to have substantial debt following our separation. If our separation were to have occurred as of September 30, 2008, our pro forma total indebtedness would have been $1,750 million, excluding our Mexican capital lease obligations. See “Unaudited Pro Forma Condensed Financial Information”, “Description of Indebtedness” and “Certain Relationships and Related Party Transactions—Separation Transactions”.

This amount of debt could have important consequences to us and our investors, including:

 

   

requiring a substantial portion of our cash flow from operations to make interest and principal payments on this debt;

 

   

requiring us to repay the full amount of our debt upon a change of control event;

 

   

making it more difficult to satisfy debt service and other obligations;

 

   

increasing the risk of a future credit ratings downgrade of our debt, which could increase future debt costs;

 

   

increasing our vulnerability to general adverse economic and industry conditions;

 

   

reducing the cash flow available to fund capital expenditures and other corporate purposes and to grow our business;

 

   

limiting our flexibility in planning for, or reacting to, changes in our business and industry;

 

   

placing us at a competitive disadvantage to our competitors that may not be as leveraged with debt as we are; and

 

   

limiting our ability to borrow additional funds as needed or take advantage of business opportunities as they arise, pay cash dividends or repurchase common stock.

To the extent we become more leveraged, the risks described above could increase. In addition, our actual cash requirements in the future may be greater than expected. Our cash flow from operations may not be sufficient to repay at maturity all of the outstanding debt as it becomes due, and we may not be able to borrow money, sell assets or otherwise raise funds on acceptable terms, or at all, to refinance our debt.

 

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We intend to evaluate acquisitions, joint ventures and other strategic initiatives, any of which could distract our management or otherwise have a negative effect on our revenues, costs and stock price.

Our future success may depend on opportunities to buy or obtain rights to other businesses or technologies that could complement, enhance or expand our current business or products or that might otherwise offer us growth opportunities. In particular, we intend to evaluate potential mergers, acquisitions, joint venture investments, strategic initiatives, alliances, vertical integration opportunities and divestitures. If we attempt to engage in these transactions, we expose ourselves to various inherent risks, including:

 

   

accurately assessing the value, future growth potential, strengths, weaknesses, contingent and other liabilities and potential profitability of acquisition candidates;

 

   

the potential loss of key personnel of an acquired or combined business;

 

   

our ability to achieve projected economic and operating synergies;

 

   

difficulties successfully integrating, operating, maintaining and managing newly-acquired operations or employees;

 

   

difficulties maintaining uniform standards, controls, procedures and policies;

 

   

unanticipated changes in business and economic conditions affecting an acquired business;

 

   

the possibility we could incur impairment charges if an acquired business performs below expectations; and

 

   

the diversion of our management’s attention from our existing business to integrate the operations and personnel of the acquired or combined business or implement the strategic initiative.

If any of the foregoing risks materializes, our results of operations and the results of the proposed transactions would likely differ from our, and market expectations, and our stock price could, accordingly, decline. In addition, we may not be able to complete desirable transactions, for reasons including a failure to secure financing, as a result of our separation agreement or other agreements with third parties. See “Certain Relationships and Related Party Transactions” for a description of the restrictions arising under the separation agreement.

We depend on cash flows generated by our subsidiaries, and a failure to receive distributions from our subsidiaries may result in our inability to meet our financial obligations, or to pay dividends.

We are a holding company with no material assets other than the equity interests of our subsidiaries. Our subsidiaries conduct substantially all of our operations and own substantially all of our assets. Consequently, our cash flow and our ability to meet our obligations and pay dividends to our stockholders depends upon the cash flow of our subsidiaries and the payment of funds by our subsidiaries to us in the form of dividends, tax sharing payments or otherwise. There are a number of other factors that could affect our ability to pay dividends, including the following:

 

   

lack of availability of cash to pay dividends due to changes in our operating cash flow, capital expenditure requirements, working capital requirements and other cash needs;

 

   

unexpected or increased operating or other expenses or changes in the timing thereof;

 

   

restrictions under Delaware law or other applicable law on the amount of dividends that we may pay;

 

   

a decision by our board of directors to modify or revoke its policy to pay dividends; and

 

   

the other risks described in “Risk Factors”.

Each of our subsidiaries is a distinct legal entity and its ability to make any payments will depend on its earnings, the terms of its indebtedness, tax considerations and legal restrictions. While no restrictions currently exist, under certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from our subsidiaries and our subsidiaries may not be able to, or be permitted to, make distributions to us in the future. In the event that we do not receive distributions from our subsidiaries, we may be unable to meet our financial obligations.

 

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Risks Related to Our Relationship with BMS

We may not realize the potential benefits from our separation from BMS.

We may not realize the benefits that we anticipate from our separation from BMS. These benefits include the following:

 

   

allowing our management to focus its efforts on our business and strategic priorities;

 

   

enabling us to allocate our capital more efficiently;

 

   

providing us with direct access to the debt and equity capital markets;

 

   

improving our ability to pursue acquisitions through the use of shares of our common stock as consideration;

 

   

enhancing our market recognition with investors; and

 

   

increasing our ability to attract and retain employees by providing equity compensation tied to our business.

We may not achieve the anticipated benefits from our separation for a variety of reasons. For example, the process of separating our business from BMS and operating as an independent public company may distract our management from focusing on our business and strategic priorities. In addition, although we will have direct access to the debt and equity capital markets following the separation, we may not be able to issue debt or equity on terms acceptable to us or at all. The availability of shares of our common stock for use as consideration for acquisitions also will not ensure that we will be able to successfully pursue acquisitions or that the acquisitions will be successful. Moreover, even with equity compensation tied to our business we may not be able to attract and retain employees as desired. We also may not fully realize the anticipated benefits from our separation if any of the matters identified as risks in this “Risk Factors” section were to occur. If we do not realize the anticipated benefits from our separation for any reason, our business may be materially adversely affected.

BMS controls the direction of our business, and the concentrated ownership of our common stock and certain governance arrangements will prevent you and other stockholders from influencing significant decisions.

After the completion of this offering, BMS will own 58.5% of the outstanding shares of our Class A common stock, or 55.1% if the underwriters exercise their over-allotment option in full, and 100% of our outstanding Class B common stock, giving BMS 85.0% of the shares of our outstanding common stock and 97.8% of the combined voting power of our outstanding common stock, or 83.1% and 97.5%, respectively, if the underwriters exercise their over-allotment option in full. Although BMS has announced its intention to retain at least 80% of the equity interest in us following this offering for the foreseeable future, it is not subject to any contractual obligation to maintain its share ownership other than the 180-day lock-up period as described in “Underwriting”. As long as BMS owns a majority of our voting power, BMS will be able to control any corporate action that requires a stockholder vote irrespective of the vote of, and without prior notice to, any other stockholder. As a result, BMS will have the ability to control significant corporate activities, including:

 

   

the election of our board of directors and, through our board of directors, decision-making with respect to our business direction and policies, including the appointment and removal of our officers;

 

   

acquisitions or dispositions of businesses or assets, mergers or other business combinations;

 

   

our capital structure;

 

   

payment of dividends; and

 

   

the number of shares available for issuance under our equity incentive plans for our prospective and existing employees.

In addition, we do not have a formal mechanism by which our independent directors must approve any future transactions with BMS.

 

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This voting control and influence may discourage transactions involving a change of control of our company, including transactions in which you as a holder of our Class A common stock might otherwise receive a premium for your shares. Furthermore, after the expiration of the 180-day lock-up period, BMS generally has the right at any time to spin-off or split-off our common stock that it owns or to sell a controlling interest in us to a third party, in either case without your approval and without providing for a purchase of your shares. See “Shares Eligible for Future Sale”.

Even if the ownership interest of BMS is reduced to less than a majority of our outstanding shares of our common stock, so long as BMS retains a significant portion of our voting power, BMS will have the ability to substantially influence these significant corporate activities.

Our historical and pro forma condensed financial information may not be representative of the results we would have achieved as an stand-alone public company and may not be a reliable indicator of our future results.

The historical and pro forma condensed financial information that we have included in this prospectus may not necessarily reflect what our financial position, results of operations or cash flows would have been had we been an independent entity during the periods presented or those that we will achieve in the future. The costs and expenses reflected in our historical financial information include an allocation for certain corporate functions historically provided by BMS, including executive oversight, risk management, information technology, accounting, audit, legal, investor relations, human resources, tax, treasury, procurement and other services, that may be different from the comparable expenses that we would have incurred had we operated as a stand-alone company. We have not adjusted our historical or pro forma condensed financial information to reflect changes that will occur in our cost structure, financing and operations as a result of our transition to becoming a stand-alone public company, including changes in our employee base, potential increased costs associated with reduced economies of scale and increased costs associated with Securities and Exchange Commission (the “SEC”) reporting and The New York Stock Exchange (the “NYSE”) requirements. Therefore, our historical and pro forma condensed financial information may not necessarily be indicative of what our financial position, results of operations or cash flows will be in the future.

The transitional services that BMS will provide to us following the separation may not be sufficient to meet our needs, and we may have difficulty finding replacement services or be required to pay increased costs to replace these services after our transitional services agreement with BMS expires.

Historically BMS has provided, and, until our separation from BMS, BMS will continue to provide significant corporate and shared services related to corporate functions such as executive oversight, risk management, information technology, accounting, audit, legal, investor relations, human resources, tax, treasury, procurement and other services. Following our separation from BMS, we expect BMS to continue to provide many of these services on a transitional basis for a fee. The terms of these services and amounts to be paid by us to BMS are provided in the transitional services agreement described in “Certain Relationships and Related Party Transactions”. While these services are being provided to us by BMS, our operational flexibility to modify or implement changes with respect to such services or the amounts we pay for them will be limited. After the expiration of the transitional services agreement, we may not be able to replace these services or enter into appropriate third-party agreements on terms and conditions, including cost, comparable to those that we will receive from BMS under the transitional services agreement. Although we intend to replace portions of the services currently provided by BMS, we may encounter difficulties replacing certain services or be unable to negotiate pricing or other terms as favorable as those we currently have in effect. In addition, we have historically received informal support from BMS, which may not be addressed in the transitional services agreement that we will enter into with BMS. The level of this informal support will diminish following the separation as we become a stand-alone company.

In Argentina, Brazil, China, India, Mexico and Vietnam, due to regulatory and other concerns, not all of the assets or shares related to our business in those jurisdictions will be transferred to us prior to or concurrently with

 

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this offering. It is currently intended that these transfers will be made, but we cannot offer any assurance that such transfers will ultimately occur or not be delayed for an extended period of time. See “Unaudited Pro Forma Condensed Financial Information” and “Certain Relationships and Related Party Transactions”.

As a stand-alone public company, we will no longer have access to the resources of BMS, and we may experience increased costs resulting from decreased purchasing power.

Prior to the separation, we have benefited from BMS’s financial strength and numerous significant business relationships and have been able to take advantage of BMS’s size and purchasing power in procuring goods, services and technology. We have drawn on these resources in developing our own contacts and relationships. Following our separation from BMS, we will no longer be able to rely on BMS’s resources and contacts. As a stand-alone public company, we may be unable to obtain goods, services and technology at prices and on terms as favorable as those that we obtained prior to our separation from BMS and, as a result, our profitability could be materially adversely affected.

We may not be able to resolve favorably disputes that arise between BMS and us with respect to our past and ongoing relationships.

Disputes may arise between BMS and us in a number of areas relating to our past and ongoing relationships, including:

 

   

labor, tax, employee benefit, indemnification and other matters arising from our separation from BMS;

 

   

employee retention and recruiting;

 

   

business combinations involving us;

 

   

sales or dispositions by BMS of all or any portion of its ownership interest in us; and

 

   

the nature, quality and pricing of services BMS has agreed to provide us.

We may not be able to resolve any potential conflicts, and even if we do, the resolution may be less favorable to us than if we were dealing with an unaffiliated party. The agreements that we will enter into with BMS may be amended upon agreement between the parties. While we are controlled by BMS, we may not have the leverage to negotiate amendments to these agreements, if required, on terms as favorable to us as those we would negotiate with an unaffiliated third party.

Our ability to operate our business may suffer if we are unable to retain our employees as a result of our separation from BMS.

Our business is dependent on our employees and as a result of our separation from BMS, some of our employees may elect to remain with BMS or may terminate their employment with us. In addition, as of September 30, 2008, approximately 12% of our U.S.-based employees are at retirement age and may retire within the next year. If we are unable to retain a significant number of our employees, our business could be materially adversely affected.

Some of our directors are executive officers of BMS. In addition, some of our directors and executive officers own common stock of BMS, and options or other instruments, the value of which is related to the value of stock of BMS, which could cause conflicts of interests that result in our not acting on opportunities on which we would otherwise act.

Five of our directors have been designated to our board of directors by BMS and are current executive officers of BMS. These directors and a number of our officers own a substantial amount of BMS common stock, and options or other instruments, the value of which is related to the value of common stock of BMS. The direct and indirect interests of our directors and officers in common stock of BMS and the presence of executive officers of BMS on our board of directors could create, or appear to create, conflicts of interest with respect to

 

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matters involving both us and BMS that could have different implications for BMS than they do for us. As a result, we may be precluded from pursuing certain opportunities on which we would otherwise act, including growth opportunities.

We will be a “controlled company” within the meaning of the NYSE rules, and, as a result, will rely on exemptions from certain corporate governance requirements that provide protection to stockholders of other companies.

Upon completion of this offering, BMS will own more than 50% of the total voting power of our common shares and we will be a “controlled company” under the NYSE corporate governance standards. As a controlled company, certain exemptions under the NYSE standards will free us from the obligation to comply with certain NYSE corporate governance requirements, including the requirements:

 

   

that a majority of our board of directors consists of “independent directors”, as defined under the rules of the NYSE;

 

   

that we have a corporate governance and nominating committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities;

 

   

that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

 

   

for an annual performance evaluation of the nominating and governance committee and compensation committee.

Accordingly, for so long as we are a “controlled company”, you will not have the same protections afforded to stockholders of companies that are subject to all of the NYSE corporate governance requirements.

Risks Related to This Offering

No market currently exists for our Class A common stock. We cannot assure you that an active trading market will develop for our Class A common stock.

Prior to this offering, there has been no public market for shares of our Class A common stock. We cannot predict the extent to which investor interest in our company will lead to the development of a trading market on the NYSE or otherwise, or how liquid that market might become. If an active market does not develop, you may have difficulty selling any shares of our Class A common stock that you purchase in this initial public offering. The initial public offering price for the shares of our Class A common stock has been determined by negotiations between us and the representatives of the underwriters, and may not be indicative of prices that will prevail in the open market following this offering.

If our stock price fluctuates after this offering, you could lose a significant part of your investment.

The market price of our stock may be influenced by many factors, some of which are beyond our control, including those described above in “—Risks Related to Our Business” and the following:

 

   

the failure of securities analysts to cover our Class A common stock after this offering or changes in financial estimates by analysts;

 

   

the inability to meet the financial estimates of analysts who follow our Class A common stock;

 

   

strategic actions by us or our competitors;

 

   

announcements by us or our competitors of significant contracts, acquisitions, joint marketing relationships, joint ventures or capital commitments;

 

   

variations in our quarterly operating results and those of our competitors;

 

   

general economic and stock market conditions;

 

   

risks related to our business and our industry, including those discussed above;

 

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changes in conditions or trends in our industry, markets or customers;

 

   

terrorist acts;

 

   

future sales of our Class A common stock or other securities; and

 

   

investor perceptions of the investment opportunity associated with our Class A common stock relative to other investment alternatives.

As a result of these factors, investors in our Class A common stock may not be able to resell their shares at or above the initial offering price or may not be able to resell them at all. These broad market and industry factors may materially reduce the market price of our Class A common stock, regardless of our operating performance. In addition, price volatility may be greater if the public float and trading volume of our Class A common stock is low.

Future sales, or the perception of future sales, of our common stock may depress the price of our Class A common stock.

The market price of our Class A common stock could decline significantly as a result of sales of a large number of shares of our common stock in the market after this offering, including shares which might be offered for sale by BMS. The perception that these sales might occur could depress the market price. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.

Upon completion of this offering, we will have 72,344,571 shares of Class A common stock (76,844,571 shares if the underwriters exercise their over-allotment option in full) and 127,655,429 shares of Class B common stock outstanding. The shares of Class A common stock offered in this offering will be freely tradable without restriction under the Securities Act of 1933, as amended (the “Securities Act”), except for any shares of Class A common stock that may be held or acquired by our directors, executive officers and other affiliates, as that term is defined in the Securities Act, which will be restricted securities under the Securities Act. Restricted securities may not be sold in the public market unless the sale is registered under the Securities Act or an exemption from registration is available. We will grant registration rights to BMS with respect to shares of our Class A common stock and Class B common stock. Any shares registered pursuant to the registration rights agreement described in “Certain Relationships and Related Party Transactions” will be freely tradable in the public market following a 180-day lock-up period as described below.

In connection with this offering, we, our directors and executive officers, BMS and its directors and executive officers have each agreed to enter into a lock-up agreement and thereby be subject to a lock-up period, meaning that they and their permitted transferees will not be permitted to sell any of the shares of our common stock for 180 days after the date of this prospectus, subject to certain extensions without the prior consent of the underwriters. Although we have been advised that there is no present intention to do so, the underwriters may, in their sole discretion and without notice, release all or any portion of the shares of our common stock from the restrictions in any of the lock-up agreements described above. See “Underwriting”.

Also, in the future, we may issue our securities in connection with investments or acquisitions. The amount of shares of our common stock issued in connection with an investment or acquisition could constitute a material portion of our then outstanding shares of our common stock.

We will not receive any benefit and accordingly you will suffer increased dilution if the underwriters exercise their over-allotment option.

If the underwriters exercise their over-allotment option, all of the net proceeds will be used to retire obligations owed to BMS that would have otherwise been forgiven or reduced in full. Accordingly, we will receive no benefit from the issuance of any shares of our Class A common stock subject to the over-allotment option.

 

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Our costs will increase significantly as a result of operating as a public company, and our management will be required to devote substantial time to complying with public company regulations.

We have historically operated our business as a division of a public company. As a stand-alone public company, we will incur additional legal, accounting, compliance and other expenses that we have not incurred historically. After this offering, we will become obligated to file with the SEC annual and quarterly information and other reports that are specified in Section 13 and other sections of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We will also be required to ensure that we have the ability to prepare financial statements that are fully compliant with all SEC reporting requirements on a timely basis. In addition, we will also become subject to other reporting and corporate governance requirements, including certain requirements of the NYSE, and certain provisions of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) and the regulations promulgated thereunder, which will impose significant compliance obligations upon us.

Sarbanes-Oxley, as well as new rules subsequently implemented by the SEC and the NYSE, have imposed increased regulation and disclosure and required enhanced corporate governance practices of public companies. We are committed to maintaining high standards of corporate governance and public disclosure, and our efforts to comply with evolving laws, regulations and standards in this regard are likely to result in increased marketing, selling and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. These changes will require a significant commitment of additional resources. We may not be successful in implementing these requirements and implementing them could materially adversely affect our business, results of operations and financial condition. In addition, if we fail to implement the requirements with respect to our internal accounting and audit functions, our ability to report our operating results on a timely and accurate basis could be impaired. If we do not implement such requirements in a timely manner or with adequate compliance, we might be subject to sanctions or investigation by regulatory authorities, such as the SEC or the NYSE. Any such action could harm our reputation and the confidence of investors and clients in our company and could materially adversely affect our business and cause our share price to fall.

Failure to achieve and maintain effective internal controls in accordance with Section 404 of Sarbanes-Oxley could have a material adverse effect on our business and stock price.

As a public company, we will be required to document and test our internal control procedures in order to satisfy the requirements of Section 404 of Sarbanes-Oxley, which will require annual management assessments of the effectiveness of our internal control over financial reporting and a report by our independent registered public accounting firm that addresses the effectiveness of internal control over financial reporting. During the course of our testing, we may identify deficiencies which we may not be able to remediate in time to meet our deadline for compliance with Section 404. Testing and maintaining internal control can divert our management’s attention from other matters that are important to the operation of our business. We also expect the new regulations to increase our legal and financial compliance costs, make it more difficult to attract and retain qualified officers and members of our board of directors, particularly to serve on our audit committee, and make some activities more difficult, time consuming and costly. We may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 or our independent registered public accounting firm may not be able or willing to issue an unqualified report on the effectiveness of our internal control over financial reporting. If we conclude that our internal control over financial reporting is not effective, we cannot be certain as to the timing of completion of our evaluation, testing and remediation actions or their effect on our operations because there is presently no precedent available by which to measure compliance adequacy. If either we are unable to conclude that we have effective internal control over financial reporting or our independent auditors are unable to provide us with an unqualified report as required by Section 404, then investors could lose confidence in our reported financial information, which could have a negative effect on the trading price of our stock.

 

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If securities or industry analysts do not publish research or reports about our business, if they adversely change their recommendations regarding our stock or if our operating results do not meet their expectations, our stock price could decline.

The trading market for our Class A common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. Moreover, if one or more of the analysts who cover our company downgrades our stock or if our operating results do not meet their expectations, our stock price could decline.

Anti-takeover provisions in our charter documents could discourage, delay or prevent a change of control of our company and may result in an entrenchment of management and diminish the value of our Class A common stock.

Several provisions of our amended and restated certificate of incorporation and amended and restated by-laws could make it difficult for our stockholders to change the composition of our board of directors, preventing them from changing the composition of management. In addition, the same provisions may discourage, delay or prevent a merger or acquisition that our stockholders may consider favorable. See “Description of Capital Stock”.

These provisions include:

 

   

a dual-class common stock structure that gives BMS and its affiliates control over all matters requiring stockholder approval, including the election of directors and significant corporate transactions, such as a merger or other sale of our company or its assets;

 

   

authorizing our board of directors to issue “blank check” preferred shares without stockholder approval;

 

   

prohibiting cumulative voting in the election of directors;

 

   

limiting the persons who may call special meetings of stockholders; and

 

   

establishing advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings.

These anti-takeover provisions could substantially impede the ability of our Class A common stockholders to benefit from a change of control and, as a result, could materially adversely affect the market price of our Class A common stock and your ability to realize any potential change-in-control premium.

 

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FORWARD-LOOKING STATEMENTS

This prospectus includes forward-looking statements in addition to historical information. These forward-looking statements are included throughout this prospectus, including in the sections entitled “Prospectus Summary”, “Risk Factors”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “Business” and “Certain Relationships and Related Party Transactions”, and relate to matters such as our industry, business strategy, goals and expectations concerning our market position, future operations, margins, profitability, capital expenditures, liquidity and capital resources and other financial and operating information. We have used the words “anticipate”, “assume”, “believe”, “budget”, “continue”, “could”, “estimate”, “expect”, “intend”, “may”, “plan”, “potential”, “predict”, “project”, “future” and similar terms and phrases to identify forward-looking statements in this prospectus.

The forward-looking statements contained in this prospectus are based on management’s current expectations and are subject to uncertainty and changes in circumstances. There can be no assurance that future developments affecting us will be those that we have anticipated. Actual results may differ materially from these expectations due to changes in global, regional or local political, economic, business, competitive, market, regulatory and other factors, many of which are beyond our control. We believe that these factors include those described in “Risk Factors”. Should one or more of these risks or uncertainties materialize, or should any of our assumptions provide incorrect, our actual results may vary in material respects from those projected in these forward-looking statements. Any forward-looking statement made by us in this prospectus speaks only as of the date on which we make it. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by any applicable securities laws.

 

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USE OF PROCEEDS

We estimate that the net proceeds we will receive from the sale of our Class A common stock in this offering will be approximately $679.7 million, after deducting underwriting discounts and commissions and estimated offering expenses. If the underwriters’ over-allotment option is exercised in full, we estimate our net proceeds will be approximately $782.3 million.

We intend to use the net proceeds from this offering to (i) repay in full approximately $597 million of the foreign intercompany notes payable to subsidiaries of BMS, and (ii) satisfy payables and other obligations owing to one or more subsidiaries of BMS that would have otherwise been forgiven or reduced in full. If the underwriters’ over-allotment option is exercised in full, we intend to use the net proceeds to repay in full an interest free obligation owed to a subsidiary of BMS that would have otherwise been forgiven or reduced in full. If the underwriters exercise their over-allotment option, we will receive no benefit from the issuance of any shares of Class A common stock subject to the over-allotment option. If the over-allotment option is not exercised or partly exercised, this obligation or the remaining part thereof will be forgiven or otherwise reduced in full.

The aggregate principal amount of these foreign intercompany notes is approximately $597 million, with the note relating to Indonesia being $32 million, the note relating to Malaysia being $55 million, the note relating to the Netherlands being $280 million and the note relating to the Philippines being $230 million. Except for the principal amounts, the terms of each of these notes are substantially similar, and the rate of interest per annum on each note is equal to LIBOR plus 0.75%.

 

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DIVIDEND POLICY

We intend to pay quarterly cash dividends on our Class A common stock and Class B common stock at an initial quarterly rate of $0.20 per share. We intend to pay the first dividend in July 2009, which will include the dividend for the second quarter and an amount on a pro-rated basis for the remainder of the first fiscal quarter ending after the closing of this offering and, thereafter, to pay dividends on a quarterly basis. The declaration and payment of future dividends to holders of our common stock will be at the discretion of our board of directors and will depend upon many factors, including our financial condition, earnings, legal requirements, restrictions in our debt agreements and other factors deemed relevant by our board of directors.

We are a holding company with no significant business operations of our own. All of our business operations will be conducted through our subsidiaries. Dividends and loans from, and cash generated by, our subsidiaries will be our principal sources of cash to repay indebtedness, fund operations and pay dividends. Accordingly, our ability to pay dividends to our stockholders will depend on the earnings and distributions of funds from our subsidiaries. See “Risks Related to Our Business—We depend on cash flows generated by our subsidiaries, and a failure to receive distributions from our subsidiaries may result in our inability to meet our financial obligations, or to pay dividends”. Our dividend policy has certain risks and limitations. We may not pay dividends according to our policy or at all, if, among other things, we do not have sufficient cash to pay the intended dividends or if our financial performance does not achieve expected results. To the extent that we do not have sufficient cash to pay dividends, we do not intend to borrow funds to pay dividends.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of September 30, 2008 on an actual basis and as adjusted to give effect to the sale by us of shares of our Class A common stock in this offering, the corporate separation transactions as described in “Certain Relationships and Related Party Transactions” and the application of the net proceeds thereof as described in “Use of Proceeds”.

You should read this table in conjunction with “Use of Proceeds”, “Selected Historical Financial and Operating Data”, “Unaudited Pro Forma Condensed Financial Information”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited and unaudited financial statements and related notes included elsewhere in this prospectus.

 

     As of September 30, 2008  
       Historical       Pro
  Forma  
 

Cash and Cash Equivalents

   $ —       $ 250.0  
                

Total Debt

   $ 2,000.0     $ 1,750.0 (a)
                

Divisional Equity (Deficit)

   $ (1,351.8 )   $ —    

Stockholders’ Equity

    

Class A Common Stock, $0.01 par value; 3,000,000,000 Shares Authorized, 72,344,571 Shares Issued and Outstanding.

     —         0.7  

Class B Common Stock, $0.01 par value; 1,200,000,000 Shares Authorized, 127,655,429 Shares Issued and Outstanding

     —         1.3  

Preferred stock, $0.01 par value; 300,000,000 Authorized, No Shares issued and Outstanding

     —         —    

Additional Paid in Capital

     —         (883.5 )

Accumulated Other Comprehensive Income (Loss)

     —         (48.8 )
          

Total Stockholders’ Equity (Deficit)

     —         (930.3 )
                

Total Capitalization

   $ 648.2     $ 819.7  
                

 

  (a) Excludes our Mexican capital lease obligations. See “Certain Relationships and Related Party Transactions—Separation Transactions”.

Because BMS will receive all of the net proceeds from this offering (including the net proceeds from any exercise of the underwriters’ over-allotment option), changes in the initial public offering price and whether or not the underwriters’ over-allotment option is exercised will not affect cash, cash equivalents, total debt or total capitalization.

 

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DILUTION

If you invest in our Class A common stock in this offering, your interest will be diluted to the extent of the difference between the initial public offering price per share of our Class A common stock and the pro forma net tangible book deficit per share of our Class A and Class B common stock after giving effect to the corporate separation transactions and this offering.

Our net tangible book deficit represents the amount of our total tangible assets less total liabilities and minority interest. As of September 30, 2008, after giving effect to the corporate separation transactions, as described in “Unaudited Pro Forma Condensed Financial Information”, our pro forma separation net tangible book deficit was approximately $(1,086.3) million, or approximately $(6.39) per share based on shares of our common stock outstanding prior to this offering. After giving effect to the sale of our shares of Class A common stock at the initial public offering price per share, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma net tangible book deficit as of September 30, 2008, which we refer to as our pro forma net tangible book deficit, would have been approximately $(1,086.3) million, or $(5.43) per share of our common stock. This represents an immediate and substantial increase in the net tangible book value of $0.96 per share to BMS, our sole stockholder, and an immediate dilution of $29.43 per share to new investors purchasing shares of our Class A common stock in this offering.

The following table illustrates this dilution on a per share basis:

 

Initial public offering price per share

     $ 24.00  

Pro forma separation net tangible book deficit per share as of September 30, 2008

   $ (6.39 )  

Change per share attributable to new investors

   $ 0.96    
          

Pro forma net tangible book deficit per share after giving effect to this offering

     $ (5.43 )
          

Dilution per share to new investors

     $ 29.43  
          

The foregoing discussion and table do not give effect to shares of Class A common stock that we will issue if the underwriters exercise their over-allotment option in full.

The following table summarizes, as of September 30, 2008, the number of shares of our common stock we issued and sold, the total consideration we received and the average price per share paid to us by BMS, our sole stockholder prior to this offering, and by new investors purchasing shares of Class A common stock in this offering.

 

     Shares Purchased     Total Consideration     Average
Price Per
Share
     Number    Percent     Number    Percent    

Sole stockholder prior to this offering

   170,000,000    85.0 %     —      0.0 %     —  

New investors in this offering

   30,000,000    15.0 %   $ 720.0    100.0 %   $ 24.00
                              

Total

   200,000,000    100.0 %   $ 720.0    100.0 %   $ 3.60
                              

No consideration was paid by BMS to MJN for its shares of common stock and the BMS investment in MJN was at a deficit balance at the time of issuance of the shares of common stock, primarily due to the issuance of the ERS intercompany note by MJN to BMS by way of dividend in August 2008.

If the underwriters exercise their option to purchase additional shares of common stock in full, the pro forma net tangible book deficit per share as of September 30, 2008 would be approximately $(5.31) per share and the dilution per share to new investors would be $29.31 per share. Furthermore, the number of shares of our Class A common stock held by new investors will increase to 34,500,000, or approximately 17% of the total number of shares of our common stock outstanding after this offering and the number of shares held by BMS, our sole stockholder, will remain at 170,000,000 shares, or approximately 83% of the total number of shares of our common stock outstanding after this offering.

 

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SELECTED HISTORICAL FINANCIAL AND OPERATING DATA

The following tables set forth our selected historical financial and operating data for the periods indicated below. The selected historical statement of earnings for the year ended December 31, 2004, and the selected balance sheet data as of December 31, 2005, are derived from our audited financial statements, which are not included in this prospectus. The selected historical statements of earnings for each of the three years ended December 31, 2005, December 31, 2006 and December 31, 2007, and the selected balance sheet data as of December 31, 2006 and December 31, 2007, are derived from our audited financial statements, which are included elsewhere in this prospectus.

The selected historical financial data as of September 30, 2008 and for the nine months ended September 30, 2007 and 2008 are derived from our unaudited condensed interim financial statements, which are included elsewhere in this prospectus. The selected balance sheet data as of September 30, 2007, are derived from our unaudited condensed financial statements, which are not included in this prospectus. The selected historical statement of earnings for the year ended December 31, 2003 and the selected balance sheet data as of December 31, 2003 and December 31, 2004, are derived from our unaudited condensed financial statements, which are not included in this prospectus. We have prepared our unaudited condensed financial statements on the same basis as our audited financial statements and have included all adjustments, consisting of normal and recurring adjustments, that we consider necessary for a fair presentation of our financial position and operating results for the unaudited periods. The selected historical financial and operating data as of and for the nine months ended September 30, 2008 are not necessarily indicative of the results that may be obtained for a full year.

Our financial statements include allocations of costs from certain corporate and shared services functions provided to us by BMS, including general corporate and shared services expenses. These allocations were made either based on specific identification or the proportionate percentage of our revenues and headcount to the respective BMS revenues and headcount, and have been included in our financial statements.

The financial statements included in this prospectus may not necessarily reflect our financial position, results of operations and cash flows as if we had operated as a stand-alone public company during all periods presented. Accordingly, our historical results should not be relied upon as an indicator of our future performance. The following table includes one financial measure, EBITDA, which we use in our business and is not calculated or presented in accordance with U.S. GAAP, but we believe such measure is useful to help investors understand our results of operations. We explain this measure and reconcile it to its most directly comparable financial measure calculated and presented in accordance with U.S. GAAP in note 1 to the following table.

 

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The following selected historical financial and operating data should be read in conjunction with “Use of Proceeds”, “Capitalization”, “Unaudited Pro Forma Condensed Financial Information”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “Certain Relationships and Related Party Transactions” and our audited and unaudited condensed financial statements and related notes included elsewhere in this prospectus.

 

    Nine Months Ended
September 30,
    Fiscal Year Ended December 31,  
    2008     2007     2007     2006     2005     2004     2003  
       
    (Dollars in millions)  

Statement of Earnings Data:

             

Net Sales

  $ 2,174.7     $ 1,907.2     $ 2,576.4     $ 2,345.1     $ 2,201.8     $ 1,997.2     $ 2,023.4  

Expenses:

             

Costs of Products Sold

    812.0       693.8       948.7       850.4       781.3       703.7       749.1  

Marketing, Selling and Administrative

    465.0       424.1       575.2       504.3       464.5       459.2       452.5  

Advertising and Product Promotion

    276.3       235.2       318.5       290.6       284.4       264.4       257.4  

Research and Development

    51.5       48.5       67.2       62.0       50.8       42.6       36.5  

Gain on Sale of Adult Nutrition Business

    —         —         —         —         —         (325.3 )     —    

Interest Expense

    11.9       —         —         —         —         —         —    

Other Expenses—net

    9.1       7.1       3.6       3.0       2.4       2.7       (21.9 )
                                                       

Total Expenses

    1,625.8       1,408.7       1,913.2       1,710.3       1,583.4       1,147.3       1,473.6  

Earnings from Operations Before Minority Interest and Income Taxes

    548.9       498.5       663.2       634.8       618.4       849.9       549.8  

Provision for Income Taxes

    (195.1 )     (172.9 )     (233.6 )     (230.1 )     (222.5 )     (325.0 )     (210.7 )

Minority Interest Expense—net of tax

    (6.3 )     (5.6 )     (7.1 )     (6.5 )     (6.1 )     (5.7 )     (4.0 )
                                                       

Net Earnings

  $ 347.5     $ 320.0     $ 422.5     $ 398.2     $ 389.8     $ 519.2     $ 335.1  
                                                       

Other Operating Data:

             

EBITDA1

  $ 592.6     $ 529.8     $ 707.2     $ 677.9     $ 666.4     $ 901.8     $ 591.5  

Balance Sheet Data (end of period):

             

Working Capital (Deficit)2

  $ (1,870.0 )   $ 69.5     $ 124.8     $ 94.2     $ (27.6 )   $ (46.8 )   $ (5.8 )

Total Assets

    1,372.0       1,268.0       1,301.9       1,204.3       1,123.5       1,103.3       1,097.9  

Total Liabilities

    2,718.1       691.9       664.1       611.9       658.7       652.2       597.1  

Minority Interest

    5.7       5.8       7.0       6.6       6.6       6.0       4.7  

Total Divisional Equity (Deficit)

    (1,351.8 )     570.3       630.8       585.8       458.2       445.1       496.1  

 

1

EBITDA is defined as net earnings before interest, taxes, depreciation and amortization. EBITDA is used by management as a performance measure for benchmarking against our peers and our competitors. We believe that EBITDA is useful to investors because it is frequently used by securities analysts, investors and other interested parties to evaluate companies in our industry. EBITDA is not a recognized term under U.S. GAAP. EBITDA should not be viewed in isolation and does not purport to be an alternative to net earnings as an indicator of operating performance or cash flows from operating activities as a measure of liquidity. EBITDA excludes some, but not all, items that affect net earnings, and these measures may vary among other companies. Therefore, EBITDA as presented below may not be comparable to similarly titled measures of other companies. The following is a reconciliation of net earnings to EBITDA:

 

    Nine Months Ended
September 30,
  Fiscal Year Ended December 31,
        2008           2007        2007   2006   2005   2004   2003
     
    (Dollars in millions)

Net Earnings

  $ 347.5   $ 320.0   $ 422.5   $ 398.2   $ 389.8   $ 519.2   $ 335.1

Interest Expense†

    11.9     0.1     0.1     0.1     0.3     0.2     0.3

Income Tax Expense

    195.1     172.9     233.6     230.1     222.5     325.0     210.7

Depreciation and Amortization

    38.1     36.8     51.0     49.5     53.8     57.4     45.4
                                         

EBITDA*

  $ 592.6   $ 529.8   $ 707.2   $ 677.9   $ 666.4   $ 901.8   $ 591.5
                                         
 
  Interest expense for the years ended December 31, 2007, 2006, 2005, 2004 and 2003 was included as part of Other Expenses—net.
  * EBITDA includes and has not been adjusted for the gain on the sale of the Adult Nutritional business of $325.3 million recognized during the year ended December 31, 2004, and EBITDA has not been adjusted for earnings from the Adult Nutritional business for the years ended December 31, 2003 and 2004, respectively.

 

2

Working Capital (Deficit) represents current assets less current liabilities. Working Capital (Deficit) as of September 30, 2008 includes a $2,000 million intercompany note issued as a dividend to E.R. Squibb & Sons, L.L.C., a wholly-owned subsidiary of BMS on August 26, 2008. The outstanding principal is payable on demand; therefore, this note has been classified as a current liability on our balance sheet. This note is being reduced and restructured into three notes as part of the separation transactions. At closing, these restructured notes will be a long-term liability. See “Unaudited Pro Forma Condensed Financial Information” and “Description of Indebtedness”.

 

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UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION

The following Unaudited Pro Forma Condensed Financial Information consists of unaudited pro forma condensed statements of earnings for the year ended December 31, 2007 and for the nine months ended September 30, 2008, and an unaudited pro forma condensed balance sheet as of September 30, 2008. The Unaudited Pro Forma Condensed Financial Information has been derived by application of pro forma adjustments to our historical financial statements included elsewhere in this prospectus.

The unaudited pro forma condensed statements of earnings give effect to the transactions described below as if they had occurred as of January 1, 2007. The unaudited pro forma condensed balance sheet gives effect to such transactions as if they had occurred as of September 30, 2008.

The pro forma adjustments are based upon available information and certain assumptions that we believe are reasonable. The Unaudited Pro Forma Condensed Financial Information is for illustrative and informational purposes only and does not purport to represent what the financial position or results of operations would have been if we had operated as a stand-alone company during the periods presented or if the transactions described below had actually occurred as of the dates indicated, nor does it project the financial position at any future date or the results of operations or cash flows for any future period.

Our Unaudited Pro Forma Condensed Financial Information has been prepared to reflect adjustments to our historical financial information, which adjustments have been grouped into two categories: (1) those attributable to our separation activities from BMS and (2) those attributable to this offering, each as described in more detail elsewhere in this prospectus.

 

   

The adjustments attributable to our separation activities reflect changes that will take place to enable us to operate separately from BMS, including changes in our operating structure in Europe, Brazil and Mexico, the restructuring of related-party debt and the assumption of certain employee benefit liabilities. As described in greater detail in “Certain Relationships and Related Party Transactions”, we are making certain changes in the organizational structure of several jurisdictions. Other than the changes in Europe, Brazil and Mexico, these changes do not result in pro forma adjustments to our historical financial information for the reasons described in the notes below.

 

   

The adjustments attributable to this offering reflect the formation of Mead Johnson Nutrition Company and the proposed related-party sales by BMS to us of the subsidiaries or the net assets that are primarily related to our pediatric nutrition business and the planned sale of shares of our Class A common stock.

Effective with this offering and as part of the separation, we will enter into a transitional services agreement, under which BMS will provide certain services to us that were previously provided when we were wholly-owned by BMS for fees specified in that agreement. The costs of the transitional services agreement in aggregate will be consistent with general and administrative expenses that BMS has historically allocated to us related to information technology, human resources, legal, research & development, insurance, finance, internal audit and other similar services. We will also incur additional costs for financial reporting and compliance, corporate governance, treasury and investor relations activities, which costs include additional compensation to current and future employees and professional fees to external service providers, that are in addition to our historical costs and are not covered by the transitional services agreement. See “Certain Relationships and Related Party Transactions”. We estimate that our annual general and administrative expenses will increase by a range of approximately $30.0 million to $36.0 million in the first year as a stand-alone public company, including service charges by BMS and expenses for services not captured by the transitional services agreement. In addition, general and administrative expenses are expected to increase further in the second and third year as a stand-alone public company due to duplication of costs and stranded costs arising from the termination of the transitional service agreement and the development of stand-alone infrastructure. The duplicative and stranded costs from the transitional service agreement have not been quantified and are expected to be temporary. No pro forma adjustments have been made to our historical financial statements to reflect the additional costs and expenses described in this paragraph.

 

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The unaudited pro forma condensed statements of earnings exclude certain non-recurring separation costs that we expect to incur in connection with this offering, including costs related to legal, accounting and consulting services. We expect these costs to be approximately $32.0 million during the last quarter of the year ending December 31, 2008 and an additional $29.0 million to $35.0 million to be incurred during 2009, which we expect to be more heavily weighted towards the first half of the year. We expect all of these costs to be expensed.

The Unaudited Pro Forma Condensed Financial Information and related notes should be read in conjunction with “Use of Proceeds”, “Capitalization”, “Selected Historical Financial and Operating Data”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “Certain Relationships and Related Party Transactions” and our audited and unaudited condensed financial statements and related notes included elsewhere in this prospectus.

Unaudited Pro Forma Condensed Statement of Earnings

For the year ended December 31, 2007

(Dollars in millions, except per share data)

 

     Historical     Adjustments
for
Separation
    Pro
Forma for
the
Separation
    Adjustments
for this
Offering
and Use of
Proceeds
   Pro Forma  

Net Sales

   $ 2,576.4     $ (39.0 )(a)   $ 2,537.4     $  —          $ 2,537.4  
                                   

Expenses:

           

Costs of Products Sold

     948.7       (11.8 )(a)     936.9       —        936.9  

Marketing, Selling and Administrative

     575.2       (9.6 )(a)     565.6       —        565.6  

Advertising and Product Promotion

     318.5       (4.1 )(a)     314.4       —        314.4  

Research and Development

     67.2       (0.5 )(a)     66.7       —        66.7  

Interest Expense

     —         103.1 (a)(b)     103.1       —        103.1  

Other Expenses—net

     3.6       —         3.6       —        3.6  
                                   

Total Expenses

     1,913.2       77.1       1,990.3       —        1,990.3  
                                   

Earnings from Operations Before Minority Interest and Income Taxes

     663.2       (116.1 )     547.1       —        547.1  

Provision for Income Taxes

     (233.6 )     41.6 (d)     (192.0 )     —        (192.0 )

Minority Interest Expense—net of tax

     (7.1 )     —         (7.1 )     —        (7.1 )
                                       

Net Earnings

   $ 422.5     $ (74.5 )   $ 348.0     $ —      $ 348.0  
                                       

Earnings Per Share:

           

Basic

     N/A       —         —         —      $ 1.74 (e)

Diluted

     N/A       —         —         —      $ 1.74 (e)

Weighted-Average Shares Outstanding

           

Basic

     N/A       —         —         —        200,000,000 (e)

Diluted

     N/A       —         —         —        200,000,000 (e)

 

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Table of Contents

Unaudited Pro Forma Condensed Statement of Earnings

For the nine months ended September 30, 2008

(Dollars in millions, except per share data)

 

     Historical     Adjustments
for
Separation
    Pro
Forma for
the
Separation
    Adjustments
for this
Offering
and Use of
Proceeds
   Pro Forma  

Net Sales

   $ 2,174.7     $ (33.8 )(a)   $ 2,140.9     $  —      $ 2,140.9  
                                   

Expenses:

           

Costs of Products Sold

     812.0       (11.2 )(a)     800.8       —        800.8  

Marketing, Selling and Administrative

     465.0       (8.4 )(a)     456.6       —        456.6  

Advertising and Product Promotion

     276.3       (5.3 )(a)     271.0       —        271.0  

Research and Development

     51.5       (0.4 )(a)     51.1       —        51.1  

Interest Expense

     11.9       65.5 (a)(b)     77.4       —        77.4  

Other Expenses—net

     9.1       —         9.1       —        9.1  
                                       

Total Expenses

     1,625.8       40.2       1,666.0       —        1,666.0  
                                       

Earnings from Operations Before Minority Interest and Income Taxes

     548.9       (74.0 )     474.9       —        474.9  

Provision for Income Taxes

     (195.1 )     27.8 (d)     (167.3 )     —        (167.3 )

Minority Interest Expense—net of tax

     (6.3 )     —         (6.3 )     —        (6.3 )
                                       

Net Earnings

   $ 347.5     $ (46.2 )   $ 301.3     $ —      $ 301.3  
                                       

Earnings Per Share:

           

Basic

     N/A       —         —         —      $ 1.51 (e)

Diluted

     N/A       —         —         —      $ 1.51 (e)

Weighted-Average Shares Outstanding

           

Basic

     N/A       —         —         —        200,000,000 (e)

Diluted

     N/A       —         —         —        200,000,000 (e)

 

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Unaudited Pro Forma Condensed Balance Sheet

As of September 30, 2008

(Dollars in millions, except per share data)

 

    Historical     Adjustments
for
Separation
    Pro
Forma for
the
Separation
    Adjustments
for this
Offering
and Use of
Proceeds
    Pro
Forma
 

ASSETS

         

Current Assets:

         

Cash

  $ —       $ 250.0 (b)   $ 250.0     $ —       $ 250.0  

Receivables—net

    273.9       —         273.9       —         273.9  

Inventories

    366.1       —         366.1       —         366.1  

Deferred Income Taxes—net of valuation allowance

    68.3       —         68.3       —         68.3  

Foreign Income Taxes Receivable

    3.7       —         3.7       —         3.7  

Prepaid Expenses and Other Assets

    35.4       —         35.4       —         35.4  
                                       

Total Current Assets

    747.4       250.0       997.4       —         997.4  

Property, Plant and Equipment—net

    443.2       —         443.2       —         443.2  

Goodwill

    117.5       —         117.5       —         117.5  

Other Intangible Assets—net

    38.5       —         38.5       —         38.5  

Deferred Income Taxes—net of valuation allowance

    2.2       (0.4 )(d)     1.8       —         1.8  

Other Assets

    23.2       —         23.2       —         23.2  
                                       

Total

  $ 1,372.0     $ 249.6     $ 1,621.6     $ —       $ 1,621.6  
                                       

LIABILITIES AND DIVISIONAL EQUITY (DEFICIT)

         

Current Liabilities:

         

Related Party Debt

  $ 2,000.0     $ (2,000.0 )(b)   $ —       $ —   (e)   $ —    

Accounts Payable

    191.6       —         191.6       —         191.6  

Accrued Expenses

    128.1       1.1 (a)     129.2       —         129.2  

Accrued Rebates and Returns

    269.6       —         269.6       —         269.6  

Deferred Income—current

    15.1       —         15.1       —         15.1  

Deferred Income Taxes—current

    0.1       —         0.1       —         0.1  

U.S. and Foreign Income Taxes Payable

    12.9       —         12.9       —         12.9  
                                       

Total Current Liabilities

    2,617.4       (1,998.9 )     618.5       —         618.5  

Pension and Other Post-retirement Liabilities

    —         50.5 (c)     50.5       —         50.5  

Deferred Income—long-term

    8.0       —         8.0       —         8.0  

Deferred Income Taxes—long-term

    74.4       (13.9 )(d)     60.5       —         60.5  

Other Liabilities

    18.3       40.4 (a)     58.7       —         58.7  

Related Party Debt

    —         1,750.0 (b)     1,750.0       —         1,750.0  
                                       

Total Liabilities

    2,718.1       (171.9 )     2,546.2       —         2,546.2  

Minority Interest

    5.7       —         5.7       —         5.7  

Divisional Equity (Deficit)

    (1,351.8 )     481.8 (a)(b)(c)(d)     (870.0 )     870.0 (e)     —    

Class A Common Stock $0.01 Per Share, 3,000,000,000 Authorized; 72,344,571 Shares Issued and Outstanding on a Pro Forma Basis

    —         —         —         0.7 (e)     0.7  

Class B Common Stock $0.01 Per Share, 1,200,000,000 Authorized; 127,655,429 Issued and Outstanding on a Pro Forma Basis

    —         —         —         1.3 (e)     1.3  

Preferred Stock $0.01 Per Share, 300,000,000 Authorized; No Shares Issued and Outstanding on a Pro Forma Basis

    —         —         —         —         —    

Additional Paid in Capital

    —         —         —         (883.5 )(e)     (883.5 )

Accumulated Other Comprehensive Income (Loss)

    —         (60.3 )(c)     (60.3 )     11.5 (e)     (48.8 )
                                       

Total Stockholders’ Equity (Deficit)

    (1,351.8 )     421.5       (930.3 )     —         (930.3 )
                                       

Total Liabilities and Stockholders’ Equity (Deficit)

  $ 1,372.0     $ 249.6     $ 1,621.6     $ —       $ 1,621.6  
                                       

 

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Table of Contents

Notes to Unaudited Pro Forma Condensed Financial Information

(Dollars in millions, except per share data)

Separation Adjustments

(a) Operating Model Changes

Due to statutory, regulatory and operational requirements, we will implement changes to our historical operating arrangements in certain jurisdictions. Pro forma adjustments have been made to reflect the impact of these changes on our results for the year ended December 31, 2007 and the nine months ended September 30, 2008 as if the changes had occurred on January 1, 2007 and to reflect the impact on our financial position as if the changes had occurred on September 30, 2008. These adjustments include the following:

European Distributor Model

We currently use BMS’s pharmaceutical operations to distribute our products in Europe at cost. As a result of our separation from BMS, we intend to distribute our products in Europe through third-party distributors in lieu of incurring costs to build our own distribution network. The use of third-party distributors will have the effect of reducing our “Net Sales” by the amount of the distributors’ margin, offset partially by a reduction in distribution-related expenses that have historically been recorded in our “Marketing, Selling and Administrative” expenses and that will be borne by a third party under the new model. The margin used for purposes of making these pro forma adjustments is the margin that has been agreed upon by us and BMS in the interim distribution arrangements, which was derived from a benchmarking evaluation. As we transition to this third-party distributor model, BMS will serve as our interim distributor and will be paid a third-party distributor margin, rather than having us incur expenses at cost as was the historical practice. The following adjustments are reflected in our pro forma results to reflect the reduction in “Net Sales”, “Marketing, Selling and Administrative” expenses and the associated earnings impact:

 

Europe    Year Ended
December 31,
2007
    Nine Months
Ended
September 30,
2008
 

Net Sales

   $ (7.8 )   $ (6.9 )

Marketing, Selling and Administrative

     (3.0 )     (2.8 )

Earnings from Operations Before Minority Interest and Income Taxes:

     (4.8 )     (4.1 )

Brazil Adjustments

We expect that our ability to operate as a stand-alone entity in Brazil will be delayed for a period of time due to certain statutory and regulatory requirements for permits and applications. Until we are able to operate as a stand-alone entity in Brazil, BMS will distribute and record sales for our products and our role will be limited to marketing activities. The following adjustments are reflected in our pro forma results to remove the Brazil operating results:

 

Brazil    Year Ended
December 31,
2007
    Nine Months
Ended
September 30,
2008
 

Net Sales

   $ (31.2 )   $ (26.9 )

Costs of Products Sold

     (13.7 )     (13.6 )

Marketing, Selling and Administrative

     (8.2 )     (7.6 )

Advertising and Product Promotion

     (4.1 )     (5.3 )

Research and Development

     (0.5 )     (0.4 )

Earnings from Operations Before Minority Interest and Income Taxes

     (4.7 )     0.0  

Mexico Operations

In Mexico, our activities are commingled with BMS’ pharmaceutical activities. As part of our separation activities, we will establish a new legal entity for our operations in Mexico. BMS will continue to own our

 

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manufacturing facility in Mexico, and we will enter into a 20-year capital lease with BMS for that facility and related property and equipment having a net book value of $35.5 prior to or concurrently with this offering. The adjustment reflects the recognition of the present value of the minimum lease payments in “Other Liabilities” of $40.4 and “Accrued Expenses” of $1.1, for the portion of the liability due within one year, with a corresponding decrease in “Divisional Equity”. Additionally, the adjustment reflects an increase in “Interest Expense” of $2.5 and $1.9 for the year ended December 31, 2007 and the nine months ended September 30, 2008, respectively. Annual lease payments are in the amount of $3.6. No adjustment is necessary to record the plant, property and equipment and related depreciation as our historical financial statements reflect these items.

We are required to pay profit sharing benefits to our employees in Mexico. Had the amount of such benefits paid to our employees been calculated on a stand-alone basis, the benefits paid to employees supporting our operations would have increased by $3.5 and $4.4 for the year ended December 31, 2007 and the nine months ended September 30, 2008, respectively.

The following adjustments are reflected in our pro forma results to reflect the interest expense on the Mexico capital lease and the increase in profit sharing benefits in Mexico:

 

     Year Ended
December 31,
2007
    Nine Months
Ended
September 30,
2008
 

Mexico Capital Lease

    

Interest Expense

   $ 2.5     $ 1.9  
Mexico Profit Sharing     

Costs of Products Sold

   $ 1.9     $ 2.4  

Marketing, Selling and Administrative

   $ 1.6     $ 2.0  

Earnings from Operations Before Minority

    

Interest and Income Taxes

   $ (6.0 )   $ (6.3 )

In several of our other jurisdictions, including Argentina and China, the transfer of assets from BMS to us will not occur prior to or concurrently with this offering for regulatory and other reasons. No pro forma adjustment has been made to our historical financial information in those jurisdictions. In Argentina, no pro forma adjustments are made because we believe that such adjustments are immaterial to our financial results. In China, no pro forma adjustments are made because we believe that MJN China’s assets, liabilities and financial results will continue to be fully consolidated with our assets, liabilities and financial results in the future. See “Certain Relationships and Related Party Transactions”.

(b) Debt Restructuring and Cash Requirements

On August 26, 2008, we issued a $2,000 intercompany note (the “ERS intercompany note”) to E.R. Squibb & Sons, L.L.C., a wholly-owned subsidiary of BMS (“ERS”). At September 30, 2008, the ERS intercompany note is reflected in current liabilities on our balance sheet. This note has been reclassified to non-current liabilities on our pro forma balance sheet as it will be restructured into three senior unsecured notes (“senior unsecured notes”) prior to or concurrently with this offering. Details of the senior unsecured notes are shown below.

 

Principal Amount  

Maturity

  Amortization

$744.2

  2014  

No amortization in 2009 and annual amortization of $75 payable in

cash in quarterly

installments in 2010 – 2014

  500

  2016   No amortization

  500

  2019   No amortization

 

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The following adjustments for our separation impacted “Related Party Debt” and “Cash” with the corresponding offset to “Divisional Equity (Deficit)”.

Our pro forma balance sheet debt reflects a reduction in the ERS intercompany note as a result of a planned forgiveness or reduction of $255.8.

On January 31, 2009, Mead Johnson Venezuela S.C.A., our wholly owned indirect subsidiary issued a note (the “Venezuela Note”) in the local currency equivalent of $5.8 aggregate principal amount payable to Bristol-Myers Squibb de Venezuela S.C.A., a wholly-owned subsidiary of BMS. This note will (i) mature in 2014, (ii) require no amortization payments, (iii) be prepayable at our option and (iv) bear interest at a fixed rate of approximately 24% per annum.

Cash of $250 has been added to the pro forma balance sheet representing an amount agreed upon between us and BMS needed to fund the operating requirements of our business as of September 30, 2008. Historically, cash balances were recorded at the BMS level.

In addition, interest expense on our pro forma statements of earnings has been adjusted to reflect interest expense as if the senior unsecured notes had been in place at the beginning of the periods presented. These adjustments increased interest expense by $100.6 and $63.6 for the year ended December 31, 2007 and the nine months ended September 30, 2008, respectively, using a weighted-average interest rate of approximately 5.75% on the aggregate borrowings. A 1/8% change in the interest rate on our pro forma indebtedness would change pro forma interest expense by approximately $2.2 for the year ended December 31, 2007 and $1.6 for the nine months ended September 30, 2008.

(c) Pension Liabilities

The historical financial statements reflect the pension, postretirement and other retirement benefit plans on a multi-employer basis in accordance with SFAS No. 87, Employers’ Accounting for Pensions, as amended by SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans. As a result, the related expenses were included in our historical statement of earnings, but the unfunded portion of employee benefit liabilities was not recorded in the historical balance sheet as of September 30, 2008. The adjustment reflects the assumption of the unfunded portion of the active employee benefit liabilities for pension, postretirement and other retirement benefit plans in the United States from BMS. As a result of the funded status of the plan as of September 30, 2008, a liability of $50.5 has been recorded to “Pension and Other Post-retirement Liabilities”. Additionally, we have recorded a $60.3 charge to “Accumulated Other Comprehensive Income” for unrecognized components of our historical pension and postretirement cost and a $9.8 credit to “Divisional Equity” to reflect the aggregate effect of this transaction with BMS. The actual funded status will be measured as of the date of this offering and may vary significantly due to recent declines in the global markets. This may also have a negative impact on our future net periodic pension cost.

(d) Resulting Tax Effects

Represents a net reduction to our net deferred tax assets of $0.4 and a reduction to our net deferred tax liability of $13.9 primarily associated with the expected assumption of certain pension liabilities from BMS upon separation (described in (c) above), assuming a statutory tax rate of 38%, and the deferred tax impacts of the capital lease liability at the Delicias, Mexico facility (described in note (a) above), assuming a local tax rate of 28%.

Adjustments to income tax expense on the unaudited pro forma condensed statements of earnings are calculated at a U.S. federal statutory rate of 35% (combined with a state-level statutory tax rate of 3% for adjustments specific to the United States).

Offering Adjustments

(e) Reflects the impact of the issuance of foreign intercompany notes that are held by subsidiaries of BMS on January 31, 2009 and the related repayment of these foreign intercompany notes in full as described under “Use of Proceeds”, the conversion of BMS’s net investment in us from “Divisional Equity (Deficit)” to “Additional Paid in Capital” as a result of this offering and the sale of shares of Class A common stock in this offering at the initial public offering price per share.

 

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The following adjustments are reflected in our pro forma results to reflect the impact of the above transactions on “Divisional Equity (Deficit)”, “Additional Paid in Capital” and “Accumulated Other Comprehensive Income”. See “Use of Proceeds”.

 

    As of September 30, 2008  
    Issuance of
Foreign
Intercompany
Notes
    Related Party
Payables and
Other
Obligations
    Proceeds from
Equity Offering /
Use of Proceeds
    Conversion of
Divisional Equity
(Deficit) to
Additional

Paid in
Capital
    Adjustments for
this Offering and
Use of Proceeds
 

Related Party Borrowings

  596.8     82.9     (679.7 )   —       —    

Divisional Equity

  (596.8 )   (82.9 )   —       1,549.7     870.0  

Class A Common Stock

  —       —       0.3     0.4     0.7  

Class B Common Stock

  —       —       —       1.3     1.3  

Additional Paid in Capital

  —       —       679.4     (1,562.9 )   (883.5 )

Accumulated Other Comprehensive Income

  —       —       —       11.5     11.5  

Pro Forma Earnings per Share

The number of shares used to compute pro forma basic and diluted earnings per share is 200,000,000, which is the number of shares outstanding upon this offering of our Class A common stock and of our Class B common stock convertible into our Class A common stock.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

This management’s discussion and analysis of financial condition and results of operations contains forward-looking statements that involve risks and uncertainties. See “Forward-Looking Statements” for a discussion of the uncertainties, risks and assumptions associated with those statements. You should read the following discussion in conjunction with our audited and unaudited financial statements, the notes to our audited financial statements, our unaudited pro forma condensed financial statements and the notes to our unaudited pro forma condensed financial statements included elsewhere in this prospectus. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those in “Risk Factors” and included in other portions of this prospectus.

Overview of Our Business

We are a global leader in pediatric nutrition with approximately $2.6 billion in net sales for the year ended December 31, 2007. We are committed to creating trusted nutritional brands and products which help improve the health and development of infants and children around the world and provide them with the best start in life. Our Enfa family of brands, including Enfamil® infant formula, is the world’s leading brand franchise in pediatric nutrition, based on retail sales. Our comprehensive product portfolio addresses a broad range of nutritional needs for infants, children and expectant and nursing mothers. We have 100 years of innovation experience during which we have developed or improved many breakthrough or industry-defining products across each of our product categories. Our singular focus on pediatric nutrition and our implementation of a business model that integrates nutritional science with health care and consumer marketing expertise differentiate us from many of our competitors. We operate in four geographic regions: North America, Europe, Asia and Latin America. Due to similarities in the economics, products offered, production process, customer base and regulatory environment, these operating regions have been aggregated into two reportable segments: North America/Europe and Asia/Latin America.

Factors Affecting Our Results of Operations

Our operating results are primarily affected by the following factors:

Industry Growth

According to Euromonitor, the global pediatric nutrition industry is projected to grow at a CAGR of approximately 9% from 2007 to 2012. We believe several trends have supported and will continue to support this growth, including the following:

 

   

favorable demographics;

 

   

increased consumer awareness of the importance of health and wellness;

 

   

enhanced nutritional insight;

 

   

innovation; and

 

   

consumer willingness to pay for premium and enhanced nutrition products.

Perceptions of Product Quality and Safety

We believe pediatric nutrition producers with a reputation for quality and safety should be able to command higher average selling prices and thereby generate higher gross margins than competitors who do not possess the same reputation. A decrease in the quality and safety of any particular product, whether real or perceived, could trigger wider negative perception of the decrease in the quality and safety of all producers, thereby affecting the industry generally. We believe our past growth has benefited from our brand recognition and from real and perceived safety and quality of our pediatric nutrition products. However, if a future market crisis involving any

 

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of our products should occur, especially if management fails to respond to such crisis in a timely and effective manner, our brand recognition and reputation could be severely damaged, which could adversely affect our results of operations. See “Risk Factors—Risks Related to Our Business—We may experience liabilities or negative effects on our reputation as a result of real or perceived quality issues, including product recalls, injuries or other claims”. For example, melamine was found in Chinese dairy used in certain infant formula products of other manufacturers, which led to the deaths of several infants in September 2008. We do not use dairy or protein-containing raw ingredients from China at any of our manufacturing sites and we have not been adversely impacted by these events in China thus far. Events such as these, however, may create a perception of contamination risk among consumers with respect to all products in our industry.

Competition and Brand Recognition

The pediatric nutrition industry is intensely competitive. Our principal competitors, including Néstle S.A., Abbott Laboratories, Groupe Danone and Wyeth, all have substantial financial, marketing and other resources. In addition, we face significant competition from domestic producers and private label, store and economy brand manufacturers. In recent years, there has been growing demand, particularly in Asia, for premium pediatric nutrition products due to increasing consumer awareness of brand image and nutritional value of the products offered by leading producers.

Our success depends on sustaining the strength of our brands, particularly our Enfa family of brands. If we fail to promote and maintain the brand equity of our products, particularly our Enfa family of brands, across each of our markets, then consumer perception of its superior nutritional benefits may be diminished. If the difference in the value attributed to our products as compared to those of our competitors narrows, consumers may choose not to buy our products. In periods of economic uncertainty, these trends may be more pronounced. See “Risk Factors—Risks Related to Our Business—Our success depends on sustaining the strength of our brands, particularly our Enfa family of brands”.

Raw Material Supply and Prices

The per unit costs of producing our pediatric nutrition products are subject to the supply and price volatility of dairy and other raw materials, which are affected by global factors. For example, dairy prices are affected by factors such as geographic location, the impact of weather on dairy production, fluctuation in product availability, competition and inflation. Dairy costs are the largest component of our costs of products sold. In 2007, our dairy costs were significantly higher than in 2006.

Increases in the price of dairy would negatively impact our gross margins if we are not able to offset such increases through increases in our selling price, change in product mix or cost reduction/productivity enhancement efforts. The prices of these materials may continue to rise due to a general increase in commodities prices, especially for agricultural products. This would in turn affect the unit costs of products sold for our pediatric nutrition products.

Foreign Exchange Movements

We market our portfolio of products in more than 50 countries in North America, Europe, Asia and Latin America. Due to the international aspect of our business, our net sales and expenses are influenced by foreign exchange movements. This impact is reflected across our results of operations discussed below.

Corporate Separation Transactions

We have been developing and producing pediatric nutrition products as a division of BMS since we were acquired by BMS in 1967, and our assets, liabilities and operating results have been included in the financial statements of BMS since that time. As part of our separation from BMS, BMS expects to sell or contribute to us the subsidiaries, assets and liabilities that are primarily related to our pediatric nutrition business. See “Certain Relationships and Related Party Transactions”.

 

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Our audited and unaudited consolidated financial statements included elsewhere in this prospectus, which are discussed below, reflect the historical position, results of operations and cash flows of the business that will be transferred to us from BMS pursuant to the separation. The financial information included in this prospectus, however, does not reflect what our financial position, results of operations and cash flows will be in the future or what our financial position, results of operations and cash flows would have been in the past had we been a public, stand-alone company during the periods presented.

Outlook

We expect our results of operations for the fourth quarter of 2008 and during 2009 to be adversely affected compared to the corresponding periods in the prior year primarily as a result of:

 

   

non-recurring separation costs that we expect to incur in connection with this offering, including costs related to legal, accounting and consulting services. We expect these costs to be approximately $32.0 million during the fourth quarter of 2008 and an additional $29.0 million to $35.0 million to be incurred during 2009, which we expect to be more heavily weighted towards the first half of the year;

 

   

stand alone public company expenses of $30.0 million to $36.0 million annually;

 

   

interest expense related to BMS intercompany debt; and

 

   

the foreign currency impact of the recent strengthening of the U.S. dollar.

In addition, even after adjusting for the foregoing factors, our operating results for the first quarter of 2009 may compare unfavorably with the first quarter of 2008, primarily as a result of favorable commodity prices and lower advertising, promotion and sale force expenses in the first quarter of 2008.

Operating results for 2009 may also be adversely impacted by the general economic conditions affecting consumers and retail and wholesale customers.

Components of Our Net Sales and Expenses

Net Sales

Our net sales are primarily derived from powdered milk formulated for infants and children sold to retailers and distributors. Net sales are driven by a combination of factors that include, but are not limited to: (1) the overall number of infants and children in the geographic markets in which we operate, (2) the innovation and competitiveness of our product offering, (3) consumer willingness to pay for our products, (4) governmental regulations and economic dynamics in our markets and (5) increased consumer awareness of the importance of health and wellness and enhanced nutritional insight. Our net sales include various adjustments including, among others, gross-to-net sales adjustments for WIC rebates, cash discounts and sales returns.

Our financial results include net sales of rebated WIC products which represented approximately 9% of total U.S. net sales for the year ended December 31, 2007, after subtracting the rebates we paid to the WIC agencies. The WIC program is a U.S. Department of Agriculture (“USDA”) program created to provide nutritious foods, nutrition education and referrals to health care professionals and other social services to those considered to be at nutritional risk, including low-income pregnant, postpartum and breastfeeding women and infants and children up to age five. It is estimated that approximately 51% of all infants born in the United States during the twelve-month period ending August 31, 2008 benefited from the WIC program during this period. Participation in the WIC program is an important part of our U.S. business based on the volume of infant formula sold under the program. Sales to WIC participants are primarily transacted through the retail network at full retail price. Rebates to the state WIC agencies are payable based on the number of retail purchases by WIC participants, vouchers issued and the terms of the WIC contracts.

Expenses

Our expenses are made up of the following components:

 

   

Costs of products sold consist primarily of costs of materials that we use in the manufacture of our products. Historically, the cost of materials has represented a majority of our total costs of products

 

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sold. Our materials costs are influenced by inflation and fluctuations in global commodity prices, principally dairy, agricultural oils and tin. Dairy costs increased 2.3 points as a percentage of costs of products sold from 27.3% for the nine months ended September 30, 2007 to 29.6% for the nine months ended September 30, 2008. In addition, dairy costs increased 5.0 points as a percentage of costs of products sold from 22.8% for the year ended December 31, 2006 to 27.8% for the year ended December 31, 2007.

 

   

Marketing, selling and administrative expenses consist primarily of employee compensation and benefits, occupancy, third-party selling, marketing and market research services. These expenses also include distribution expenses, which are primarily comprised of warehousing and freight costs and allocations of corporate and shared service costs. Marketing, selling and administrative expenses are driven by business strategy and inflation.

 

   

Advertising and product promotion expenses consist primarily of expenses related to media, samples, medical education and direct-to-consumer programs. Advertising and product promotion expenses are driven by marketing strategy and inflation.

 

   

Research and development expenses consist primarily of employee compensation and benefits, clinical studies and product development costs. Research and development expenses are driven by business strategy and the level of innovation and support for currently marketed products.

 

   

Other (income) expenses consist primarily of the impact of foreign exchange transaction gains and losses, income or loss from a third-party manufacturing contract that is non-core to our pediatric nutrition business and gains and losses from the disposal of property, plant and equipment.

 

   

Minority interest expenses consist almost entirely of an 11% minority interest in our joint venture in China with Guangzhou Dairy Products Factory and GETDZ Commerce and Development Corp.

BMS currently provides us with significant corporate and shared services functions. Our historical financial statements in this prospectus reflect an allocation of these costs within marketing, selling and administrative expenses. These allocations include costs related to corporate and shared services functions such as executive oversight, risk management, information technology, accounting, audit, legal, investor relations, human resources, tax, treasury, procurement and other services. Following our separation from BMS, we expect BMS to continue to provide many of the services related to these functions on a transitional basis for a fee. These services will be provided under the transitional services agreement described in “Certain Relationships and Related Party Transactions”. In addition to the cost of these services, we may incur other corporate and operational costs which may be greater than historically allocated levels. For example, as a public company, we will incur costs relating to our public reporting and compliance obligations. Also, we will incur certain non-recurring expenses in connection with our separation from BMS.

Results of Operations

The following table sets forth, for the periods indicated, selected items from our financial statements:

 

    Nine Months Ended
September 30,
    Year Ended December 31,  
    2008     2007     % Change     2007     2006     2005     % Change  
                                        2007 vs.
2006
    2006 vs.
2005
 
(Dollars in millions)      

Net Sales

  $ 2,174.7     $ 1,907.2     14.0 %   $ 2,576.4     $ 2,345.1     $ 2,201.8     9.9 %   6.5 %

Expenses

    1,625.8       1,408.7     15.4 %     1,913.2       1,710.3       1,583.4     11.9 %   8.0 %

Earnings from Operations Before Minority Interest and Income Taxes

    548.9       498.5     10.1 %     663.2       634.8       618.4     4.5 %   2.7 %

Provision for Income Taxes

    (195.1 )     (172.9 )   12.8 %     (233.6 )     (230.1 )     (222.5 )   1.5 %   3.4 %

Effective Tax Rate

    35.6 %     34.7 %   —         35.2 %     36.2 %     36.0 %   —       —    

Minority Interest Expense—net of tax

    (6.3 )     (5.6 )   12.5 %     (7.1 )     (6.5 )     (6.1 )   9.2 %   6.6 %
                                             

Net Earnings

  $ 347.5     $ 320.0     8.6 %   $ 422.5     $ 398.2     $ 389.8     6.1 %   2.2 %
                                             

 

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Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007

Below is a summary of comparative results of operations and a more detailed discussion of results for the nine months ended September 30, 2008 and 2007:

 

     Nine Months Ended September 30,  
     2008     2007     % Change     % of Net Sales  
               2008             2007      
(Dollars in millions)       

Net Sales

   $ 2,174.7     $ 1,907.2     14.0 %   —       —    

Expenses

     1,625.8       1,408.7     15.4 %   74.8 %   73.9 %

Earnings from Operations Before Minority Interest and Income Taxes

     548.9       498.5     10.1 %   25.2 %   26.1 %

Provision for Income Taxes

     (195.1 )     (172.9 )   12.8 %   9.0 %   9.1 %

Effective Tax Rate

     35.6 %     34.7 %   —       —       —    

Minority Interest Expense—net of tax

     (6.3 )     (5.6 )   12.5 %   0.3 %   0.3 %
                      

Net Earnings

   $ 347.5     $ 320.0     8.6 %   16.0 %   16.8 %
                      

Net Sales

Net sales for the nine months ended September 30, 2008 increased $267.5 million, or 14.0%, including a positive 4.2% foreign currency exchange impact, to $2,174.7 million compared to the nine months ended September 30, 2007. Net sales increased in all regions and in all product categories, driven by pricing increases in response to increased dairy costs, the impact of increased advertising and promotion, regional expansion within key Asian markets and product innovation. Innovations launched in the period include the addition of prebiotics and an increase in the level of DHA in several of our products in Asia. Additionally, we launched Nutramigen AA®, an amino-acid based infant formula for infants with severe food allergies.

We operate in two reportable segments: North America/Europe and Asia/Latin America. Our net sales based on those segments are shown in the table below:

 

     Nine Months Ended September 30,  
     2008    2007    % Change     % Change
Due to Foreign
Exchange
 
(Dollars in millions)       

North America/Europe

   $ 1,036.0    $ 1,012.5    2.3 %   1.9 %

Asia/Latin America

     1,138.7      894.7    27.3 %   6.7 %
                  

Net Sales

   $ 2,174.7    $ 1,907.2    14.0 %   4.2 %
                  

Our North America/Europe segment represented 47.6% of net sales and our Asia/Latin America segment represented 52.4% of net sales for the nine months ended September 30, 2008. For the nine months ended September 30, 2008, North America/Europe sales increased $23.5 million, or 2.3%, including a positive 1.9% foreign currency exchange impact, to $1,036.0 million compared to the nine months ended September 30, 2007. This increase was due primarily to pricing increases offset by U.S. volume losses attributable to growth in private label brands and WIC contract transitions. Asia/Latin America sales increased $244.0 million, or 27.3%, including a positive 6.7% foreign currency exchange impact, to $1,138.7 million, during the same period. Growth in Asia/Latin America was broad-based across all major markets driven by pricing increases, strong volume growth in China and Hong Kong, including the effect of higher advertising and promotion supporting product launches, the addition of prebiotics and the increase in DHA in some children’s nutrition products in Asia.

 

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We have three product categories: (1) infant formula, (2) children’s nutrition and (3) other. Our net sales based on those product categories are shown in the table below:

 

     Nine Months Ended September 30,  
     2008    2007    % Change     % Change
Due to Foreign
Exchange
 
(Dollars in millions)       

Infant Formula

   $ 1,462.2    $ 1,328.9    10.0 %   3.0 %

Children’s Nutrition

     640.7      510.4    25.5 %   7.1 %

Other

     71.8      67.9    5.7 %   5.1 %
                  

Net Sales

   $ 2,174.7    $ 1,907.2    14.0 %   4.2 %
                  

Net sales for the period increased in each of our product categories. For the nine months ended September 30, 2008, infant formula sales increased $133.3 million, or 10.0%, including a positive 3.0% foreign currency exchange impact, to $1,462.2 million compared to the nine months ended September 30, 2007. Infant formula growth reflected the mix between the lower growth in our North America/Europe segment, and the higher growth in our Asia/Latin America segment. Children’s nutrition products, sold primarily in the Asia/Latin America segment, increased $130.3 million, or 25.5%, including a positive 7.1% foreign currency exchange impact, to $640.7 million during the same period in line with the broad-based growth across our key Asia and Latin America markets.

We recognize revenue net of various sales adjustments to arrive at net sales reported on the statements of earnings. These adjustments are referred to as gross-to-net sales adjustments. The components of our gross sales to net sales by each significant category of gross-to-net sales adjustments were as follows:

 

     Nine Months Ended September 30,  
     2008     2007     % Change  
(Dollars in millions)                   

Gross Sales

   $ 2,997.8     $ 2,787.8     7.5  %

Gross-to-Net Sales Adjustments

      

WIC Rebates

     (601.7 )     (670.0 )   (10.2 )%

Sales Discounts

     (63.9 )     (45.4 )   40.7  %

Returns

     (48.7 )     (49.2 )   (1.0 )%

Cash Discounts

     (35.4 )     (38.7 )   (8.5 )%

Prime Vendor Charge-Backs

     (32.1 )     (34.8 )   (7.8 )%

Other Adjustments

     (41.3 )     (42.5 )   (2.8 )%
                  

Total Gross-to-Net Sales Adjustments

     (823.1 )     (880.6 )   (6.5 )%
                  

Total Net Sales

   $ 2,174.7     $ 1,907.2     14.0  %
                  

For the nine months ended September 30, 2008, our gross sales increased $210.0 million, or 7.5%, to $2,997.8 million compared to the nine months ended September 30, 2007. Gross-to-net sales adjustments during the same period declined $57.5 million, or 6.5%, to $823.1 million. The decline was generated by changes in WIC rebates in North America due to the loss of the Western States Contracting Alliance, Texas, Minnesota and Iowa WIC contracts to other infant formula manufacturers during the fourth quarter of 2007, partially offset by the addition of California and Louisiana WIC contracts during the second half of 2007, as well as Illinois and Colorado WIC contracts during the nine months ended September 30, 2008. Sales discounts increased $18.5 million during the same period primarily in key Asia markets due to revenue growth and a change in retail sales mix resulting in increased gross sales to key customers with higher discounts.

 

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Expenses

 

     Nine Months Ended September 30,  
     2008    2007    % Change     % of Net Sales  
                 2008             2007      
(Dollars in millions)                             

Expenses:

            

Costs of Products Sold

   $ 812.0    $ 693.8    17.0 %   37.3 %   36.4 %

Marketing, Selling and Administrative

     465.0      424.1    9.6 %   21.4 %   22.2 %

Advertising and Product Promotion

     276.3      235.2    17.5 %   12.7 %   12.3 %

Research and Development

     51.5      48.5    6.2 %   2.4 %   2.5 %

Interest Expense

     11.9      —      N/A     0.5 %   N/A  

Other Expenses—net

     9.1      7.1    28.2 %   0.4 %   0.4 %
                    

Total Expenses

   $ 1,625.8    $ 1,408.7    15.4 %   74.8 %   73.9 %
                    

Costs of Products Sold

For the nine months ended September 30, 2008, costs of products sold increased $118.2 million, or 17.0%, to $812.0 million compared to the nine months ended September 30, 2007. This increase was driven primarily by global dairy price increases. In 2007, the market volatility in dairy prices was mitigated through the contractual pricing agreements we entered into during 2006 and prior periods. However, many of these contracts expired at the end of 2007, resulting in an increase in our costs of products sold in 2008. Additionally, the costs of products sold increase was driven by sales volume growth and an unfavorable foreign exchange impact due to the weakening of the U.S. dollar versus foreign currencies. Furthermore, the cost increase as a percentage of sales was also driven by product mix changes as lower margin children’s nutrition products experienced more rapid volume gains than higher margin infant formulas.

Marketing, Selling and Administrative Expenses

For the nine months ended September 30, 2008, marketing, selling and administrative expenses increased $40.9 million, or 9.6%, to $465.0 million compared to the nine months ended September 30, 2007. This increase was driven by an unfavorable foreign exchange impact due to weakening of the U.S. dollar versus foreign currencies. This increase was also driven by increases in marketing efforts in Asia, including sales force expansion in China, global salary and benefits increases due to inflation and higher corporate allocation costs. Partially offsetting these increases was the one-time impact of a $17.6 million bad debt write-off in the first half of 2007 related to a distributor’s insolvency.

Advertising and Product Promotion Expenses

For the nine months ended September 30, 2008, advertising and product promotion expenses increased $41.1 million, or 17.5%, to $276.3 million compared to the nine months ended September 30, 2007. This increase was driven in large part by a strategic decision to increase various demand-generating activities in key Asian markets, investment in promotional programs in China, Brazil, the Philippines and Thailand, and by an unfavorable foreign exchange impact due to weakening of the U.S. dollar versus foreign currencies.

Research and Development Expenses

For the nine months ended September 30, 2008, research and development expenses increased $3.0 million, or 6.2%, to $51.5 million compared to the nine months ended September 30, 2007. This increase was driven mainly by increased investment in clinical and discovery trials, salary and benefits inflation and an unfavorable foreign exchange impact due to weakening of the U.S. dollar versus foreign currencies.

 

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Interest Expense

For the nine months ended September 30, 2008, we incurred interest expense of $11.9 million from the $2,000 million ERS intercompany note. See “Unaudited Pro Forma Condensed Financial Information” and “Description of Indebtedness” for a description of the ERS intercompany note as a part of this offering.

Earnings from Operations Before Minority Interest and Income Taxes

Our earnings from operations before minority interest and income taxes consists of earnings from our two reportable segments, North America/Europe and Asia/Latin America, reduced by Corporate and Other costs. Corporate and Other costs consist of unallocated general and administrative activities and associated expenses, including in part, executive, legal, finance, information technology, human resources, research and development, global marketing and global supply chain costs.

 

     Nine Months Ended
September 30,
 
     2008     2007     % Change  
(Dollars in millions)                   

Total Earnings from Operations Before Minority Interest and Income Taxes

   $ 548.9     $ 498.5     10.1 %

North America/Europe

     357.6       360.8     (0.9 )%

Asia/Latin America

     359.4       265.2     35.5 %

Corporate and Other

     (168.1 )     (127.5 )   31.8 %

For the nine months ended September 30, 2008, North America/Europe earnings from operations before minority interest and income taxes was relatively flat and decreased $3.2 million, or 0.9%, to $357.6 million compared to the nine months ended September 30, 2007. During the same period, Asia/Latin America earnings from operations before minority interest and income taxes increased $94.2 million, or 35.5%, to $359.4 million. This increase was primarily driven by growth in sales and the one-time impact of a $17.6 million bad debt write-off in the first half of 2007 related to a distributor’s insolvency. During the same period, Corporate and Other costs increased $40.6 million, or 31.8%, to $168.1 million. This was principally due to a $13.2 million increase in cost of information management services provided by BMS, an $11.9 million interest expense charge due to the $2,000 million ERS intercompany note and $14.0 million in expenses related to this offering.

Income Taxes

For the nine months ended September 30, 2008, our provision for income taxes increased $22.2 million, or 12.8%, to $195.1 million compared to the nine months ended September 30, 2007, primarily due to earnings mix, the benefit of certain basis differences recorded in the nine months ended September 30, 2007 and the loss of benefit of our research and development credit, which expired on December 31, 2007.

Net Earnings

For the foregoing reasons, for the nine months ended September 30, 2008, net earnings increased $27.5 million, or 8.6%, to $347.5 million compared to the nine months ended September 30, 2007.

 

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Year Ended December 31, 2007 Compared to Year Ended December 31, 2006

Below is a summary of comparative results of operations and a more detailed discussion of results for the years ended December 31, 2007 and 2006:

 

     Year Ended December 31,  
                       % of Net Sales  
     2007     2006     % Change         2007             2006      
(Dollars in millions)                               

Net Sales

   $ 2,576.4     $ 2,345.1     9.9 %   —       —    

Expenses

     1,913.2       1,710.3     11.9 %   74.3 %   72.9 %

Earnings from Operations Before Minority Interest and Income Taxes

     663.2       634.8     4.5 %   25.7 %   27.1 %

Provision for Income Taxes

     (233.6 )     (230.1 )   1.5 %   9.1     9.8 %

Effective Tax Rate

     35.2 %     36.2 %      

Minority Interest Expense—net of tax

     (7.1 )     (6.5 )   9.2 %   0.3 %   0.3 %
                      

Net Earnings

   $ 422.5     $ 398.2     6.1 %   16.4 %   17.0 %
                      

Net Sales

For the year ended December 31, 2007, global net sales increased $231.3 million, or 9.9%, including a positive 3.3% foreign currency exchange impact, to $2,576.4 million compared to the year ended December 31, 2006. The business grew in all regions and all product categories, with strong broad-based growth across our key Asia markets.

Net sales based on our segments are shown in the table below:

 

     Year Ended December 31,  
     2007    2006    % Change     % Change
Due to Foreign
Exchange
 
(Dollars in millions)                       

North America/Europe

   $ 1,351.2    $ 1,290.5    4.7 %   1.3 %

Asia/Latin America

     1,225.2      1,054.6    16.2 %   5.7 %
                  

Net Sales

   $ 2,576.4    $ 2,345.1    9.9 %   3.3 %
                  

Our North America/Europe segment represented 52.4% of net sales and our Asia/Latin America segment represented 47.6% of net sales for the year ended December 31, 2007. North America/Europe net sales increased $60.7 million, or 4.7%, including a positive 1.3% foreign currency exchange impact, to $1,351.2 million in 2007 compared to 2006. Volume growth also came from increased sales in the United States with strong market share performance built upon a continued marketing focus on the mental development benefits provided by our products, partially offset by the loss of regulatory exclusivity for Cafcit, a pediatric pharmaceutical product, in the fourth quarter of 2006. The Cafcit trademark was divested during the fourth quarter of 2007, and we no longer market pharmaceutical products, consistent with our strategic focus on pediatric nutrition. During the same period, Asia/Latin America sales increased $170.6 million, or 16.2%, including a positive 5.7% foreign currency exchange impact, to $1,225.2 million. Growth was broad-based with the top Asia markets all showing double digit increases in net sales.

 

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Net sales based on our product categories are shown in the table below:

 

     Year Ended December 31,  
     2007    2006    % Change     % Change
Due to Foreign
Exchange
 
(Dollars in millions)                       

Infant Formula

   $ 1,788.1    $ 1,634.8    9.4  %   2.4 %

Children’s Nutrition

     696.5      603.8    15.4  %   5.6 %

Other

     91.8      106.5    (13.8 )%   3.7 %
                  

Net Sales

   $ 2,576.4    $ 2,345.1    9.9  %   3.3 %
                  

Net sales for the period increased in the infant formula and children’s nutrition product categories. For the year ended December 31, 2007, the infant formula business increased $153.3 million, or 9.4%, including a positive 2.4% foreign currency impact, to $1,788.1 million compared to the year ended December 31, 2006. We maintained a strong position in infant formula products sold in the United States, with 5.0% growth in net sales. This was partially offset by a $17 million decline in net sales of Cafcit, due to the loss of regulatory exclusivity in the fourth quarter of 2006 and its divestiture in the fourth quarter of 2007. Children’s nutrition products, which are almost entirely sold in the Asia/Latin America segment, increased $92.7 million, or 15.4%, including a positive 5.6% foreign currency exchange impact, to $696.5 million during the same period, primarily due to broad-based growth across our key Asia markets.

The reconciliation of our gross sales to net sales by each significant category of gross-to-net sales adjustments were as follows:

 

     Year Ended December 31,
     2007     2006     % Change
(Dollars in millions)                 

Gross Sales

   $ 3,717.2     $ 3,480.1     6.8 %

Gross-to-Net Sales Adjustments

      

WIC Rebates

     (847.8 )     (871.9 )   (2.8)%

Sales Discounts

     (66.3 )     (55.0 )   20.5 %

Returns

     (67.6 )     (65.2 )   3.7 %

Cash Discounts

     (48.0 )     (47.9 )   0.2 %

Prime Vendor Charge-Backs

     (47.5 )     (46.7 )   1.7 %

Other Adjustments

     (63.6 )     (48.3 )   31.7 %
                  

Total Gross-to-Net Sales Adjustments

     (1,140.8 )     (1,135.0 )   0.5%
                  

Total Net Sales

   $ 2,576.4     $ 2,345.1     9.9 %
                  

For the year ended December 31, 2007, our gross sales increased $237.1 million, or 6.8%, to $3,717.2 million compared to the year ended December 31, 2006. Gross-to-net sales adjustments during the same period increased $5.8 million, or 0.5%, to $1,140.8 million. This decline was largely the result of changes in WIC rebates in North America due to the loss of Georgia and the New England and Tribal Organization WIC contracts to other infant formula manufacturers in the fourth quarter of 2006, as well as the Western States Contracting Alliance, Texas, Minnesota and Iowa WIC contracts during the fourth quarter of 2007. These declines were partially offset by the addition of the Michigan WIC contract during the fourth quarter of 2006, as well as California and Louisiana WIC contracts during the second half of 2007. In addition, sales discounts increased $6.5 million during the same period in key Asian markets due to a change in retail sales mix resulting in increased gross sales to key customers with higher discounts, and a $5.1 million increase from a distributor model change.

 

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Expenses

 

     Year Ended December 31,  
                     % of Net Sales  
     2007    2006    % Change         2007             2006      
(Dollars in millions)                             

Expenses:

            

Costs of Products Sold

   $ 948.7    $ 850.4    11.6 %   36.8 %   36.3 %

Marketing, Selling and Administrative

     575.2      504.3    14.1 %   22.3 %   21.5 %

Advertising and Product Promotion

     318.5      290.6    9.6 %   12.4 %   12.4 %

Research and Development

     67.2      62.0    8.4 %   2.6 %   2.6 %

Other Expenses—net

     3.6      3.0    20.0 %   0.1 %   0.1 %
                    

Total Expenses

   $ 1,913.2    $ 1,710.3    11.9 %   74.3 %   72.9 %
                    

Costs of Products Sold

For the year ended December 31, 2007, costs of products sold increased $98.3 million, or 11.6%, to $948.7 million compared to the year ended December 31, 2006. The costs of products sold increase was driven by sales volume growth, dairy price increases and an unfavorable foreign exchange impact due to the weakening of the U.S. dollar versus foreign currencies. Furthermore, the cost increase as a percentage of sales was driven by product mix changes as lower margin children’s nutrition products experienced more rapid volume gains than higher margin routine infant formulas.

Marketing, Selling and Administrative Expenses

For the year ended December 31, 2007, marketing, selling and administrative expenses increased $70.9 million, or 14.1%, to $575.2 million compared to the year ended December 31, 2006. This increase was driven by a $17.6 million bad debt write-off related to a distributor insolvency, increased corporate allocations from BMS including information management and corporate insurance, unfavorable foreign exchange due to the weakening of the U.S. dollar versus foreign currencies and global salary and benefits inflationary increases.

Advertising and Product Promotion Expenses

For the year ended December 31, 2007, advertising and product promotion expenses increased $27.9 million, or 9.6%, to $318.5 million compared to the year ended December 31, 2006. This percentage increase was driven by strategic decisions regarding investment to support sales growth.

Research and Development Expenses

For the year ended December 31, 2007, research and development expenses increased $5.2 million, or 8.4%, to $67.2 million compared to the year ended December 31, 2006. The rate of increase reflected the full year staffing impact of the regional development centers in Asia and Latin America.

Earnings from Operations Before Minority Interest and Income Taxes

 

     Year Ended December 31,  
     2007     2006     % Change  
(Dollars in millions)                   

Total Earnings from Operations Before Minority Interest and Income Taxes

   $ 663.2     $ 634.8     4.5 %

North America/Europe

     477.6       460.3     3.8 %

Asia/Latin America

     363.9       335.9     8.3 %

Corporate and Other

     (178.3 )     (161.4 )   10.5 %

 

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For the year ended December 31, 2007, North America/Europe earnings from operations before minority interest and income taxes increased $17.3 million, or 3.8%, to $477.6 million compared to the year ended December 31, 2006. The increase in earnings from operations before minority interest and income taxes for North America/Europe was primarily driven by a 4.7% increase in net sales during the same period. For the same period, Asia/Latin America earnings from operations before minority interest and income taxes increased $28.0 million, or 8.3%, to $363.9 million compared to the year ended December 31, 2006. The increase in earnings from operations before minority interest and income taxes for Asia/Latin America was primarily driven by a 16.2% increase in net sales during the same period. The increase in earnings from operations before minority interest and income taxes was partially offset by a bad debt expense of $17.6 million related to a distributor’s insolvency. For the same period, Corporate and Other costs increased $16.9 million, or 10.5%, to $178.3 million compared to the year ended December 31, 2006. This was due to an increase in corporate insurance and information management expenses allocated from BMS.

Income Taxes

The effective tax rate for the year ended December 31, 2007 decreased from 36.2% to 35.2%, compared to the year ended December 31, 2006. This reduction in the effective tax rate was driven primarily by the benefit of certain basis differences. For the year ended December 31, 2007, our provision for income taxes increased $3.5 million, or 1.5%, to $233.6 million compared to the year ended December 31, 2006, due to higher pre-tax earnings.

Net Earnings

For the foregoing reasons, for the year ended December 31, 2007, net earnings increased $24.3 million, or 6.1%, to $422.5 million compared to the year ended December 31, 2006.

Year Ended December 31, 2006 Compared to Year Ended December 31, 2005

Below is a summary of comparative results of operations and a more detailed discussion of results for the years ended December 31, 2006 and 2005:

 

     Year Ended December 31,  
                       % of Net Sales  
     2006     2005     % Change         2006             2005      
(Dollars in millions)                               

Net Sales

   $ 2,345.1     $ 2,201.8     6.5 %   —       —    

Expenses

     1,710.3       1,583.4     8.0 %   72.9 %   71.9 %

Earnings from Operations Before Minority Interest and Income Taxes

     634.8       618.4     2.7 %   27.1 %   28.1 %

Provision for Income Taxes

     (230.1 )     (222.5 )   3.4 %   9.8 %   10.1 %

Effective Tax Rate

     36.2 %     36.0 %      

Minority Interest Expense—net of tax

     (6.5 )     (6.1 )   6.6 %   0.3 %   0.3 %
                      

Net Earnings

   $ 398.2     $ 389.8     2.2 %   17.0 %   17.7 %
                      

Net Sales

For the year ended December 31, 2006, global net sales increased $143.3 million, or 6.5%, including a positive 1.4% foreign currency exchange impact, to $2,345.1 million compared to the year ended December 31, 2005.

 

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Net sales based on our segments are shown in the table below:

 

     Year Ended December 31,  
     2006    2005    % Change     % Change
Due to Foreign
Exchange
 
(Dollars in millions)                       

North America/Europe

   $ 1,290.5    $ 1,247.7    3.4 %   0.5 %

Asia/Latin America

     1,054.6      954.1    10.5 %   2.6 %
                  

Net Sales

   $ 2,345.1    $ 2,201.8    6.5 %   1.4 %
                  

Our North America/Europe segment represented 55.0% of net sales and our Asia/Latin America segment represented 45.0% of net sales for the year ended December 31, 2006. North America/Europe sales increased $42.8 million, or 3.4%, including a positive 0.5% foreign currency exchange impact, to $1,290.5 million in 2006 compared to 2005. Our net sales increased 2.5% in the United States where we expanded our market leadership position, but net sales were negatively impacted by reductions in retail customer inventory. During the same period, Asia/Latin America sales increased $100.5 million, or 10.5%, including a positive 2.6% foreign currency exchange impact, to $1,054.6 million. This increase in net sales was primarily due to strong growth in Mexico and China, our largest markets outside of the United States, as well as strong growth in other Asia and Latin America markets.

Net sales based on our product categories are shown in the table below:

 

     Year Ended December 31,  
     2006    2005    % Change     % Change
Due to Foreign
Exchange
 
(Dollars in millions)                       

Infant Formula

   $ 1,634.8    $ 1,576.5    3.7 %   0.9 %

Children’s Nutrition

     603.8      528.9    14.2 %   3.0 %

Other

     106.5      96.4    10.5 %   2.1 %
                  

Net Sales

   $ 2,345.1    $ 2,201.8    6.5 %   1.4 %
                  

Net sales for the period increased in each of our product categories. For the year ended December 31, 2006, infant formula increased $58.3 million, or 3.7%, including a positive 0.9% foreign currency exchange impact, to $1,634.8 million compared to the year ended December 31, 2005, driven by a continued marketing focus on the mental development benefits provided by our products. For the same period, growth was led by the children’s nutrition business, which increased $74.9 million, or 14.2%, including a positive 3.0% foreign currency exchange impact, to $603.8 million, due to broad-based growth in our key Asia markets.

The reconciliation of our gross sales to net sales by each significant category of gross-to-net sales adjustments were as follows:

 

     Year Ended December 31,  
     2006     2005     % Change  
(Dollars in millions)                   

Gross Sales

   $ 3,480.1     $ 3,293.4     5.7  %

Gross-to-Net Sales Adjustments

      

WIC Rebates

     (871.9 )     (843.0 )   3.4  %

Sales Discounts

     (55.0 )     (38.2 )   44.0  %

Returns

     (65.2 )     (72.1 )   (9.6 )%

Cash Discounts

     (47.9 )     (47.3 )   1.3  %

Prime Vendor Charge-Backs

     (46.7 )     (46.4 )   0.6  %

Other Adjustments

     (48.3 )     (44.6 )   8.3  %
                  

Total Gross-to-Net Sales Adjustments

     (1,135.0 )     (1,091.6 )   4.0  %
                  

Total Net Sales

   $ 2,345.1     $ 2,201.8     6.5  %
                  

 

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For the year ended December 31, 2006, our gross sales increased $186.7 million, or 5.7%, to $3,480.1 million compared to the year ended December 31, 2005. Gross-to-net sales adjustments during the same period increased $43.4 million, or 4.0%, to $1,135.0 million, generally in line with the growth in sales. WIC rebates grew at a rate slightly lower than U.S. sales growth. Contract changes in the period included the loss of Georgia and the New England and Tribal Organization WIC contracts during October 2006 to other infant formula manufacturers, partially offset by the addition of the Michigan WIC contract in November 2006. Returns declined due to improvements in our actual and expected return rate, relating to our products in North America. Sales discounts increased $16.8 million during the same period due to a change in retail sales mix resulting in increased gross sales to key customers with higher discounts.

Expenses

 

     Year Ended December 31,  
                     % of Net Sales  
     2006    2005    % Change         2006             2005      
(Dollars in millions)                             

Expenses:

            

Costs of Products Sold

   $ 850.4    $ 781.3    8.8 %   36.3 %   35.5 %

Marketing, Selling and Administrative

     504.3      464.5    8.6 %   21.5 %   21.1 %

Advertising and Product Promotion

     290.6      284.4    2.2 %   12.4 %   12.9 %

Research and Development

     62.0      50.8    22.0 %   2.6 %   2.3 %

Other Expenses—net

     3.0      2.4    25.0 %   0.1 %   0.1 %
                    

Total Expenses

   $ 1,710.3    $ 1,583.4    8.0 %   72.9 %   71.9 %
                    

Costs of Products Sold

For the year ended December 31, 2006, costs of products sold increased $69.1 million, or 8.8%, to $850.4 million compared to the year ended December 31, 2005. This increase was driven by sales volume growth, a $15.6 million impairment charge due to the loss of Cafcit regulatory exclusivity and higher inventory write-offs mainly due to the Company’s more stringent product quality standards. Furthermore, the cost increase as a percentage of sales was driven by higher growth in lower margin children’s nutrition products in our Asia/Latin America segment and specialty products in our North America/Europe segment, compared to a lower rate of growth in the higher margin routine infant formula products.

Marketing, Selling and Administrative Expenses

For the year ended December 31, 2006, marketing, selling and administrative expenses increased $39.8 million, or 8.6%, to $504.3 million compared to the year ended December 31, 2005. The increase was principally due to an increase in the health care professional sales force supporting infant formula products in the United States, the full recognition of customer service costs that were previously shared with a discontinued BMS business and corporate allocation increases related to stock-based compensation.

Advertising and Product Promotion Expenses

For the year ended December 31, 2006, advertising and product promotion expenses increased $6.2 million, or 2.2%, to $290.6 million compared to the year ended December 31, 2005. This increase was driven by sales growth. However, as a percentage of sales, advertising and product promotion expenditure decreased from 12.9% in 2005 to 12.4% in 2006. This decrease was due to promotion expense cut-backs to compensate for the increased research and development, selling and customer service costs in the same period.

Research and Development Expenses

For the year ended December 31, 2006, research and development expenses increased $11.2 million, or 22.0%, to $62.0 million compared to the year ended December 31, 2005. This increase was due to additional investments in clinical studies and product development in the support of new product innovation and incremental headcount to expand our regional development centers in Asia and Latin America.

 

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Earnings from Operations Before Minority Interest and Income Taxes

 

     Year Ended December 31,  
     2006     2005     % Change  
(Dollars in millions)                   

Total Earnings from Operations Before Minority Interest and Income Taxes

   $ 634.8     $ 618.4     2.7  %

North America/Europe

     460.3       466.8     (1.4 )%

Asia/Latin America

     335.9       294.4     14.1  %

Corporate and Other

     (161.4 )     (142.8 )   13.0  %

For the year ended December 31, 2006, North America/Europe earnings from operations before minority interest and income taxes decreased $6.5 million, or 1.4%, to $460.3 million compared to the year ended December 31, 2005. The decrease in earnings from operations before minority interest and income taxes for North America/Europe was primarily due to increases in marketing, selling and administrative expenses caused by both the increase in health care professional force supporting infant formula sales in the United States and the divestiture of the BMS Over-the-Counter business. For the same period, Asia/Latin America earnings from operations before minority interest and income taxes increased $41.5 million, or 14.1%, to $335.9 million. The increase in earnings from operations before minority interest and income taxes for Asia/Latin America was in line with the increase in net sales during the year ended December 31, 2007. For the same period, Corporate and Other expenses increased $18.6 million, or 13.0%, to $161.4 million. This increase was primarily due to the corporate allocation increase from BMS related to stock-based compensation. The increase was also driven by our global business services function encompassing research and development and administrative functions.

Income Taxes

For the year ended December 31, 2006, our provision for income taxes increased $7.6 million, or 3.4%, to $230.1 million compared to the year ended December 31, 2005. This increase was consistent with our higher pre-tax earnings as the effective tax rate was relatively unchanged at 36.2%.

Net Earnings

For the foregoing reasons, for the year ended December 31, 2006, net earnings increased $8.4 million, or 2.2%, to $398.2 million compared to the year ended December 31, 2005.

Financial Position, Liquidity and Capital Resources

Overview

Historically, our primary source of liquidity is cash from operations. Cash flows from operating activities represent the inflow of cash from our customers and the outflow of our cash for inventory purchases, operating expenses and taxes. Cash flows used in investing activities primarily represent capital expenditure for equipment, buildings and computer software. Cash flows used in financing activities represent the transfers to BMS. All of our financing activities reflect the nature of our relationship with BMS and consist entirely of net transfers of cash to BMS.

As an operating division, we have not reported cash or cash equivalents on our balance sheet for the periods presented. Historically, BMS has managed the treasury relationships for receiving and disbursing cash to cover all cash flow activity from operations and investing activities. In the future, we believe that cash from operations will continue to be sufficient to support our working capital needs. However, we can provide no assurance that cash flow from operations will be sufficient to meet future needs.

 

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     Nine Months Ended
September 30,
    Year Ended December 31,  
             2008                     2007             2007     2006     2005  
(Dollars in millions)                               

Cash flow provided by/(used in):

          

Operating Activities

   $ 376.4     $ 391.2     $ 472.1     $ 351.8     $ 434.4  

Investing Activities

     (49.4 )     (47.7 )     (74.2 )     (63.0 )     (54.7 )

Financing Activities

     (327.0 )     (343.5 )     (397.9 )     (288.8 )     (379.7 )

Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007

Net cash provided by operating activities decreased $14.8 million to $376.4 million for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007. This decrease resulted primarily from a build in inventory to support future sales growth that was partially offset by net earnings growth of $27.5 million. Net cash used in investing activities increased $1.7 million to $49.4 million for the same period, driven by a slight increase in capital expenditures.

Year Ended December 31, 2007 Compared to Year Ended December 31, 2006

Net cash provided by operating activities increased $120.3 million to $472.1 million for the year ended December 31, 2007 compared to the year ended December 31, 2006. This increase was driven by a $24.3 million increase in net earnings and an increase of $68.8 million from changes in accounts payable and accrued expenses primarily due to increased value of dairy and other commodity purchases. Net cash used in investing activities increased $11.2 million to $74.2 million for the same period, primarily related to increases in capacity and quality investment at our production facilities and an increase in capitalized software to support formulation management and web based sales capabilities.

Year Ended December 31, 2006 Compared to Year Ended December 31, 2005

Net cash provided by operating activities decreased $82.6 million to $351.8 million for the year ended December 31, 2006 compared to the year ended December 31, 2005. This decrease was attributable to increased inventory of $45.9 million for recovery from supplier disruptions in 2005 and a new product launch in Latin America, as well as a year-over-year increase of $66.4 million in accrued rebates and returns due to the timing of WIC payments in the United States at year end 2006, partially offset by $8.4 million in increased net earnings. Net cash used in investing activities increased $8.3 million to $63.0 million for the same period, primarily related to an increase in software spending for formulation management capabilities and increases in capacity and quality investment at our production facilities.

Net Debt

On August 26, 2008, we declared and issued a dividend in the form of a note in an amount of $2,000 million bearing interest at an annual interest rate of 6.1% to ERS. Prior to or concurrently with this offering, we will restructure this note into three senior unsecured notes of $744.2 million, $500 million and $500 million, respectively. In addition, we and BMS have agreed that our opening cash balance at the date of this offering will be $250 million to meet our operating requirements. The resulting debt on our balance sheet at the time of this offering will be $1,750 million, including the Venezuela Note and excluding our Mexican capital lease obligations. See “Certain Relationships and Related Party Transactions—Separation Transactions”. We believe that cash flows from operations will be sufficient to service our debt. For a more detailed description of our debt see “Description of Indebtedness”.

Capital Expenditures

We expect our capital expenditures for the year ending December 31, 2008 to grow in line with historical growth rates and the year ending December 31, 2009 to grow above historical growth rates to support manufacturing and research and development capabilities, capitalized software and other capital needs.

 

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Contractual Obligations and Commitments

As of December 31, 2007, our significant contractual obligations and other commitments were as follows:

 

     Payments due by December 31,
     2008    2009    2010    2011    Thereafter    Total
(Dollars in millions)                              

Operating Lease Obligations

   $ 8.1    $ 5.9    $ 2.4    $ 0.8    $ 8.9    $ 26.1

Capital Lease Obligations

     0.2      0.2      0.2      0.2      0.8      1.6

Purchase Obligations

     16.0      13.7      12.8      5.7      5.6      53.8
                                         

Total

   $ 24.3    $ 19.8    $ 15.4    $ 6.7    $ 15.3    $ 81.5
                                         

Our operating lease obligations are generally related to vehicle leases, real estate leases for offices or manufacturing sites and leases for expatriate housing. Capital lease obligations relate to assets utilized for interplant transportation of materials and finished goods. Purchase obligations are generally for unconditional commitments related to the purchase of materials used in manufacturing and for promotional services. The table above does not include $14.3 million in long-term tax positions due to the uncertainty related to the timing of the reversal of those positions.

For 2008, we have entered into two additional significant obligations. On October 15, 2008, we entered into a long-term supply agreement effective January 1, 2009. Estimated payments over the life of the ten-year agreement are $31.8 million. On August 26, 2008, we declared and issued a dividend in the form of a note in an amount of $2,000 million bearing interest at an annual interest rate of 6.1% to ERS. This note will be restructured into three separate notes prior to or concurrently with this offering. See “Unaudited Pro Forma Condensed Financial Information” and “Description of Indebtedness”. We expect the amount due for principal and interest payments in respect of these notes and the Venezuela Note to be approximately $161 million, $169 million and $2,065 million in 2010, 2011 and thereafter, respectively.

Following our separation from BMS, we expect BMS to continue to provide many of the services related to corporate and shared services functions such as executive oversight, risk management, information technology, accounting, audit, legal, investor relations, human resources, tax, treasury, procurement and other services on a transitional basis for a fee. We expect BMS to continue to provide us many of these services under the transitional services agreement described in “Certain Relationships and Related Party Transactions”.

Off-Balance Sheet Arrangements

We do not currently use off-balance sheet derivative financial instruments to hedge or partially hedge interest rate exposure nor do we maintain any other off-balance sheet arrangements for the purpose of credit enhancement, hedging transactions or other financial or investment purposes.

Quantitative and Qualitative Disclosures About Market Risk

Inflation

The impact of inflation has affected, and will continue to affect, our operations significantly. Our materials costs are influenced by inflation and fluctuations in global commodity prices, principally dairy, agricultural oils and tin. In addition, costs for construction, taxes, repairs, maintenance, insurance and media are all subject to inflationary pressures.

Foreign Exchange Risk

We are exposed to market risk due to changes in currency exchange rates. Our primary net foreign currency translation exposures are the Chinese renminbi, the Mexican peso, the Philippine peso, the Hong Kong dollar and the Euro. Historically, we have used derivative financial instruments indirectly through participation in the centralized hedging functions of BMS, which are designed primarily to minimize exposure to foreign currency risk. We do not hold or issue derivative financial instruments for speculative purposes.

 

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We use foreign currency contracts to hedge anticipated transactions on certain foreign currencies and designate these derivative instruments as foreign currency cash flow hedges when appropriate. If the derivative is designated as a cash flow hedge, the change in the fair value of the derivative is initially recorded in other comprehensive income and then recognized in our statement of earnings when the corresponding hedged item impacts our earnings. The foreign currency derivatives resulted in losses of $2.6 million, $5.1 million and $5.4 million in the years ended December 31, 2007, 2006 and 2005, respectively, and $4.3 million and $1.6 million in the nine months ended September 30, 2008 and 2007, respectively. The impact of hedge ineffectiveness on our earnings was not significant.

After the completion of this offering, we plan to enter into hedging and other foreign exchange management arrangements to reduce the risk of foreign currency exchange rate fluctuations to the extent that cost-effective derivative financial instruments or other non-derivative financial instrument approaches are available. Derivative financial instruments will not be used for speculative purposes. The intent of gains and losses on hedging transactions is to offset the respective gains and losses on the underlying exposures being hedged. While we intend to mitigate some of this risk with hedging and other activities, our business will nevertheless remain subject to substantial foreign exchange risk from foreign currency translation exposures that we will not be able to manage through effective hedging or the use of other financial instrument approaches.

Commodity Risk

We purchase certain products in the normal course of business, including dairy, tin and edible oils, the prices of which are affected by global commodity prices. Therefore, we are exposed to some price volatility related to market conditions outside of our control.

We employ various purchasing and pricing contract techniques in an effort to minimize volatility. Generally these techniques include setting fixed prices with suppliers, such as unit pricing that is based on an average of commodity prices over the corresponding period of time. We do not generally make use of financial instruments to hedge commodity prices, partly because of these contract pricing techniques.

Critical Accounting Policies

In presenting our financial statements in conformity with U.S. GAAP, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures.

Some of the estimates and assumptions that we are required to make relate to matters that are inherently uncertain as they pertain to future events. We base these estimates and assumptions on historical experience or on various other factors that we believe to be reasonable and appropriate under the circumstances. On an ongoing basis, we reconsider and evaluate our estimates and assumptions. Actual results may differ significantly from these estimates. Future results may differ from our estimates under different assumptions or conditions.

We believe that the critical accounting policies listed below involve our more significant judgments, assumptions and estimates and, therefore, could have the greatest potential impact on our financial statements.

For further information on our critical and other significant accounting policies, see the notes to our financial statements included elsewhere in this prospectus.

Basis of Presentation

Our financial statements have been derived from the consolidated financial statements and accounting records of BMS, principally from statements and records representing the Mead Johnson Nutrition business. The statements of earnings also include expense allocations for certain corporate functions historically provided to us by BMS, including general corporate expenses related to corporate functions such as executive oversight, risk

 

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management, information technology, accounting, audit, legal, investor relations, human resources, tax and other services. These allocations are based on either specific identification or the proportionate percentage of our revenues and headcount to the respective total BMS revenues and headcount. These allocations are reflected in marketing, selling and administrative expenses in these statements of earnings and totaled $81.8 million and $73.8 million for the nine months ended September 30, 2008 and 2007, respectively and $101.7 million, $83.3 million and $75.6 million for the years ended December 31, 2007, 2006 and 2005, respectively. We and BMS consider these allocations to be a reasonable reflection of the utilization of services provided. The allocations may not, however, reflect the expense we would have incurred as a stand-alone company. Actual costs that may have been incurred if we had been a stand-alone public company in 2007, 2006 and 2005 would depend on a number of factors, including our chosen organizational structure, what functions were outsourced or performed by our employees and strategic decisions made in areas such as information technology systems and infrastructure.

BMS has not allocated a portion of its external debt interest cost to us as none of the debt at the BMS level is being allocated to us. Debt is not being allocated as none of the debt recorded by BMS is directly related to our business, which is self-funding. BMS debt is used solely for BMS corporate purposes.

Revenue Recognition

We recognize revenue in accordance with Staff Accounting Bulletin (“SAB”) No. 101, Revenue Recognition in Financial Statements, as amended by SAB No. 104, Revenue Recognition, when substantially all the risks and rewards of ownership have transferred to the customer. Revenue is recognized on the date of receipt by the purchaser. Revenues are reduced at the time of recognition to reflect expected returns that are estimated based on historical experience and business trends. Additionally, provisions are made at the time of revenue recognition for discounts, WIC rebates and estimated sales allowances based on historical experience, updated for changes in facts and circumstances, as appropriate. Such provisions are recorded as a reduction of revenue. We offer sales incentives to customers and consumers through various programs consisting primarily of customer pricing allowances, merchandising funds and consumer coupons. The cost of these programs is recognized as incurred and recorded as a reduction of revenue.

WIC rebate accruals were $214.4 million at September 30, 2008 and $197.6 million and $230.3 million at December 31, 2007 and 2006, respectively, which are included in accrued rebates and returns. We participate on a competitive bidding basis in nutrition programs sponsored by states, tribal governments, the Commonwealth of Puerto Rico, and U.S. territories for WIC. Under these programs, we reimburse these entities for the difference between wholesaler list price and the contract price on eligible products. We account for WIC rebates by establishing an accrual in an amount equal to our estimate of WIC rebate claims attributable to a sale. We determine our estimate of the WIC rebate accrual primarily based on historical experience regarding WIC rebates and current contract prices under the WIC programs. We consider levels of inventory in the distribution channel, new WIC contracts, terminated WIC contracts, changes in existing WIC contracts and WIC participation, and adjust the accrual periodically throughout the year to reflect actual expense. Rebates under the WIC program reduced revenues by $601.7 million and $670.0 million for the nine months ended September 30, 2008 and 2007, respectively and $847.8 million, $871.9 million and $843.0 million in the years ended December 31, 2007, 2006 and 2005, respectively.

Sales return accruals were $29.4 million at September 30, 2008 and $30.7 million and $29.9 million at December 31, 2007 and 2006, respectively. We account for sales returns in accordance with the Statement of Financial Accounting Standards (“SFAS”) No. 48, Revenue Recognition When Right of Return Exists, by establishing an accrual in an amount equal to our estimate of sales recorded for which the related products are expected to be returned. We determine our estimate of the sales return accrual primarily based on historical experience regarding sales returns, but also consider other factors that could impact sales returns. Returns reduced sales by $48.7 million and $49.2 million for the nine months ended September 30, 2008 and 2007, respectively and $67.6 million, $65.2 million and $72.1 million for the years ended December 31, 2007, 2006 and 2005, respectively.

 

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Income Taxes

During the periods presented, we did not file separate tax returns, as we were included in the tax grouping of other BMS entities within the respective entity’s tax jurisdiction. The income tax provision included in these financial statements was calculated based on a separate return-methodology, as if our operations were separate taxpayers in the respective jurisdictions.

The provision for income taxes has been determined using the asset and liability approach of accounting for income taxes. Under this approach, deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. The provision for income taxes represents income taxes paid or payable for the current year plus the change in deferred taxes during the year. Deferred taxes result from differences between the financial and tax basis of our assets and liabilities. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax attributes are expected to be recovered or paid, and are adjusted for changes in tax rates and tax laws when changes are enacted.

Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. The assessment of whether or not a valuation allowance is required often requires significant judgment, including the long-range forecast of future taxable income and the evaluation of tax planning initiatives. Adjustments to the deferred tax valuation allowances are made to earnings in the period when such assessments are made.

With the exception of Mead Johnson-dedicated entities, we do not maintain taxes payable to or from BMS and are deemed to settle the annual current tax balances immediately with the legal tax paying entities in the respective jurisdictions. These settlements are reflected as changes in divisional equity.

We adopted the Financial Accounting Standards Board (“FASB”) Interpretation Number (“FIN”) No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109 on January 1, 2007. As a result of the adoption of this accounting pronouncement, we derecognized $4.8 million of previously recognized tax benefits, which was accounted for as a decrease to the opening balance of divisional equity.

We intend to enter into a tax matters agreement prior to or concurrently with the completion of this offering. See “Certain Relationships and Related Party Transactions”.

Impairment of Long-Lived Assets

We periodically evaluate whether current facts or circumstances indicate that the carrying value of our depreciable assets to be held and used may not be recoverable. If such circumstances are determined to exist, an estimate of undiscounted future cash flows produced by the long-lived asset, or the appropriate grouping of assets, is compared to the carrying value to determine whether impairment exists. If an asset is determined to be impaired, the loss is measured based on the difference between the asset’s fair value and its carrying value. An estimate of the asset’s fair value is based on quoted market prices in active markets, if available. If quoted market prices are not available, the estimate of fair value is based on various valuation techniques, including a discounted value of estimated future cash flows. We report an asset to be disposed of at the lower of its carrying value or its estimated net realizable value. Asset impairment or accelerated depreciation resulting from an assessment in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, is recorded as costs of products sold.

Goodwill and Other Intangible Assets

Goodwill is tested for impairment using a two-step process on an annual basis or when current facts or circumstances indicate that a potential impairment may exist. The first step is to identify a potential impairment, and the second step measures the amount of the impairment loss, if any. Goodwill is deemed to be impaired if the

 

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carrying amount of a reporting unit’s goodwill exceeds its estimated fair value. We complete our annual goodwill impairment assessment during the first quarter and monitor for any potential impairment in the remaining quarters, neither of which indicated an impairment of goodwill in 2008, 2007, 2006 or 2005.

Other intangible assets, consisting of a trademark and computer software, are amortized on a straight-line basis over their useful lives, ranging from three to ten years. All other intangible assets are evaluated for impairment as described in “—Impairment of Long-Lived Assets” above.

Contingencies

In the normal course of business, we are subject to loss contingencies, such as legal proceedings and claims arising out of our business, that cover a wide range of matters, including, among others, government investigations, shareholder lawsuits, product and/or environmental, health, and safety liabilities, and tax matters. In accordance with SFAS No. 5, Accounting for Contingencies, we record accruals for such loss contingencies when it is probable that a liability will be incurred and the amount of loss can be reasonably estimated. We, in accordance with SFAS No. 5, do not recognize gain contingencies until realized. For a discussion of contingencies, see the notes to our financial statements included elsewhere in this prospectus.

Recent Accounting Pronouncements

For a description of a complete list of recent accounting pronouncements, see the notes to our financial statements included elsewhere in this prospectus.

Effective January 1, 2008, we adopted SFAS No. 157, Fair Value Measurements, for financial assets and liabilities and any other assets and liabilities carried at fair value. This pronouncement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. On November 14, 2007, the FASB agreed to a one-year deferral for the implementation of SFAS No. 157 for other non-financial assets and liabilities. Our adoption of SFAS No. 157 did not have a material effect on our financial statements for financial assets and liabilities and any other assets and liabilities carried at fair value. We are currently in the process of evaluating this pronouncement for other non-financial assets or liabilities.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, as an amendment to SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 161 requires that objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation. The fair value of derivative instruments and their gains and losses will need to be presented in tabular format in order to present a more complete picture of the effects of using derivative instruments. SFAS No. 161 is effective for financial statements issued for fiscal years beginning after November 15, 2008. We are currently evaluating the impact of adopting this pronouncement.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, as an amendment of ARB No. 51. SFAS No. 160 establishes accounting and reporting standards that require the ownership interests in subsidiaries held by parties other than the parent be clearly identified, labeled and presented in the consolidated statement of financial position within equity, but separate from the parent’s equity. This statement also requires the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income. Changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary must be accounted for consistently, and when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary must be initially measured at fair value. The gain or loss on the deconsolidation of the subsidiary is measured using the fair value of any noncontrolling equity investment. This statement also requires entities provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. This statement is effective for fiscal years beginning on or after December 15, 2008. We are currently in the process of evaluating the impact of adopting this pronouncement.

 

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BUSINESS

Our Company

We are a global leader in pediatric nutrition with approximately $2.6 billion in net sales for the year ended December 31, 2007. We are committed to creating trusted nutritional brands and products which help improve the health and development of infants and children around the world and provide them with the best start in life. Our Enfa family of brands, including Enfamil® infant formula, is the world’s leading brand franchise in pediatric nutrition, based on retail sales. Our comprehensive product portfolio addresses a broad range of nutritional needs for infants, children and expectant and nursing mothers. We have 100 years of innovation experience during which we have developed or improved many breakthrough or industry-defining products across each of our product categories. Our singular focus on pediatric nutrition and our implementation of a business model that integrates nutritional science with health care and consumer marketing expertise differentiate us from many of our competitors.

We strive to be the world’s premier pediatric nutrition company. We market our portfolio of more than 70 products to mothers, health care professionals and retailers in more than 50 countries in North America, Europe, Asia and Latin America. Our two reportable segments are North America/Europe and Asia/Latin America, which comprised 52.4% and 47.6%, respectively, of our net sales for the year ended December 31, 2007. Our broad geographic footprint allows us to take advantage of both the largest and most rapidly growing markets.

We believe mothers and health care professionals associate the Mead Johnson name and the Enfa family of brands with quality, science-based pediatric nutrition products. We believe the strength of our brands allows us to create and maintain consumer loyalty across our product portfolio and stages of pediatric development.

The two principal product categories in which we operate are infant formula and children’s nutrition.

Infant Formula:

 

   

We are a global leader in infant formula, based on retail sales.

 

   

We are a leader in infant formula in the United States, the world’s largest infant formula market, based on U.S. market share.

 

   

We are a leader in infant formula in Asia, the fastest growing region in the pediatric nutrition industry, based on retail sales.

 

   

Infant formula products represented 67.2% and 69.4% of our net sales for the nine months ended September 30, 2008 and the year ended December 31, 2007, respectively, and our net sales of infant formula products have grown at a CAGR of 8.5% from 2004 to 2007.

Children’s Nutrition:

 

   

We are a global leader in children’s nutrition, based on retail sales.

 

   

We are a leader in China, the Philippines, Thailand, Malaysia and Mexico, five of the six largest children’s nutrition markets, based on retail sales, accounting for approximately 56% of total children’s nutrition sales in 2007.

 

   

Children’s nutrition products represented 29.5% and 27.0% of our net sales for the nine months ended September 30, 2008 and the year ended December 31, 2007, respectively, and our net sales of children’s nutrition products have grown at a CAGR of 14.2% from 2004 to 2007.

 

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Our business model integrates nutritional science with marketing expertise. During the course of our history, we have made several advances in pediatric nutrition, including the following:

 

 

 

In 2008, we launched Nutramigen AA®, an amino acid infant formula for infants with severe protein allergies;

 

 

 

In 2005, we developed and launched Enfamil Gentlease LIPIL® in the United States, a unique partially hydrolyzed, reduced-lactose infant formula that is better tolerated by infants with gas and fussiness;

 

 

 

In 2004, we added prebiotics to our Enfalac® infant formula in Asia, providing improved digestive health for infants;

 

 

 

In 2003, we introduced Nutramigen® with LGG in Europe, the first broadly distributed extensively hydrolyzed infant formula with a probiotic shown to reflect a reduced incidence of atopic dermatitis in infants allergic to protein in cow’s milk;

 

 

 

In 2002, we developed Enfamil LIPIL®, the first infant formula in the United States to include the nutrients DHA and ARA, which are important nutrients in breast milk that have been clinically shown to promote infant brain and eye development;

 

 

 

In 1996, we launched the Lactum® brand of vitamin-fortified milk powder, with the compelling consumer insight that mothers want their children to be 100% nourished;

 

 

 

In the 1980s, we developed Sustagen® from a product used to provide nutrition to patients in hospitals to a consumer brand of fortified milk powder focused on nutritional reassurance. During the 1990s, we launched multiple Sustagen® line extensions specifically for children;

 

 

 

In 1965, we developed ProSobee®, the first soy-based infant formula in the United States;

 

 

 

In 1958, we developed Lofenalac®, the first commercially available infant feeding product for the management of infants with phenylketonuria;

 

 

 

In 1942, we developed Nutramigen®, the first protein hydrolysate infant formula in the United States; and

 

 

 

In 1911, we launched Dextri-Maltose®, the first clinically-supported, physician-recommended infant formula.

Our History

Mead Johnson was founded in 1905 and we introduced Dextri-Maltose®, our first infant formula product, in 1911. Over the next several decades, we built upon our leadership in science-based nutrition, introducing many innovative infant feeding products while expanding into vitamins, pharmaceutical products and nutrition. During the course of our history, we have expanded our operations into geographies outside of the United States, including Europe, Asia and Latin America. Throughout our history, our deeply-held commitment to support breastfeeding and our commitment to improve the health and development of infants and children around the world have been hallmarks of our organization. In 1967, we became a wholly-owned subsidiary of BMS. Following our separation from BMS, we will be a global company focused on the manufacture and marketing of branded pediatric nutrition products. As a stand-alone public company, we believe we will be better positioned to compete in the pediatric nutrition industry and invest in and grow our business.

 

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Industry Overview

According to Euromonitor, the pediatric nutrition industry is an approximately $19 billion global industry that has grown at a CAGR of approximately 11% from 2002 to 2007. The industry is characterized by well- recognized global brands that generate strong loyalty among consumers and health care professionals. The pediatric nutrition industry is composed of two categories: infant formula and children’s nutrition. Infant formula products are designed to be the sole or primary source of nutrition in the first year of an infant’s life, while children’s nutrition products are nutritional supplements for children over the age of one, which are either milk-based or designed to be added to milk. Children’s nutrition products also are commonly referred to as growing-up milk or toddler milk. According to Euromonitor, infant formula comprised approximately 75% of global pediatric nutrition sales in 2007. The following diagram shows the categorization and size of the global pediatric nutrition industry:

Global Pediatric Nutrition Industry Categorization and Size

LOGO

 

Source: Euromonitor. Market data for 2007.

Infant Formula

According to Euromonitor, infant formula is an approximately $14 billion category. Category sales have grown at a CAGR of approximately 9% from 2002 to 2007 and are projected to grow at a CAGR of approximately 7% from 2007 to 2012. Infant formula is further categorized into routine and specialty formulas. Routine formula, which comprises the majority of infant formula sold worldwide, is for use by full term, healthy infants and infants with minor intolerances such as mild spit-up, fussiness or gas. Specialty formula is for use by infants with special needs, including prematurity, milk protein intolerance and other allergies. The growth and attractiveness of the infant formula category for existing companies with strong brands are likely to be sustained by increasing global wealth, which will make premium routine and specialty infant formula more affordable for a wider range of households.

Children’s Nutrition

According to Euromonitor, children’s nutrition is an approximately $5 billion category. Category sales have grown at a CAGR of approximately 18% from 2002 to 2007 and are projected to grow at a CAGR of approximately 14% from 2007 to 2012. This robust growth is being driven by economic development, primarily in emerging markets, and by increased awareness and recognition of the benefits of nutritional supplements for young children. Children’s nutrition products are widely accepted in Asia and Latin America and have become increasingly recognized by mothers and health care professionals in Europe and North America. In North America, where children’s nutrition sales have traditionally been only a minor component of net sales, children’s nutrition sales are projected to grow steadily, due in part to increased awareness of the benefits of sound nutrition in growing children.

 

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Industry Growth Trends

According to Euromonitor, the global pediatric nutrition industry is projected to grow at a CAGR of approximately 9% from 2007 to 2012. We believe several favorable trends have and will continue to support this growth, including the following:

 

   

favorable demographics;

 

   

increased consumer awareness of the importance of health and wellness;

 

   

enhanced nutritional insight;

 

   

innovation; and

 

   

consumer willingness to pay for premium and enhanced nutrition products.

Favorable Demographics

We believe favorable demographics, particularly in emerging markets, will continue to drive growth in pediatric nutrition. Among these favorable demographics is the increase of household incomes in various emerging markets. For example, between 2000 and 2007, the projected percentage of households with annual incomes above $5,000 has increased from 2% to 19% in China and from 5% to 19% in India. As a result, an increasing number of households are able to afford and purchase pediatric nutrition products. In addition, the number of working women has been increasing worldwide. For example, the number of women in East Asia who were salaried workers increased from 31% in 1996 to 40% in 2006. We believe that as the number of working women increases, the use of pediatric nutrition products among such women who are also mothers increases as well. We have also observed increasing consumer spending on health care worldwide. For example, consumer expenditures on health care increased between 2000 and 2007 at a CAGR of 13% in China and 14% in India. We believe this increase in consumer spending on health care products has resulted in increased awareness and purchase of pediatric nutrition products.

Increased Consumer Awareness of the Importance of Health and Wellness

According to Euromonitor, multiple factors have contributed and are expected to continue to contribute to increased consumer awareness of the benefits of nutrition. Among these factors are greater media coverage of science and health issues and government campaigns to promote healthy eating and lifestyles. For instance, in the United States, both the 2005 Dietary Guidelines and the Food Pyramid have become a new point of reference for manufacturers for developing new or reformulating existing healthier products for consumers.

Enhanced Nutritional Insight

There is increasing scientific, governmental and academic focus on the impact of early nutrition on lifelong health, which is reflected in a rise in the number of studies on the importance of nutrition for infants and children as they develop. The Codex Alimentarius Commission, a global body formed by the United Nations Food and Agriculture Organization (the “CODEX”), provides for the optional addition and the World Health Organization (the “WHO”) recommends the addition of DHA and ARA to infant formulas. Similarly, the American Dietetic Association recommends that all infants who are not breastfed consume a formula containing DHA and ARA. This focus on nutrition has resulted in more mothers paying increased attention to ingredients used in infant and children’s products. For example, The Gallup Organization, Inc. reports 63% of mothers of children under the age of four in the United States have reported using a DHA or ARA formula in 2007. Studies have shown that DHA and ARA are essential nutrients found in breast milk that promote brain and eye development.

Innovation

Significant focus on nutritional science has resulted in increased research and innovation in pediatric nutrition. There has been a growing trend to incorporate new ingredients such as prebiotics, probiotics, DHA and ARA and protein fractions, and we believe such ingredients will continue to drive innovation in an effort to create products that are better suited for children’s needs and bring pediatric nutrition products closer to breast milk in terms of composition and efficacy.

 

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Consumer Willingness to Pay for Premium and Enhanced Nutrition Products

There has been a global trend for consumers to adopt products with greater nutritional enhancement. Prices for nutritionally fortified foods command a significant premium, and consistent with this trend, in emerging markets such as Thailand and China, there has been strong growth for premium-priced pediatric nutrition products. We believe there is intense pressure for children to succeed globally that will result in more parents seeking the advantages that premium pediatric nutrition products provide to their children.

Our Competitive Strengths

We believe we possess the following competitive strengths that will enable us to expand our position as a global leader in pediatric nutrition:

Global Leader in Pediatric Nutrition

We are a global leader in pediatric nutrition with approximately $2.6 billion in net sales for the year ended December 31, 2007. We hold leading positions in both infant formula and children’s nutrition based on retail sales in 2007, according to data reported by Nielsen2 and ERC. We are a leader in infant formula in the United States, the world’s largest infant formula market, based on U.S. market share, and in Asia, the fastest growing region in the pediatric nutrition industry, based on retail sales. In addition, in children’s nutrition, we are a leader in China, the Philippines, Thailand, Malaysia and Mexico, five of the six largest children’s nutrition markets, based on retail sales, accounting for approximately 56% of total children’s nutrition sales in 2007. Our global leadership position affords us several distinct competitive advantages, including manufacturing scale, the ability to support a world-class sales and marketing team and the ability to invest in research and development.

Powerful Global Brand Equity

The Mead Johnson name has been associated with science-based pediatric nutrition products for 100 years. Our Enfa family of brands, including Enfamil® infant formula, which accounted for 59.5% of our net sales for the year ended December 31, 2007, is the world’s leading brand franchise in pediatric nutrition, based on retail sales. Total unaided awareness of Enfamil® exceeded 90% in the United States in 2007. We believe we also own some of the most well-known regional and local brands in the industry, including Alacta®, Cal-C-Tose®, ChocoMilk®, Lactum®, Nutramigen®, Poly-Vi-Sol® and Sustagen®. See the tables under “—Our Products” for a description of our brands.

Parents and health care professionals alike trust us to provide high-quality nutritional products for the health and development of infants and children. We have built our brand equity through decades of significant innovation, stringent quality standards and clinical support of our brands’ benefits. Our brand equity has allowed us to create and maintain brand loyalty across our extensive product portfolio throughout the various stages of pediatric development, garner premium prices and introduce new products. In addition, our brand equity is instrumental in obtaining recommendations from health care professionals and securing hospital contracts.

Global Geographic Presence

We market our portfolio of more than 70 products to mothers, health care professionals and retailers in more than 50 countries in North America, Europe, Asia and Latin America. For the nine months ended September 30, 2008, 61.5% of our net sales were generated in countries outside of the United States. In addition, we operate research and development centers in Mexico, Thailand and the United States, allowing us to address regional consumer preferences rapidly and efficiently.

 

2 As reported by Nielsen through its ScanTrack & Audit retail data service for the infant and children’s formula category for the years ended December 31, 2005, 2006 and 2007.

 

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We also operate in-house production facilities at seven different locations around the world. We believe our diversified operations are well-balanced between developed and emerging markets, positioning us to achieve growth in these regions.

Leader in New Product Innovation

We invest heavily in research and development to maintain our standing as one of the industry leaders in new product innovation. We have been a leader in innovation since 1911, when we launched Dextri-Maltose®, the first clinically-supported, physician-recommended infant formula. We believe our global research and development capabilities, together with the strength of our brands and our ability to convert advances in nutritional science into marketable products, will continue to allow us to develop new products and improve existing products across each of our product categories. In 2002, we made a breakthrough innovation in the pediatric nutrition industry by developing Enfamil LIPIL®, the first infant formula in the United States to include the nutrients DHA and ARA, which are important nutrients in breast milk that have been clinically shown to promote infant brain and eye development. We have made several other recent advances in pediatric nutrition, including the following:

 

 

 

In 2008, we launched Nutramigen AA®, an amino acid infant formula for infants with severe protein allergies;

 

 

 

In 2005, we developed and launched Enfamil Gentlease LIPIL® in the United States, a unique partially hydrolyzed, reduced-lactose infant formula that is better tolerated by infants with gas and fussiness;

 

 

 

In 2004, we added prebiotics to our Enfalac® infant formula in Asia, providing improved digestive health for infants; and

 

 

 

In 2003, we introduced Nutramigen® with LGG in Europe, the first broadly distributed extensively hydrolyzed product with a probiotic shown to reflect a reduced incidence of atopic dermatitis in infants allergic to protein in cow’s milk.

Over the past twenty years, we also have launched important innovations built upon marketing insights. In 1996, we launched the Lactum® brand of vitamin-fortified milk powder, with the compelling consumer insight that mothers want their children to be 100% nourished. In the 1980s, we developed Sustagen® from a product used to provide nutrition to patients in hospitals to a consumer brand of fortified milk powder focused on nutritional reassurance. During the 1990s, we launched multiple Sustagen® line extensions specifically for children. These product launches built on a century of innovations in the United States that include the launch of the first soy-based formula in 1929, the first lactose-free formula in 1936 and the first extensively hydrolyzed formula in 1942.

Extensive Product Portfolio

Together with the strength of our brands, our extensive line of pediatric nutrition products generates significant consumer retention and conversion advantages across both functional needs and stages of pediatric development. Our comprehensive infant product portfolio includes routine infant formulas, specialty infant formulas and solutions for infants with highly specialized medical needs. We provide specialty formulas to address severe protein sensitivity, multiple food allergies and fat malabsorption. We also provide specialty formulas for premature and low birth weight infants.

Our children’s nutrition products are tailored according to nutritional needs at each age. For example, our Enfagrow®, Enfakid® and EnfaSchool® brands span Stages 3, 4 and 5, suitable for children between the ages of one and beyond five. We also market a portfolio of products for expectant and nursing mothers that supplement the mothers’ diet. We believe maintaining an extensive product portfolio positions us well to retain our consumers across products and stages of pediatric development and meet children’s nutritional needs and the needs of their expectant mothers as they change over time.

 

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Global Supply Chain Excellence and Continuous Improvements

We manage sourcing, manufacturing and distribution through a fully-integrated, global supply chain to optimize our costs and produce the highest quality products. We operate in-house production facilities at seven different locations around the world and additionally utilize third-party manufacturers for a percentage of our requirements. Procurement is managed on a global basis to ensure supply and cost efficiency. Sourcing of semi-finished products is managed on a global basis while finishing and packaging of our products are managed on a regional and sub-regional basis. We outsource distribution to leverage third-party expertise to increase our efficiency and flexibility, contributing to higher operating margins than those of our primary competitors in 2007 and the first half of 2008, based on publicly available information. In addition, since 2004, we have consistently achieved annual cost savings in excess of 3% of our costs of products sold. We also have cultivated a pipeline of efficiency projects spanning the next several years in order to further support our continuous improvement program.

Focus on Pediatric Nutrition

We believe our singular focus on pediatric nutrition differentiates us from many of our competitors, which are large, multinational packaged foods or pharmaceutical companies, whose pediatric nutrition products generally comprise a relatively minor proportion of their total product offerings and sales. We have 100 years of experience in integrating nutritional science with consumer marketing, allowing us to develop science-based clinically supported products that are precisely tailored to consumers’ needs. With our knowledge of the factors that drive product choice at each age of a child’s life, we have developed a top-rated sales force, as well as direct marketing and proprietary market research programs that allow us to understand and efficiently target each product and stage of pediatric development.

Highly Dedicated Employees and Experienced Management Team

Our highly dedicated employees are committed to improving the health and development of infants and children around the world, while helping to build a growing business. Our senior management team has expertise from leading packaged goods, health care and other companies and is skilled in the integration of nutritional science and marketing.

Attractive Cash Flow Generation

Our strong operating margins and relatively low capital expenditures and working capital requirements result in attractive cash flow generation, allowing for reinvestment in research and development and additional growth opportunities for our company. In fiscal 2007, 2006 and 2005, we generated $393.7 million, $282.9 million and $378.0 million, respectively, of free cash flow, defined as operating cash flow less capital expenditures. We expect this strong cash flow to create stockholder value by enabling us to invest in the growth of our business.

Our Growth Strategies

We are committed to improving the health and development of infants and children around the world. We intend to grow our business profitably through the following strategic initiatives:

Continued Leadership in Innovation

Innovation is fundamental to our long-term growth and profitability. From 2003 to 2007, we have increased our investment in research and development by 84% and established world-class professional capabilities in our research and development headquarters and regional labs. Our research and development teams drive the integration of nutritional science with marketing across all phases of the product development process. We believe we have a strong innovation pipeline that is focused on improving the health and development of infants

 

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and children, with a particular focus on brain development, allergy and tolerance issues, immunity, healthy growth and improved product experience. Investments in leading systems and processes will be used to reduce cycle times for projects in our pipeline and we are planning to achieve a systematic flow of innovations. We believe our global research and development capabilities, the strength of our brands and our ability to convert advances in nutritional science into marketable product innovations will continue to allow us to successfully develop new products and improve existing products across each of our product categories.

Build on Our Leadership Position in Our Core Businesses

We intend to grow our business in our core countries and product categories by building loyal usage of our brands, introducing product innovations with speed and excellence and leveraging our expertise in marketing to consumers and health care professionals. In addition, we will continue to implement best practices and insights using our balance of local, regional and global capabilities to execute the most effective programs in all markets. We differentially invest behind the critical drivers of our business. We have a successful business model based on acquiring new consumers and retaining them. This expertise and deployment of resources will enable us to focus on the business drivers known to drive consumer acquisition and retention. We also intend to invest in order to attract, retain and train talented employees who are committed to improving the health of the world’s infants and children and who have world class capabilities in key business disciplines including marketing, sales, product development, supply chain and finance.

Expansion into New High-Growth Geographic Markets

Emerging markets in Asia, Eastern Europe and the Middle East are projected to experience rapid growth. We have established replicable business models and developed a deep understanding of business drivers in our core markets that we believe will lead to success in selected new high-growth markets. We believe our global supply chain infrastructure, along with the strength of our business model and demand-creation capabilities, strategically positions us for further expansion into certain high-growth regions in which we currently have a more limited presence.

Entering into Adjacent Product Categories

There is a global trend of mothers seeking increased nutritional reassurance, and mothers and health care professionals alike associa