10-Q 1 form10-qx1q20133312013.htm 10-Q Form 10-Q - 1Q2013 (3/31/2013)

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

For the quarterly period ended March 31, 2013
 
Commission File Number: 001-34251
 
MEAD JOHNSON NUTRITION COMPANY
(Exact Name of Registrant as Specified in Its Charter)
 
Delaware
 
80-0318351
(State or Other Jurisdiction of
 Incorporation or Organization)
 
(I.R.S. Employer
 Identification No.)
 
2701 Patriot Blvd.
Glenview, Illinois 60026
(Address of Principal Executive Offices and Zip Code)
 
Registrant’s Telephone Number, Including Area Code: (847) 832-2420
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): 
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
  Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes £ No ý
 
As of April 22, 2013, there were 202,474,989 shares of common stock outstanding.





MEAD JOHNSON NUTRITION COMPANY
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2013
 
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 



PART I — FINANCIAL INFORMATION
 
ITEM 1.      FINANCIAL STATEMENTS.

MEAD JOHNSON NUTRITION COMPANY 
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in millions, except per share data)
(UNAUDITED)
 
 
Three Months Ended March 31,
 
2013
 
2012
NET SALES
$
1,037.9

 
$
986.6

Cost of Products Sold
390.9

 
373.5

GROSS PROFIT
647.0

 
613.1

Expenses:
 

 
 

Selling, General and Administrative
217.0

 
210.4

Advertising and Promotion
144.5

 
125.8

Research and Development
24.2

 
22.5

Other Expenses – net
12.2

 
5.6

EARNINGS BEFORE INTEREST AND INCOME TAXES
249.1

 
248.8

 
 
 
 
Interest Expense – net
14.2

 
14.5

EARNINGS BEFORE INCOME TAXES
234.9

 
234.3

 
 
 
 
Provision for Income Taxes
60.4

 
64.5

NET EARNINGS
174.5

 
169.8

Less Net Earnings Attributable to Noncontrolling Interests
2.0

 
5.6

NET EARNINGS ATTRIBUTABLE TO SHAREHOLDERS
$
172.5

 
$
164.2

Earnings per Share – Basic
 

 
 

Net Earnings Attributable to Shareholders
$
0.85

 
$
0.80

Earnings per Share – Diluted
 

 
 

Net Earnings Attributable to Shareholders
$
0.85

 
$
0.80

 
 
 
 
Dividends Declared per Share
$
0.34

 
$
0.30

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



1


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



 
 
Three Months Ended March 31,
 
2013
 
2012
NET EARNINGS
$
174.5

 
$
169.8

 
 
 
 
OTHER COMPREHENSIVE INCOME/(LOSS)
 

 
 

Foreign Currency Translation Adjustments
 

 
 

Translation Adjustments
(34.7
)
 
22.9

Tax Benefit/(Expense)
3.2

 
(6.4
)
Deferred Gains/(Losses) on Derivatives Qualifying as Hedges
 

 
 

Deferred Losses on Derivatives Qualifying as Hedges for the Period
(4.4
)
 
(6.4
)
Reclassification Adjustment for (Gains)/Losses Included in Net Earnings
3.0

 
(1.0
)
Tax Benefit
0.5

 
2.2

Pension and Other Postretirement Benefits
 

 
 

Deferred Gains/(Losses) on Pension and Other Postretirement Benefits
1.0

 
(0.1
)
Reclassification Adjustment for Losses Included in Net Earnings
8.9

 
1.8

Tax Benefit/(Expense)
(3.5
)
 
0.8

OTHER COMPREHENSIVE INCOME/(LOSS)
(26.0
)
 
13.8

 
 
 
 
COMPREHENSIVE INCOME
148.5

 
183.6

 
 
 
 
Less Comprehensive Income/(Loss) Attributable to Noncontrolling Interests
(3.2
)
 
5.6

 
 
 
 
COMPREHENSIVE INCOME ATTRIBUTABLE TO SHAREHOLDERS
$
151.7

 
$
178.0

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

2


MEAD JOHNSON NUTRITION COMPANY
 
CONSOLIDATED BALANCE SHEETS
(Dollars and shares in millions, except per share data)
(UNAUDITED) 
 
March 31, 2013
 
December 31, 2012
ASSETS
 

 
 

CURRENT ASSETS:
 

 
 

Cash and Cash Equivalents
$
1,017.2

 
$
1,042.1

Receivables – net of allowances of $6.8 and $7.6, respectively
413.4

 
364.6

Inventories
444.0

 
435.9

Deferred Income Taxes – net of valuation allowance
83.8

 
86.4

Income Taxes Receivable
31.2

 
26.0

Prepaid Expenses and Other Assets
66.3

 
60.0

Total Current Assets
2,055.9

 
2,015.0

Property, Plant, and Equipment – net
716.8

 
689.9

Goodwill
228.2

 
270.6

Other Intangible Assets – net
122.6

 
129.9

Deferred Income Taxes – net of valuation allowance
21.7

 
24.5

Other Assets
130.3

 
128.3

TOTAL
$
3,275.5

 
$
3,258.2

LIABILITIES AND EQUITY/(DEFICIT)
 

 
 

CURRENT LIABILITIES:
 

 
 

Short-term Borrowings
$
103.1

 
$
161.0

Accounts Payable
511.7

 
508.5

Dividends Payable
69.4

 
61.3

Note Payable
19.1

 
26.0

Accrued Expenses
201.5

 
220.4

Accrued Rebates and Returns
319.6

 
314.8

Deferred Income – current
28.3

 
36.1

Income Taxes – payable and deferred
64.2

 
41.8

Total Current Liabilities
1,316.9

 
1,369.9

Long-Term Debt
1,521.1

 
1,523.2

Deferred Income Taxes – noncurrent
17.3

 
15.9

Pension, Postretirement and Postemployment Liabilities
186.2

 
188.8

Other Liabilities
106.0

 
95.1

Total Liabilities
3,147.5

 
3,192.9

COMMITMENTS AND CONTINGENCIES


 


 
 
 
 
REDEEMABLE NONCONTROLLING INTEREST
39.3

 
36.3

 
 
 
 
EQUITY/(DEFICIT)
 

 
 

Shareholders’ Equity
 

 
 

Common Stock, $0.01 par value: 3,000 authorized, 206.4 and 206.0 issued, respectively
2.1

 
2.1

Additional Paid-in/(Distributed) Capital
(661.3
)
 
(676.6
)
Retained Earnings
1,218.6

 
1,124.8

Treasury Stock – at cost
(276.7
)
 
(244.6
)
Accumulated Other Comprehensive Loss
(207.8
)
 
(187.0
)
Total Shareholders’ Equity
74.9

 
18.7

Noncontrolling Interests
13.8

 
10.3

Total Equity
88.7

 
29.0

TOTAL
$
3,275.5

 
$
3,258.2

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

3


MEAD JOHNSON NUTRITION COMPANY
 
CONSOLIDATED STATEMENTS OF EQUITY/(DEFICIT) AND REDEEMABLE NONCONTROLLING INTEREST
(Dollars in millions)
(UNAUDITED)
 
 
Common
Stock
 
Additional
Paid-in
(Distributed)
Capital
 
Retained
Earnings
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Non-
controlling
Interests
 
Total 
Equity/
(Deficit)
 
Redeemable
Non-
controlling
Interest
Balance as of January 1, 2013
$
2.1

 
$
(676.6
)
 
$
1,124.8

 
$
(244.6
)
 
$
(187.0
)
 
$
10.3

 
$
29.0

 
$
36.3

Stock-based Compensation Awards
 

 
15.3

 
 

 
(9.1
)
 
 

 
 

 
6.2

 
 

Treasury Stock Acquired
 

 
 

 
 

 
(23.0
)
 
 

 
 

 
(23.0
)
 
 

Cash Dividends Declared
 

 
 

 
(69.0
)
 
 

 
 

 
 

 
(69.0
)
 
 

Net Earnings
 

 
 

 
172.5

 
 

 
 

 
1.7

 
174.2

 
0.3

Redeemable Noncontrolling Interest Accretion
 

 
 

 
(9.7
)
 
 

 
 

 
 

 
(9.7
)
 
9.7

Other Comprehensive Income (Loss)
 

 
 

 
 

 
 

 
(20.8
)
 
1.8

 
(19.0
)
 
(7.0
)
Balance as of March 31, 2013
$
2.1

 
$
(661.3
)
 
$
1,218.6

 
$
(276.7
)
 
$
(207.8
)
 
$
13.8

 
$
88.7

 
$
39.3

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of January 1, 2012
$
2.1

 
$
(728.4
)
 
$
770.0

 
$
(89.7
)
 
$
(133.1
)
 
$
11.1

 
$
(168.0
)
 
$
—

Stock-based Compensation Awards
 
 
17.8

 
 

 
(13.6
)
 
 

 
 

 
4.2

 
 

Treasury Stock Acquired
 
 


 
 

 
(17.2
)
 
 

 
 

 
(17.2
)
 
 

Acquisition
 
 
 
 
 
 
 
 
 
 
 
 
 
 
30.2

Cash Dividends Declared
 
 


 
(61.3
)
 
 

 
 

 
 

 
(61.3
)
 
 

Net Earnings
 
 


 
164.2

 
 

 
 

 
5.5

 
169.7

 
0.1

Other Comprehensive Income (Loss)
 
 


 
 

 
 

 
13.8

 
—

 
13.8

 
 

Balance as of March 31, 2012
$
2.1

 
$
(710.6
)
 
$
872.9

 
$
(120.5
)
 
$
(119.3
)
 
$
16.6

 
$
(58.8
)
 
$
30.3

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

4


MEAD JOHNSON NUTRITION COMPANY
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
(UNAUDITED)
 
 
Three Months Ended March 31,
 
2013
 
2012
CASH FLOWS FROM OPERATING ACTIVITIES:
 

 
 

Net Earnings
$
174.5

 
$
169.8

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

 
 

Depreciation and Amortization
20.1

 
18.5

Other
30.3

 
28.0

Changes in Assets and Liabilities
(14.4
)
 
(196.0
)
Pension and Other Postretirement Benefits Contributions
(2.6
)
 
(0.9
)
Net Cash Provided by Operating Activities
207.9

 
19.4

CASH FLOWS FROM INVESTING ACTIVITIES:
 

 
 

Payments for Capital Expenditures
(77.5
)
 
(30.4
)
Proceeds from Sale of Property, Plant and Equipment
0.8

 
0.5

Investment in Other Companies
(0.7
)
 
—

Acquisition
—

 
(106.1
)
Net Cash Used in Investing Activities
(77.4
)
 
(136.0
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 

 
 

Proceeds from Short-term Borrowings
3.1

 
30.0

Repayments of Short-term Borrowings
(61.0
)
 
(30.0
)
Repayments of Notes Payable
(8.4
)
 
—

Payments of Dividends
(60.9
)
 
(53.0
)
Stock-based-compensation-related Proceeds and Excess Tax Benefits
5.2

 
11.5

Purchases of Treasury Stock
(32.1
)
 
(29.6
)
Net Cash Used in Financing Activities
(154.1
)
 
(71.1
)
Effects of Changes in Exchange Rates on Cash and Cash Equivalents
(1.3
)
 
8.1

NET DECREASE IN CASH AND CASH EQUIVALENTS
(24.9
)
 
(179.6
)
CASH AND CASH EQUIVALENTS:
 

 
 

Beginning of Period
1,042.1

 
840.3

End of Period
$
1,017.2

 
$
660.7

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

5


MEAD JOHNSON NUTRITION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
1.                                      ORGANIZATION
 
Mead Johnson Nutrition Company (“MJN” or the “Company”) manufactures, distributes and sells infant formulas, children’s nutrition and other nutritional products. MJN has a broad product portfolio, which extends across routine and specialty infant formulas, children’s milks and milk modifiers, pediatric vitamins, dietary supplements for pregnant and breastfeeding mothers, and products for pediatric metabolic disorders. These products are generally sold to wholesalers, retailers and distributors and are promoted to healthcare professionals, and, where permitted by regulation and policy, directly to consumers. 

2.                                      ACCOUNTING POLICIES
 
Basis of Presentation—The Company prepared the accompanying unaudited consolidated financial statements in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X issued by the Securities and Exchange Commission (“SEC”). Under those rules, certain footnotes and other financial information that are normally required by GAAP for annual financial statements have been condensed or omitted. The Company is responsible for the financial statements included in this Form 10-Q.
 
The consolidated financial statements include all of the normal and recurring adjustments necessary for the fair presentation of the Company’s financial position as of March 31, 2013 and December 31, 2012, results of operations for the three months ended March 31, 2013 and 2012, and cash flows for the three months ended March 31, 2013 and 2012. Intercompany balances and transactions have been eliminated. Revenues, expenses, assets and liabilities can vary during each quarter of the year. Accordingly, the results and trends in these unaudited consolidated financial statements may not be indicative of full-year operating results or future performance.
 
The accounting policies used in preparing these consolidated financial statements are the same as those used to prepare the Company’s annual report on Form 10-K for the year ended December 31, 2012 (“2012 Form 10-K”). These unaudited consolidated financial statements and the related notes should be read in conjunction with the audited year-end financial statements and accompanying notes included in the Company’s 2012 Form 10-K.

Recently Adopted Accounting Standards—In February 2013, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, requiring entities to provide information about the amounts reclassified out of accumulated other comprehensive income by component. For significant reclassifications related to net income, the ASU required disclosure in the consolidated statement of earnings or within the footnotes. For other amounts, the ASU required a cross-reference to other disclosures that provide additional detail about those amounts. This ASU did not change the current requirements for reporting the consolidated statement of earnings or other comprehensive income in the financial statements. The Company adopted the guidance effective January 1, 2013.

Recently Issued Accounting Standards—In March 2013, the FASB issued ASU No. 2013-05, Foreign Currency Matters (Topic 830), clarifying the applicable guidance for the release of the cumulative translation adjustment. ASU 2013-05 is effective for the Company in the period beginning January 1, 2014. The Company does not expect the adoption of this update to have a material effect on the consolidated financial statements.   

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






6



The following table presents the calculation of basic and diluted earnings per share: 
 
 
Three Months Ended March 31,
(In millions, except per share data)
 
2013
 
2012
Basic earnings per share:
 
 

 
 

Weighted-average shares outstanding
 
202.7

 
203.9

Net earnings attributable to shareholders
 
$
172.5

 
$
164.2

Dividends and undistributed earnings attributable to unvested shares
 
(0.4
)
 
(0.4
)
Net earnings attributable to shareholders used for basic earnings per share calculation
 
$
172.1

 
$
163.8

Net earnings attributable to shareholders per share
 
$
0.85

 
$
0.80

Diluted earnings per share:
 
 

 
 

Weighted-average shares outstanding
 
202.7

 
203.9

Incremental shares outstanding assuming the exercise/vesting of dilutive stock options/performance shares
 
0.5

 
0.7

Weighted-average shares — diluted
 
203.2

 
204.6

Net earnings attributable to shareholders
 
$
172.5

 
$
164.2

Dividends and undistributed earnings attributable to unvested shares
 
(0.4
)
 
(0.4
)
Net earnings attributable to shareholders used for diluted earnings per share calculation
 
$
172.1

 
$
163.8

Net earnings attributable to shareholders per share
 
$
0.85

 
$
0.80


Potential shares outstanding from all stock-based awards were 3.1 million and 3.1 million as of March 31, 2013 and 2012, respectively, of which 2.6 million and 2.4 million were not included in the diluted earnings per share calculation for the three months ended March 31, 2013 and 2012, respectively. 

4.                                      INCOME TAXES
 
For the three months ended March 31, 2013 and 2012, the effective tax rate (“ETR”) was 25.7% and 27.5%, respectively. The lower ETR was primarily attributable to management’s assertion that certain current year foreign earnings and profits are permanently invested abroad.
 
The Company’s gross reserve for uncertain tax positions related to foreign and domestic matters, including penalties and interest, as of March 31, 2013 and December 31, 2012, was $85.1 million and $75.9 million, respectively. The Company believes that it has adequately provided for all uncertain tax positions. It is reasonably possible that new issues may be raised by tax authorities and that these issues may require increases in the balance of uncertain tax positions. 
 
Pursuant to the Amended and Restated Tax Matters Agreement dated December 18, 2009, Bristol-Myers Squibb Company (“BMS”), the Company’s former parent, maintains responsibility for all uncertain tax positions which may exist in the pre-initial public offering period or which may exist as a result of the initial public offering transaction. The Company has recorded a receivable from BMS for uncertain tax positions, including penalties and interest, of $8.3 million as of March 31, 2013.

5.                                      SEGMENT INFORMATION
 
MJN operates in four geographic operating segments: Asia, Europe, Latin America and North America. This operating segmentation is how the chief operating decision maker regularly assesses information for decision making purposes, including allocation of resources. Due to similarities in the economics, products offered, production process, customer base, and regulatory environment, these operating segments have been aggregated into two reportable segments: Asia/Latin America and North America/Europe.

During the fourth quarter of 2012, the Company implemented a change in its organizational structure involving the transfer of its Puerto Rican operations from North America to Latin America. This change did not impact Europe or Asia and did not have a material impact on the assets of North America or Latin America. Segment information, for all periods presented, has been revised to be consistent with the new basis of presentation.

Corporate and Other consists of unallocated general and administrative expenses; global business support activities, including research and development, marketing and supply chain costs; and income or expenses incurred within the operating segments that are not reflective of ongoing operations and affect the comparability of the operating segments’ results.

7


 
The following table summarizes net sales and earnings before interest and income taxes for each of our reportable segments: 
 
 
Three Months Ended March 31,
 
 
Net Sales
 
Earnings Before Interest and Income Taxes
(In millions)
 
2013
 
2012
 
2013
 
2012
Asia/Latin America
 
$
755.3

 
$
707.3

 
$
268.4

 
$
280.9

North America/Europe
 
282.6

 
279.3

 
51.3

 
31.8

Total operating segments
 
1,037.9

 
986.6

 
319.7

 
312.7

Corporate and Other
 
—

 
—

 
(70.6
)
 
(63.9
)
Total
 
$
1,037.9

 
$
986.6

 
$
249.1

 
$
248.8


6.                                      EMPLOYEE STOCK BENEFIT PLANS
 
The following table summarizes stock-based compensation expense related to stock options, performance share awards and restricted stock units.
 
 
Three Months Ended March 31,
(In millions)
 
2013
 
2012
Stock options
 
$
1.7

 
$
1.8

Performance share awards
 
4.2

 
5.4

Restricted stock units
 
2.7

 
2.4

Total pre-tax stock-based compensation expense
 
$
8.6

 
$
9.6

Net tax benefit related to stock-based compensation expense
 
$
(2.9
)
 
$
(3.8
)
 
During the three months ended March 31, 2013, the Company granted the following awards: 
(Shares in millions)
 
Shares Granted
 
Weighted-
Average Grant
Date Fair Value
Stock options
 
0.5

 
$
15.02

Performance share awards
 
0.2

 
$
72.14

Restricted stock units
 
0.1

 
$
74.72

 
As of March 31, 2013, the Company had the following awards outstanding and related expense yet to be recognized: 
(Dollars and shares in millions)
 
Outstanding
 
Unrecognized
Compensation
Expense
 
Expected
Weighted-Average
Period to be
Recognized
(years)
Stock options
 
2.3

 
$
12.2

 
2.4
Performance share awards
 
0.4

 
$
19.7

 
1.6
Restricted stock units
 
0.5

 
$
21.2

 
2.7
 

8


7.                                      PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
 
The net periodic benefit cost of the Company’s defined benefit pension and postretirement benefit plans includes: 
 
 
Three Months Ended March 31,
 
 
Pension Benefits
 
Other Benefits
(In millions)
 
2013
 
2012
 
2013
 
2012
Service cost – benefits earned during the period
 
$
1.3

 
$
0.9

 
$
0.3

 
$
0.2

Interest cost on projected benefit obligations
 
3.6

 
3.9

 
0.3

 
0.3

Expected return on plan assets
 
(4.1
)
 
(4.0
)
 
—

 
—

Amortization of net actuarial loss
 
1.6

 
1.3

 
0.4

 
0.5

  Net periodic benefit cost
 
$
2.4

 
$
2.1

 
$
1.0

 
$
1.0

Settlements
 
6.9

 
—

 
—

 
—

Total net periodic benefit cost
 
$
9.3

 
$
2.1

 
$
1.0

 
$
1.0

 
Settlements reflect the recognition of losses that were previously deferred within accumulated other comprehensive income (loss) attributable to plan participants who have received lump sum distributions during the plan year. Recognition of settlements is triggered when the amount paid for lump sum distributions from a plan exceeds the sum of service and interest cost for the plan year. For the U.S. plans, losses reclassified to settlements were $6.9 million and zero for the three months ended March 31, 2013 and 2012, respectively. Settlements are recognized as Other Expenses in the consolidated statements of earnings.

8.                               OTHER EXPENSES - NET
 
The components of Other Expenses - net were:
 
 
Three Months Ended March 31,
(In millions)
 
2013
 
2012
Foreign exchange losses - net
 
$
4.7

 
$
3.2

Pension settlements
 
6.9

 
—

Other - net
 
0.6

 
2.4

Other expenses - net
 
$
12.2

 
$
5.6


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

10.                                      NET EARNINGS ATTRIBUTABLE TO NONCONTROLLING INTERESTS
 
Net earnings attributable to noncontrolling interests consists of a 20%, 11% and 10% interest held by third parties in operating entities in Argentina, China and Indonesia, respectively. 


9


11.                               INVENTORIES
 
The major categories of inventories were as follows:
(In millions)
 
March 31, 2013
 
December 31, 2012
Finished goods
 
$
239.2

 
$
264.6

Work in process
 
70.8

 
56.9

Raw and packaging materials
 
134.0

 
114.4

Inventories
 
$
444.0

 
$
435.9


12.                               PROPERTY, PLANT AND EQUIPMENT
 
The major categories of property, plant, and equipment were as follows: 
(In millions)
 
March 31, 2013
 
December 31, 2012
Land
 
$
6.4

 
$
6.0

Buildings
 
523.6

 
506.0

Machinery, equipment, and fixtures
 
621.5

 
595.7

Construction in progress
 
147.1

 
150.4

Accumulated depreciation
 
(581.8
)
 
(568.2
)
Property, plant, and equipment — net
 
$
716.8

 
$
689.9


13.                               GOODWILL
 
The Company tests goodwill and intangible assets not subject to amortization for impairments in the first quarter of each year and whenever a significant event occurs or circumstances change that would, more likely than not, reduce the fair value of these intangible assets. As a result of the Company’s review in the first quarter of 2013, the Company concluded that no impairment of goodwill or intangibles not subject to amortization exists. During the course of this review, however, the Company determined that the amount of goodwill attributed to certain reporting units needed to be revised.

For the three months ended March 31, 2013 and 2012, the change in the carrying amount of goodwill by reportable segment, was primarily driven by the cumulative impact due to a correction of the currency denomination of the goodwill related to two reporting units. The revision had the impact of decreasing the Company’s total value of goodwill and decreasing the total currency translation adjustment included in the accumulated other comprehensive income section of shareholders’ equity and other comprehensive income.

For the three months ended March 31, 2013 and 2012, the change in the carrying amount of goodwill by reportable segment, including the cumulative impact of the revisions described above, was as follows:
(In millions)
 
Asia/
Latin America
 
North America/
Europe
 
Total
Balance as of January 1, 2013
 
$
253.6

 
$
17.0

 
$
270.6

Redenomination
 
(42.5
)
 
2.0

 
(40.5
)
Translation adjustments
 
(1.9
)
 
—

 
(1.9
)
Balance as of March 31, 2013
 
$
209.2

 
$
19.0

 
$
228.2

 
 
 
 
 
 
 
Balance as of January 1, 2012
 
$
115.8

 
$
1.7

 
$
117.5

Acquisition
 
155.5

 
17.3

 
172.8

Translation adjustments
 
(0.8
)
 
(0.1
)
 
(0.9
)
Balance as of March 31, 2012
 
$
270.5

 
$
18.9

 
$
289.4

 
As of March 31, 2013, the Company had no accumulated impairment loss.

10


14.                               OTHER INTANGIBLE ASSETS
 
The gross carrying value and accumulated amortization by class of intangible assets as of March 31, 2013 and December 31, 2012 were as follows: 
 
 
As of March 31, 2013
 
As of December 31, 2012
(In millions)
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Book
Value
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Book
Value
Indefinite-lived intangible assets:
 
 

 
 

 
 

 
 

 
 

 
 

Trademark(1) .
 
$
43.4

 
$
—

 
$
43.4

 
$
45.3

 
$
—

 
$
45.3

Non-compete agreement(1) .
 
8.6

 
—

 
8.6

 
8.9

 
—

 
8.9

Sub-total
 
52.0

 
—

 
52.0

 
54.2

 
—

 
54.2

Amortizable intangible assets:
 
 

 
 

 
 

 
 

 
 

 
 

Computer software
 
131.7

 
(64.9
)
 
66.8

 
132.2

 
(60.2
)
 
72.0

Distributor-customer relationship(1) .
 
4.2

 
(0.4
)
 
3.8

 
4.4

 
(0.7
)
 
3.7

Sub-total
 
135.9

 
(65.3
)
 
70.6

 
136.6

 
(60.9
)
 
75.7

Total other intangible assets
 
$
187.9

 
$
(65.3
)
 
$
122.6

 
$
190.8

 
$
(60.9
)
 
$
129.9

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

15.                               DEBT
 
Short-Term Borrowings and Five-Year Revolving Credit Facility Agreement
 
The Company’s short-term borrowings were primarily from the five-year revolving credit facility agreement (“Credit Facility”) and were $103.1 million and $161.0 million as of March 31, 2013 and December 31, 2012 respectively. For the three months ended March 31, 2013, borrowings from the Credit Facility had a weighted-average interest rate of 1.54%. As of March 31, 2013, borrowings from the Credit Facility had a weighted-average interest rate of 1.67%. The Company intends to repay these borrowings within 12 months and has the ability to do so.
 
Borrowings from the Credit Facility are used for working capital and other general corporate purposes. The Credit Facility is unsecured and repayable on maturity in June 2016, subject to annual extensions if a sufficient number of lenders agree. The maximum amount of outstanding borrowings and letters of credit permitted at any one time under the Credit Facility is $500.0 million, which may be increased from time to time up to $750.0 million at the Company’s request and with the consent of the lenders, subject to satisfaction of customary conditions. The Credit Facility contains financial covenants, whereby the ratio of consolidated total debt to consolidated Earnings Before Interest, Income Taxes, Depreciation and Amortization (“EBITDA”) cannot exceed 3.25 to 1.0, and the ratio of consolidated EBITDA to consolidated interest expense cannot be less than 3.0 to 1.0. The Company was in compliance with these covenants as of March 31, 2013.

Borrowings under the Credit Facility bear interest at a rate that is determined as a base rate plus a margin. The base rate is either (a) LIBOR for a specified interest period, or (b) a floating rate based upon JPMorgan Chase Bank’s prime rate, the Federal Funds rate or LIBOR. The margin is determined by reference to the Company’s credit rating. The margin can range from 0.075% to 1.45% over the base rate. In addition, the Company incurs an annual 0.2% facility fee on the entire facility commitment of $500.0 million.
 
Note Payable
 
On March 15, 2012, the Company completed the Argentine Acquisition described in Note 9. Of the ARS850.7 million purchase price payable in connection with the Argentine Acquisition, ARS377.6 million was financed through a note payable. As of March 31, 2013, the remaining balance of the note payable was ARS85.1 million ($19.1 million) due upon the receipt of Argentine regulatory approval (the “Payment Date”). Through March 15, 2013, the annual interest rate for the note payable was 14%. Effective as of March 16, 2013, the note was converted to U.S. dollar-denominated indebtedness and the annual interest rate was automatically modified to be 0.85% through the Payment Date.
 





11


Long-Term Debt
 
The components of long-term debt were as follows: 
(Dollars in millions)
 
March 31, 2013
 
December 31, 2012
Principal Value:
 
 

 
 

3.50% Notes due 2014
 
$
500.0

 
$
500.0

4.90% Notes due 2019
 
700.0

 
700.0

5.90% Notes due 2039
 
300.0

 
300.0

Sub-total
 
1,500.0

 
1,500.0

Adjustments to Principal Value:
 
 

 
 

Unamortized basis adjustment for terminated interest rate swaps
 
23.7

 
26.0

Unamortized bond discount
 
(2.6
)
 
(2.8
)
Long-term debt
 
$
1,521.1

 
$
1,523.2

 
Using quoted prices in markets that are not active, the Company determined that the fair value of its long-term debt was $1,685.0 million (Level 2) as of March 31, 2013.
 
The components of interest expense-net were as follows: 
 
 
Three Months Ended March 31,
(In millions)
 
2013
 
2012
Interest expense
 
$
16.0

 
$
16.2

Interest income
 
(1.8
)
 
(1.7
)
Interest expense-net
 
$
14.2

 
$
14.5


16.                               DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS
 
Derivatives
 
The Company is exposed to market risk due to changes in currency exchange rates and interest rates. To manage that risk, the Company enters into certain derivative financial instruments, when available on a cost-effective basis, to hedge its underlying economic exposure. These financial instruments are in Level 2 of the fair value hierarchy for both periods presented. For the three months ended March 31, 2013 and 2012, there were no transfers between levels in the fair value hierarchy. Derivative financial instruments are not used for speculative purposes.
 
The following table summarizes the Company’s fair value of outstanding derivatives designated as hedging instruments: 
(In millions)
 
 
 
 
 
 
Cash flow hedges:
 
Balance Sheet Location
 
March 31, 2013
 
December 31, 2012
Foreign exchange contracts
 
Other assets
 
$
0.2

 
$
—

Foreign exchange contracts
 
Accrued expenses
 
(6.2
)
 
(5.1
)
Net liability of derivatives designated as hedging instruments
 
 
 
$
(6.0
)
 
$
(5.1
)
 
The Company’s derivative financial instruments present certain market and counterparty risks; however, concentration of counterparty risk is mitigated as the Company uses a variety of major banks worldwide whose long-term debt is rated A or higher by Standard & Poor’s Rating Service, Fitch Ratings, or Moody’s Investors Service, Inc. In addition, only conventional derivative financial instruments are used. The Company would not be materially impacted if any of the counterparties to the derivative financial instruments outstanding at March 31, 2013 failed to perform according to the terms of its agreement. At this time, the Company does not require collateral or any other form of securitization to be furnished by the counterparties to its derivative financial instruments.
 






12


Cash Flow Hedges-Foreign Exchange Contracts
 
The Company uses foreign exchange contracts to hedge forecasted transactions, primarily intercompany purchases for up to 18 months, on certain foreign currencies and designates these derivative instruments as foreign currency cash flow hedges when appropriate. For the contracts that qualify as hedges of probable forecasted transactions, the effective portion of changes in fair value is temporarily reported in accumulated other comprehensive income (loss) and recognized in earnings when the hedged item affects earnings.
 
The Company assesses hedge effectiveness at inception and on a quarterly basis. These assessments determine whether derivatives designated as qualifying hedges continue to be highly effective in offsetting changes in the cash flows of hedged items. Any ineffective portion of the change in fair value is included in current period earnings. For the three months ended March 31, 2013 and 2012, the impact of hedge ineffectiveness on earnings was not significant.
 
The Company will discontinue cash flow hedge accounting when the forecasted transaction is no longer probable to occur on the originally forecasted date, or 60 days thereafter, or when the hedge is no longer effective. During three months ended March 31, 2013 and 2012, the Company did not discontinue any cash flow hedges.
 
The effective portion of changes in the fair value of foreign exchange contracts is recognized in earnings when the hedged item affects earnings, in cost of products sold, or deemed ineffective, in other expenses/(income)—net. All of the Company’s foreign exchange contracts qualify as hedges of probable forecasted cash flows.
 
As of March 31, 2013, the notional value of the Company’s outstanding foreign exchange forward contracts designated as hedging instruments was $168.8 million, with a fair value of $6.0 million in net liabilities. As of December 31, 2012, the notional value of the Company’s outstanding foreign exchange forward contracts designated as hedging instruments was $207.2 million, with a fair value of $5.1 million in net liabilities. The fair value of all foreign exchange forward contracts is based on quarter-end forward currency rates. The fair value of foreign exchange forward contracts should be viewed in relation to the fair value of the underlying hedged transactions and the overall reduction in exposure to fluctuations in foreign currency exchange rates.
 
The change in accumulated other comprehensive loss and the impact on earnings from foreign exchange contracts that qualified as cash flow hedges were as follows: 
(In millions)
 
2013
 
2012
Balance—January 1
 
$
(4.1
)
 
$
4.3

Derivatives qualifying as cash flow hedges deferred in other comprehensive income
 
(4.4
)
 
(6.4
)
Derivatives qualifying as cash flow hedges reclassified to cost of products sold (effective portion)
 
3.0

 
(1.0
)
Change in deferred taxes
 
0.5

 
2.2

Balance—March 31
 
$
(5.0
)
 
$
(0.9
)
 
At March 31, 2013, the balance of the effective portion of changes in fair value on foreign exchange forward contracts that qualified for cash flow hedge accounting included in accumulated other comprehensive loss was $5.0 million, all of which is expected to be reclassified into earnings within the next 12 months.
 
Fair Value Hedges
 
The Company may, from time to time, enter into fixed-to-floating interest rate swaps as part of its interest rate management strategy. The gain or loss on these swaps that are designated and qualify as fair value hedges will be recognized in current earnings and offset by the loss or gain on the hedged item. These swaps are recorded at fair value. The fair value of the interest rate swaps is the present value of the future cash flows calculated based on forecasted LIBOR rates from a third party bank including credit value adjustments.
 
In November 2009, the Company executed several interest rate swaps to convert $700.0 million of the Company’s newly-issued fixed rate debt to be paid in 2014 and 2019 to variable rate debt. In November 2010, the Company terminated $200.0 million notional amount of fixed-to-floating interest rate swaps in exchange for cash of $15.6 million. In July 2011, the Company terminated the remaining $500.0 million notional amount of fixed-to-floating interest rate swaps in exchange for cash of $23.5 million. The related basis adjustments of the underlying hedged items are being recognized as a reduction of interest expense over the remaining life of the underlying debt. The amortization of the basis adjustment for the terminated interest rate

13


swaps reduced interest expense by $2.3 million for the three months ended March 31, 2013 and 2012. There were no interest rate swaps outstanding at March 31, 2013. See Note 15 for discussion of the Company’s long-term debt.

There were no ineffective fair value hedges for the three months ended March 31, 2013 and 2012.
 
Other Financial Instruments
 
The Company does not hedge the interest rate risk associated with money market funds which totaled $398.6 million and $520.7 million as of March 31, 2013 and December 31, 2012, respectively. Money market funds are classified as Level 2 in the fair value hierarchy and are included in cash and cash equivalents on the balance sheet. The money market funds have quoted market prices that are generally equivalent to par.

17.                               EQUITY
 
Changes in common shares and treasury stock were as follows: 
(In millions)
 
Common Shares
Issued
 
Treasury Stock
 
Cost of Treasury
Stock
Balance as of January 1, 2013
 
206.0

 
3.5

 
$
244.6

Stock-based compensation
 
0.4

 
0.1

 
9.1

Treasury stock purchases
 
—

 
0.3

 
23.0

Balance as of March 31, 2013
 
206.4

 
3.9

 
$
276.7

 
 
 
 
 
 
 
Balance as of January 1, 2012
 
205.1

 
1.4

 
$
89.7

Stock-based compensation
 
0.6

 
0.2

 
13.6

Treasury stock purchases
 
—

 
0.2

 
17.2

Balance as of March 31, 2012
 
205.7

 
1.8

 
$
120.5

 
The Company may use either authorized and unissued shares or treasury shares to meet share requirements resulting from the exercise of stock options and vesting of performance share awards and restricted stock units. Treasury stock is recognized at the cost to reacquire the shares. Shares issued from treasury are recognized using the first-in first-out method.
 
On March 16, 2010, MJN’s board of directors authorized the repurchase of up to $300.0 million of the Company’s stock. From the date of such authorization through March 31, 2013, 3.5 million shares were repurchased at an average cost per share of $70.04. As of March 31, 2013, the Company has $55.7 million available under the authorization.

Changes in Accumulated Other Comprehensive Income by component were as follows:
(In millions)
 
Foreign Currency Translation Adjustments
 
Deferred Gains/(Losses) on Derivatives Qualifying as Hedges
 
Pension and Other Post-retirement Benefits
 
Total
 
Noncontrolling Interest
 
Redeemable Noncontrolling Interest
Balance as of January 1, 2013
 
$
(14.6
)
 
$
(4.1
)
 
$
(168.3
)
 
$
(187.0
)
 
$
(0.2
)
 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
 
  Deferred Gains/(Losses)
 
(30.6
)
 
(4.4
)
 
1.0

 
(34.0
)
 
2.9

 
(7.0
)
  Reclassification Adjustment for
  (Gains)/Losses Included in Net
  Earnings
 
—

 
3.0

 
8.9

 
11.9

 
—

 
—

  Tax Benefit/(Expense)
 
4.3

 
0.5

 
(3.5
)
 
1.3

 
(1.1
)
 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of March 31, 2013
 
$
(40.9
)
 
$
(5.0
)
 
$
(161.9
)
 
$
(207.8
)
 
$
1.6

 
$
(7.0
)


14


Reclassification adjustments out of Accumulated Other Comprehensive Income were as follows:
 
 
Three Months Ended March 31, 2013
 
 
Affected Statement of Earnings Lines
 
 
 
 
(In millions)
 
Cost of Products Sold
 
Selling, General and Administrative
 
Research and Development
 
Other Expenses - Net
 
Tax Benefit/(Expense)
 
Net
Deferred Gains/(Losses) on Derivatives Qualifying as Hedges:
 
 
 
 
 
 
 
 
 
 
 
 
  Forward Exchange Contracts
 
$
(3.0
)
 
$
—

 
$
—

 
$
—

 
$
0.9

 
$
(2.1
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Pension and Other Postretirement Benefit Plans:
 
 
 
 
 
 
 
 
 
 
 

  Actuarial Gains/(Losses)
 
(0.7
)
 
(1.1
)
 
(0.2
)
 
—

 
0.9

 
(1.1
)
  Settlements
 
—

 
—

 
—

 
(6.9
)
 
2.5

 
(4.4
)
Total Reclassifications
 
$
(3.7
)
 
$
(1.1
)
 
$
(0.2
)
 
$
(6.9
)
 
$
4.3

 
$
(7.6
)


18.                               CONTINGENCIES
 
In the ordinary course of business, the Company is subject to lawsuits, investigations, government inquiries and claims, including, but not limited to, product liability claims, advertising disputes and inquiries, consumer fraud suits, other commercial disputes, premises claims and employment and environmental, health, and safety matters.
 
The Company is not aware of any environmental, health or safety-related litigation or significant environmental, health and safety-related financial obligations or liabilities arising from current or former operations or properties that are likely to have a material impact on the Company’s business, financial position, results of operations or cash flows. Liabilities or obligations, which could require the Company to make significant expenditures, could arise in the future, however, as the result of, among other things, changes in, or new interpretations of, existing laws, regulations or enforcement policies, claims relating to on- or off-site contamination, or the imposition of unanticipated investigation or cleanup obligations.
 
The Company records accruals for such contingencies when it is probable that a loss will be incurred and can be reasonably estimated. Although MJN cannot predict with certainty the final resolution of lawsuits, investigations and claims asserted against the Company, MJN does not believe any currently pending legal proceeding to which MJN is a party will have a material effect on the Company’s business or financial condition, although an unfavorable outcome in excess of amounts recognized as of March 31, 2013, with respect to one or more of these proceedings could have a material effect on the Company’s results of operations and cash flows for the periods in which a loss is recognized.


15


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

Overview of Our Business
 
We are a global leader in pediatric nutrition. We are committed to building trusted nutritional brands and products that help improve the health and development of infants and children around the world and provide them with the best start in life. Our comprehensive product portfolio addresses a broad range of nutritional needs for infants, children and expectant and nursing mothers. We have over 100 years of innovation experience during which we have developed or improved many breakthrough or industry-defining products across each of our product categories. We operate in four geographic segments: Asia, Europe, Latin America and North America. Due to similarities in the economics, products offered, production process, customer base and regulatory environment, these operating segments have been aggregated into two reportable segments: Asia/Latin America and North America/Europe.

Executive Summary
 
For the three months ended March 31, 2013, sales grew 5% year over year reflecting price increases, category growth and strong sales in Hong Kong which we believe is due to purchases made ahead of a new restrictive Hong Kong export regulation, offset by lower sales in China. Our 2012 acquisition in Argentina (the “Argentine Acquisition”) added to our overall net sales and was offset by the elimination of sales from certain non-core businesses. Earnings per share increased by 6% and was primarily attributable to sales growth and a lower effective tax rate partially offset by increased demand-generation investments and pension settlement expense.

Three Months Results of Operations
 
Below is a summary of comparative results of operations for the three months ended March 31, 2013 and 2012: 
 
 
 
 
 
 
 
 
% of Net Sales
(In millions, except per share data)
 
2013
 
2012
 
% Change
 
2013
 
2012
Net Sales
 
$
1,037.9

 
$
986.6

 
5
 %
 
 
 
 
Earnings before Interest and Income Taxes
 
249.1

 
248.8

 
—
 %
 
24
%
 
25
%
Interest Expense—net
 
14.2

 
14.5

 
(2
)%
 
1
%
 
1
%
Earnings before Income Taxes
 
234.9

 
234.3

 
—
 %
 
23
%
 
24
%
Provision for Income Taxes
 
60.4

 
64.5

 
(6
)%
 
6
%
 
7
%
    Effective Tax Rate
 
25.7
%
 
27.5
%
 
 
 
 
 
 
Net Earnings
 
174.5

 
169.8

 
3
 %
 
17
%
 
17
%
Less: Net Earnings/(Loss) Attributable to Noncontrolling Interests
 
2.0

 
5.6

 
(64
)%
 
—
%
 
—
%
Net Earnings Attributable to Shareholders
 
$
172.5

 
$
164.2

 
5
 %
 
17
%
 
17
%
Weighted-Average Common Shares— Diluted
 
203.2

 
204.6

 
 
 
 
 
 
Earnings per Common Share—Diluted
 
$
0.85

 
$
0.80

 
6
 %
 
 
 
 
 
The results for the three months ended March 31, 2013 and 2012 include several items that affect the comparability of our results. These items include significant expenses/(income) not indicative of on-going results (“Specified Items”) and are listed in the table below.
 
 
Three Months Ended March 31,
(In millions)
 
2013
 
2012
IT/other separation costs
 
$
—

 
$
1.7

Severance and other costs
 
1.4

 
1.0

Legal, settlements and related costs
 
0.2

 
1.5

Specified Items before income taxes
 
$
1.6

 
$
4.2

Income tax impact on items above
 
(0.1
)
 
(1.0
)
Specified Items after taxes
 
$
1.5

 
$
3.2

 




16


Net Sales 
Our net sales by reportable segments are shown in the table below:
 
 
Three Months Ended March 31,
 
 
 
% Change Due to
(Dollars in millions)
 
2013
 
2012
 
% Change
 
Volume
 
Price
 
Foreign
Exchange
Asia/Latin America
 
$
755.3

 
$
707.3

 
7
%
 
1
 %
 
6
%
 
—
%
North America/Europe
 
282.6

 
279.3

 
1
%
 
(4
)%
 
5
%
 
—
%
Net Sales
 
$
1,037.9

 
$
986.6

 
5
%
 
(1
)%
 
6
%
 
—
%
 
Asia/Latin America sales accounted for 73% of our net sales for the first quarter of 2013. Sales grew year over year reflecting price increases and category growth throughout the segment and strong sales in Hong Kong which we believe is due to purchases made ahead of a new restrictive Hong Kong export regulation. Sales volume increased slightly year over year, this slight increase is attributable to a 2% increase in segment volume related to the Argentine Acquisition, which mitigated the impact of a year over year volume decline in China.
 
North America/Europe sales for the first quarter of 2013 increased slightly compared to the same period in 2012. This result was attributable to price increases and market share recovery offset by the elimination of certain non-core businesses and lower U.S. category consumption.
 
Our net sales by product category are shown in the table below: 
 
 
Three Months Ended March 31,
 
 
(Dollars in millions)
 
2013
 
2012
 
% Change
Infant Formula
 
$
606.6

 
$
562.6

 
8
 %
Children’s Nutrition
 
407.7

 
393.7

 
4
 %
Other
 
23.6

 
30.3

 
(22
)%
Net Sales
 
$
1,037.9

 
$
986.6

 
5
 %
 
Infant Formula accounts for approximately 90% of our sales in North America/Europe and nearly half of our sales in Asia/Latin America. Other category sales declined due to the elimination of certain non-core products primarily in the North America/Europe segment.
 
We recognize revenue net of various sales adjustments to arrive at net sales as reported on the statements of earnings. These adjustments are referred to as gross-to-net sales adjustments. The reconciliation of our gross sales to net sales is as follows: 
 
 
Three Months Ended March 31,
 
% of Gross Sales
(Dollars in millions)
 
2013
 
2012
 
2013
 
2012
Gross Sales
 
$
1,327.5

 
$
1,267.6

 
100
%
 
100
%
Gross-to-Net Sales Adjustments
 
 

 
 

 
 

 
 

WIC Rebates
 
181.1

 
182.2

 
14
%
 
14
%
Sales Discounts
 
52.6

 
44.5

 
4
%
 
3
%
Returns
 
19.6

 
19.9

 
1
%
 
2
%
Cash Discounts
 
11.2

 
11.0

 
1
%
 
1
%
Prime Vendor Charge-Backs
 
7.3

 
8.1

 
1
%
 
1
%
Coupons and Other Adjustments
 
17.8

 
15.3

 
1
%
 
1
%
Total Gross-to-Net Sales Adjustments
 
289.6

 
281.0

 
22
%
 
22
%
Total Net Sales
 
$
1,037.9

 
$
986.6

 
78
%
 
78
%
 
Total gross-to-net sales adjustments were consistent as a percentage of gross sales with the prior year.







17


Gross Profit
 
 
Three Months Ended March 31,
 
 
(Dollars in millions)
 
2013
 
2012
 
% Change
Net Sales
 
$
1,037.9

 
$
986.6

 
5
%
Cost of Products Sold
 
390.9

 
373.5

 
5
%
Gross Profit
 
$
647.0

 
$
613.1

 
6
%
Gross Margin
 
62.3
%
 
62.1
%
 
 

The increase in gross margin resulted from increased prices, lower dairy costs and productivity, partially offset by unfavorable manufacturing variances primarily from lower manufacturing volumes in the Asia/Latin America segment.
 
Expenses
 
 
Three Months Ended March 31,
 
 
 
% of Net Sales
(Dollars in millions)
 
2013
 
2012
 
% Change
 
2013
 
2012
Selling, General and Administrative
 
$
217.0

 
$
210.4

 
3
%
 
21
%
 
21
%
Advertising and Promotion
 
144.5

 
125.8

 
15
%
 
14
%
 
13
%
Research and Development
 
24.2

 
22.5

 
8
%
 
2
%
 
2
%
Other Expenses/(Income)—net
 
12.2

 
5.6

 
118
%
 
1
%
 
1
%
 
Selling, General and Administrative Expenses
 
Selling, general and administrative expenses increased year over year due to higher sales force expense and distribution costs.
 
Advertising and Promotion Expenses
 
Our advertising spending primarily includes television and other consumer media. Promotion activities primarily include product evaluation and education provided to health care professionals and consumers, where permitted by regulation. The increase in advertising and promotion expenses reflected demand-generation investments primarily in Asia/Latin America in support of new product launches and our strategic growth initiatives.

Research and Development Expenses
 
Our research and development expenses include the continued investment in our innovation capability, product pipeline and quality programs.
 
Other Expenses — net  
 
 
Three Months Ended March 31,
(In millions)
 
2013
 
2012
Foreign exchange losses - net
 
$
4.7

 
$
3.2

Pension settlements
 
6.9

 
—

Other - net
 
0.6

 
2.4

Other expenses - net
 
$
12.2

 
$
5.6

For pension settlements, lump sum payments to retirees triggered an earlier recognition of settlement expense compared to the prior year.
 
Earnings before Interest and Income Taxes 
Earnings before interest and income taxes (“EBIT”) from our two reportable segments is reduced by Corporate and Other expenses. Corporate and Other consists of unallocated general and administrative expenses; global business support activities, including research and development, marketing and supply chain costs; and income or expenses incurred within our operating segments that are not reflective of ongoing operations and affect the comparability of the operating segments’ results.
 

18


 
 
Three Months Ended March 31,
 
 
(Dollars in millions)
 
2013
 
2012
 
% Change
Asia/Latin America
 
$
268.4

 
$
280.9

 
(4
)%
North America/Europe
 
51.3

 
31.8

 
61
 %
Corporate and Other
 
(70.6
)
 
(63.9
)
 
(10
)%
EBIT
 
$
249.1

 
$
248.8

 
—
 %

The Asia/Latin America decrease in EBIT was primarily related to higher demand-generation investments to support sales growth and reflected inflation within the segment.
 
The North America/Europe increase in EBIT was primarily attributable to higher gross margin and lower operating expenses due to the timing of advertising and promotion, as well as our new business model in Europe.
 
The increase in Corporate and Other expenses reflected earlier recognition of pension settlement expense for the U.S. plans compared to the prior year.
 
Interest Expense—net
Net interest expense is consistent with the prior year.
 
Income Taxes
The effective tax rate (“ETR”) for the three months ended March 31, 2013 and 2012 was 25.7% and 27.5%, respectively. The lower ETR was primarily attributable to management’s assertion that certain current year foreign earnings and profits are permanently invested abroad.
 
Net Earnings Attributable to Noncontrolling Interests
Net earnings attributable to noncontrolling interests consists of a 20%, 11% and 10% interest held by third parties in the Company’s operating entities in Argentina, China and Indonesia, respectively.

Net Earnings Attributable to Shareholders
For the foregoing reasons, net earnings attributable to shareholders for the three months ended March 31, 2013 increased 5% to $172.5 million compared with the three months ended March 31, 2012.
 
Liquidity and Capital Resources
 
Overview
 
Our primary sources of liquidity are cash on hand, cash from operations and available borrowings under our $500.0 million revolving credit facility. Cash flows from operating activities represent the inflow of cash from our customers net of the outflow of cash for raw material purchases, manufacturing, operating expenses, interest and taxes. Cash flows used in investing activities primarily represent acquisitions and capital expenditures for equipment, buildings and computer software. Cash flows used in financing activities primarily represent proceeds and repayments of short-term borrowings, dividend payments and share repurchases.
 
Cash and cash equivalents totaled $1,017.2 million at March 31, 2013, of which $582.1 million was held outside of the United States. During the quarter, we repatriated approximately $2.7 million of cash to the United States from multiple jurisdictions. As a result of our evaluation of our global cash position, management has asserted that current year earnings and profits in certain foreign jurisdictions are permanently invested abroad. We will continue to evaluate our global cash position and whether earnings and profits of certain other foreign jurisdictions are permanently invested abroad. As of March 31, 2013, approximately $347 million of cash and cash equivalents were held by foreign subsidiaries whose undistributed earnings, either partially or entirely, are considered permanently invested. Our intent is to invest these earnings in our foreign operations and our current plans do not demonstrate a need to repatriate them to fund our U.S. operations. If we decide at a later date to repatriate these earnings to the United States, the Company would be required to provide U.S. taxes on these amounts.

During the quarter, the Company repaid $57.9 million against its short-term revolving credit facilities. The Company’s short-term borrowings were $103.1 million and $161.0 million as of March 31, 2013 and December 31, 2012 respectively.
 

19


Our board of directors previously authorized the repurchase of up to $300 million of the Company’s stock. The repurchase program is primarily intended to offset the dilutive effect on earnings from stock-based compensation. During the three months ended March 31, 2013, we purchased 0.3 million shares under the program for $23.0 million. As of March 31, 2013, we have $55.7 million available under the authorization.
 
Cash Flows
 
We believe that cash from operations will be sufficient to support our working capital needs, pay our operating expenses, satisfy debt obligations, fund capital expenditures and make dividend payments. 
 
 
Three Months Ended March 31,
(Dollars in millions)
 
2013
 
2012
Cash flow provided by/(used in):
 
 

 
 

Operating Activities
 
 

 
 

Net Earnings
 
$
174.5

 
$
169.8

Depreciation and Amortization
 
20.1

 
18.5

Other
 
30.3

 
28.0

Changes in Assets and Liabilities
 
(14.4
)
 
(196.0
)
Pension and Other Postretirement Benefits Contributions
 
(2.6
)
 
(0.9
)
Total Operating Activities
 
207.9

 
19.4

Investing Activities
 
(77.4
)
 
(136.0
)
Financing Activities
 
(154.1
)
 
(71.1
)
Effects of Changes in Exchange Rates on Cash and Cash Equivalents
 
(1.3
)
 
8.1

Net Decrease in Cash and Cash Equivalents
 
$
(24.9
)
 
$
(179.6
)
 
For the three months ended March 31, 2013, cash flow from operating activities was $207.9 million and primarily driven by net earnings. For the three months ended March 31, 2012, cash flow from operating activities reflected earnings, partially offset by an increase in working capital, defined as accounts receivable plus inventory less accounts payable, and declines in accrued expenses and deferred income. The increase in working capital, in the first quarter of 2012, was primarily attributable to payments made with respect to our fourth quarter 2011 advance purchase of dairy inputs. In addition, the decline in accrued expenses was primarily attributable to higher annual compensation payments.
 
Cash flow used in investing activities was $58.6 million less than the prior year in light of the Argentine Acquisition in 2012. For more information regarding this acquisition, see Item 1, “Financial Statements.”
 
Cash flow used in financing activities was $154.1 million for the three months ended March 31, 2013, and included $60.9 million of dividend payments, $57.9 million net repayments from our short-term credit facilities, $32.1 million of treasury stock purchases and $8.4 million for the note payable installments related to the Argentine Acquisition, partially offset by $5.2 million inflow related to stock-based compensation. Cash flow used in financing activities was $71.1 million for the three months ended March 31, 2012, and included $53.0 million of dividend payments, $29.6 million of treasury stock purchases, partially offset by $11.5 million related to stock-based compensation.
 
Capital Expenditures
 
Capital expenditures and the cash outflow for capital expenditures were as follows:
(In millions)
 
Capital expenditures
 
Cash outflow for capital
expenditures
Three months ended March 31, 2013
 
$
39.5

 
$
77.5

 
 
 
 
 
Three months ended March 31, 2012
 
$
10.0

 
$
30.4

Capital expenditures included investment primarily in our new spray dryer and technology center in Singapore (the “Asia Spray Dryer Project”). We expect capital expenditures in 2013 to be approximately $260 million, including our investment in our Asia Spray Dryer Project, with continued emphasis on investment in growth and innovation.

Short-Term Borrowings and Note Payable
 
For information regarding Short-Term Borrowings and Note Payable, see Item 1, “Financial Statements.”


20


Special Note Regarding Forward-Looking Statements
 
This Quarterly Report on Form 10-Q and other written and oral statements we make from time to time contain certain “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You can identify these forward-looking statements by the fact they use words such as “should,” “expect,” “anticipate,” “estimate,” “target,” “may,” “project,” “guidance,” “intend,” “plan,” “believe” and other words and terms of similar meaning and expression. Such statements are likely to relate to, among other things, a discussion of goals, plans and projections regarding financial position, results of operations, cash flows, market position, product development, product approvals, sales efforts, expenses, capital expenditures, performance or results of current and anticipated products and the outcome of contingencies such as legal proceedings and financial results. You can also identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. Such forward-looking statements are based on current expectations that involve inherent risks, uncertainties and assumptions that may cause actual results to differ materially from expectations as of the date of this filing. These risks include, but are not limited to: (1) the ability to sustain brand strength, particularly the Enfa family of brands; (2) the effect on our reputation of real or perceived quality issues; (3) the effect of regulatory restrictions related to our products; (4) the adverse effect of commodity costs; (5) increased competition from branded, private label, store and economy-branded products; (6) the effect of an economic downturn on consumers’ purchasing behavior and customers’ ability to pay for product; (7) inventory reductions by customers; (8) the adverse effect of changes in foreign currency exchange rates; (9) the effect of changes in economic, political and social conditions in the markets where we operate; (10) changing consumer preferences; (11) the possibility of changes in the Women, Infant and Children (WIC) program, or participation in WIC; (12) legislative, regulatory or judicial action that may adversely affect our ability to advertise our products or maintain product margins; and (13) the ability to develop and market new, innovative products. For additional information regarding these and other factors, see our filings with the United States Securities and Exchange Commission (the “SEC”), including our Annual Report on Form 10-K for the year ended December 31, 2012 (the “2012 Form 10-K”), which filings are available upon request from the SEC or at www.meadjohnson.com. We caution readers not to place undue reliance on any forward-looking statements, which speak only as of the date made.  We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future events or otherwise. 

ITEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 
There is no material change in the information reported under Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” contained in our 2012 Form 10-K.

ITEM 4.     CONTROLS AND PROCEDURES.
 
Disclosure Controls and Procedures. Under the supervision and with the participation of our management, including our Chief Executive Officer and the Chief Financial Officer (our principal executive officer and principal financial officer, respectively), we have evaluated our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of March 31, 2013. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that, as of March 31, 2013, the Company’s disclosure controls and procedures were effective in ensuring information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting. There has been no change in our internal control over financial reporting during the quarter ended March 31, 2013, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1.            LEGAL PROCEEDINGS.
 
Information pertaining to legal proceedings can be found in Part I of this report under Item 1, “Financial Statements” in Note 18 to the interim consolidated financial statements, and is incorporated by reference herein.
 

ITEM 1A.         RISK FACTORS.
 
There is no material change in the information reported under Item 1A, “Risk Factors” contained in our 2012 Form 10-K.

21


ITEM 2.     UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
 
(c) Issuer Purchases of Equity Securities

The following table includes information about the Company’s stock repurchases during the three-month period ending March 31, 2013:
 
(Dollars in millions, except per share amounts)


Period
 
Total Number of
Shares Purchased 
(1)
 
Average Price Paid per Share
(2)
 
Total Number of Shares Purchased as Part of Publicly Announced Program
 
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program
(3)
January 1, 2013 through January 31, 2013
 
—

 
$
—

 
—

 
$
78.7

February 1, 2013 through February 28, 2013
 
228,600

 
77.04

 
228,600

 
61.1

March 1, 2013 through March 31, 2013
 
71,400

 
75.26

 
71,400

 
55.7

 
 
300,000

 
$
76.61

 
300,000

 
$
55.7

                                      
(1)
The total number of shares purchased does not include shares surrendered to the Company to pay the exercise price in connection with the exercise of employee stock options or shares surrendered to the Company to satisfy tax withholding obligations in connection with the exercise of employee stock options or the vesting of restricted stock units.
(2) 
Average Price Paid per Share includes commissions.
(3)
In March 2010, the Company announced that its board of directors authorized the Company to repurchase up to $300 million of its common stock, from time to time, on the open market. This program does not have an expiration date.

22

ITEM 6.     EXHIBITS.
 

 
Exhibit
Number
 
Exhibit Description
 
 
 
10.1
 
Form of 2013 Nonqualified Stock Option Agreement
 
 
 
10.2
 
Form of 2013 Employee Restricted Stock Unit Agreement
 
 
 
10.3
 
Form of 2013 Non-Employee Director Restricted Stock Unit Agreement
 
 
 
10.4
 
Form of 2013 Performance Share Award Agreement
 
 
 
31.1
 
Rule 13a-14(a) and 15d-14(a) Certification of the Chief Executive Officer
 
 
 
31.2
 
Rule 13a-14(a) and 15d-14(a) Certification of the Chief Financial Officer
 
 
 
32.1
 
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
32.2
 
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
101.INS
 
XBRL Instance Document
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document



23


SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
MEAD JOHNSON NUTRITION COMPANY
 
 
 
 
Date:
April 25, 2013
By:
/s/ Tom De Weerdt
 
 
 
Tom De Weerdt
 
 
 
Vice President, Corporate Controller
 
 
 
(Authorized Officer and Chief Accounting Officer)


24