10-K 1 mjn2013form10-k.htm 10-K MJN 2013 Form 10-K



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 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)
(IRS 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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common Stock, $0.01 Par Value
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
______________________________________
        Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes ý    No o
         Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o    No ý
         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 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý
 
Accelerated filer o
 
Non-accelerated filer o
 
Smaller reporting company o
         Indicate by check mark if the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No ý
         The aggregate market value of the shares of common stock held by non-affiliates of the registrant, computed by reference to the closing price as reported on the New York Stock Exchange, as of June 28, 2013, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $16.0 billion.
As of February 10, 2014, there were 201,660,776 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
         Part III of this Annual Report on Form 10-K incorporates by reference portions of the registrant’s Proxy Statement for its 2014 Annual Meeting of Stockholders, which Proxy Statement will be filed with the United States Securities and Exchange Commission within 120 days after the end of the registrant’s 2013 fiscal year.





MEAD JOHNSON NUTRITION COMPANY
TABLE OF CONTENTS
PART I
Item 1.
 
Item 1A.
 
Item 1B.
 
Item 2.
 
Item 3.
 
Item 4.
 
 
 
 
PART II
Item 5.
 
Item 6.
 
Item 7.
 
Item 7A.
 
Item 8.
 
Item 9.
 
Item 9A.
 
Item 9B.
 
 
 
 
PART III
Item 10.
 
Item 11.
 
Item 12.
 
Item 13.
 
Item 14.
 
 
 
 
PART IV
Item 15.
 





PART I
Item 1.    BUSINESS.
        In this Annual Report on Form 10-K, we refer to Mead Johnson Nutrition Company and its subsidiaries as “the Company,” “MJN,” “Mead Johnson,” “we” or “us.”
Our Company
        Mead Johnson Nutrition Company is a global leader in pediatric nutrition with $4.2 billion in net sales for the year ended December 31, 2013. We are committed to being the world’s leading nutrition company for infants and children and to helping nourish the world’s children for the best start in life. Our 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 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. 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 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 three reportable segments are Asia, Latin America and North America/Europe, which comprised 52%, 20% and 28%, respectively, of our net sales for the year ended December 31, 2013. See “Item 8. Financial Statements – Note 5. Segment Information.” For the year ended December 31, 2013, 77% of our net sales were generated in countries outside of the United States.
        We believe parents 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, which represented 59% and 39% of our net sales for the year ended December 31, 2013, respectively.
Our History
        Mead Johnson was founded in 1905 and introduced Dextri-Maltose, our first infant feeding 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 adult and children’s nutrition. Some of our products, developed in cooperation with clinicians and leading nutrition researchers, established a partnership between Mead Johnson and the scientific community that continues to this day.
        During the course of our history, we have expanded our operations into geographies outside of the United States, including Asia, Latin America and Europe and now focus solely on pediatric nutrition. Throughout our history, our deeply-held commitments to support good nutrition early in life and to improve the health and development of infants and children around the world have been hallmarks of our organization.
Our Brands
        The Mead Johnson name has been associated with science-based nutritional products for more than a century. In addition to the Mead Johnson name, our products are marketed around the world under brands that we have developed through our global sales and marketing efforts.
Enfa Family of Brands
       The Enfa family of brands includes several of the world’s leading infant formula and children’s nutrition brands, and we have positioned them as providing unique, clinically supported health and developmental benefits. The Enfa infant formula products often include docosahexaenoic acid (“DHA”) and other key nutrients to support brain and immune system development. Our Enfa family of brands accounted for approximately 80% of our net sales for the year ended December 31, 2013 and is the world’s leading brand franchise in pediatric nutrition, based on retail sales.


1



        Building upon the strength of our brand equity, we have extended the Enfa family of brands into the growing children’s nutrition category. We believe we have enhanced consumer retention by creating links between age groups and leveraging brand loyalty.
        Additionally, the use of the Enfa prefix in our prenatal nutrition products (such as EnfaMama) links the scientific basis, quality and innovation that these products hold in common with our core pediatric nutrition line.
        We consistently promote the brand through our global sales and marketing operations. Our studies show mothers and health care professionals often associate the Enfa family of brands with science, superior nutrition, quality and good value. Mothers often describe the Enfa family of brands as science-based, sophisticated, trustworthy, reliable and comforting.
Complementary Brands
        In addition to the Enfa family of brands, we market several other powerful brands on a local, regional or global basis. These brands complement the Enfa family of brands portfolio and are designed to meet the specific nutritional needs of infants under the supervision of health care professionals (such as Nutramigen), the nutritional needs of children (such as Lactum) or the nutritional needs of broad consumer populations (such as ChocoMilk and Cal-C-Tose).
Stages of Development
        Generally, there are six stages of pediatric development and we produce different products for each of these stages globally. The general stages of pediatric development are illustrated below:
       Outside of the United States, we market both infant formula products (Stages 1 and 2) and an extended range of children’s nutrition products designed for the changing nutritional needs of growing toddlers and children (Stages 3, 4 and 5). In the United States, our business is primarily focused on the infant formula category (including newborn and infant), but the children’s nutrition business is growing rapidly. This strategy allows us to take advantage of brand loyalty developed in the early stages to retain consumers as they grow older. 
Our Products
        Our pediatric nutrition products are grouped by category of feeding: (1) infant formula products, (2) children’s nutrition products and (3) other products. Infant formula, children’s nutrition and other product sales comprised approximately 59%, 39% and 2% of our net sales for the year ended December 31, 2013, respectively.
Infant Formula
General
        Our infant formula products include routine feeding formula, solutions formulas for mild feeding problems and specialty formula products, including formulas for severe intolerance, formulas for premature and low birth weight infants and medical nutrition products. The table below illustrates our key infant formula brands and products:
ROUTINE INFANT FORMULA
SOLUTIONS INFANT FORMULAS FOR
COMMON FEEDING PROBLEMS
SPECIALTY INFANT FORMULAS
AND SUPPLEMENTS
Enfamil Premium
Enfamil Gentlease: for gas/fussiness
Nutramigen: for mild to moderate cow’s milk or soy allergies
Enfamil Premium Newborn
Enfamil ProSobee: soy formula
Puramino: for severe cow’s milk protein or multiple food allergies
Enfamil A+
Enfamil LactoFree: for lactose intolerance
Pregestimil: for fat malabsorption
Enfalac A+
Enfamil AR: for anti-regurgitation
Enfamil Premature: for premature infants
SanCor Bebé
Enfamil HA: for infants at risk of cow’s milk protein allergy
Enfacare: for premature infants when they are able to go home
SanCor Bebé Premium
Enfamil Comfort: for gas/fussiness
Enfamil Human Milk Fortifier: liquid supplement added to human milk for premature and low birth weight infants
 
 
Enfamil for Supplementing: for when mothers choose to introduce formula
 
 
Other Medical Nutrition Products: for children with metabolic disorders
 
 
 
 

2



Routine Infant Formula
        We design routine infant formula as a breast milk substitute for healthy, full-term infants without special nutritional needs both for use as the infant’s sole source of nutrition and as a supplement to breastfeeding. We endeavor to develop routine infant formula closer to breast milk.
        Each product is referred to as a “formula,” as it is formulated for the specific nutritional needs of an infant of a given age. Generally, our routine infant formula has the following four main components: (1) protein from cow’s milk that is processed to have a profile similar to human milk, (2) a blend of vegetable fats (including DHA and arachidonic acid (“ARA “)) to replace bovine milk fat in order to better resemble the composition of human milk, (3) a carbohydrate, generally lactose from cow’s milk and (4) a vitamin and mineral “micronutrient” pre-mix that is blended into the product to meet the specific needs of the infant at a given age. Patterned after breast milk, which changes composition to meet the infant’s changing nutritional needs, we produce two stages of infant formula. Stage 1 formulas are consumed by newborn infants up to six months of age (up to three months of age in the case of Enfamil Premium Newborn). Stage 2 formulas are generally consumed by infants from age six to twelve months. Our most prominent product form around the world is milk-based powder, but we also produce several infant formulas in ready-to-use and concentrated liquid form for sale primarily in the United States, Canada and Argentina.
        We market the same product under different names in different regions, based on regional marketing strategies and regional brand recognition. For example, our premium infant formulas containing DHA and ARA are sold under the brands Enfamil Premium and Enfamil Premium Newborn in the United States. Outside the United States, we use the brands Enfamil A+ and Enfalac A+ for our DHA and ARA supplemented formulas.
       Routine infant formula products comprised 41% of our total net sales for each of the years ended December 31, 2013, 2012 and 2011.
Solutions Infant Formulas for Common Feeding Problems
        We design several solutions infant formulas to address common feeding tolerance problems in normal infants, including spit-up, fussiness, gas and lactose intolerance. We market our solutions infant formulas for mild intolerance such as Gentlease and Prosobee under the Enfa family of brands name.
        Solutions infant formula products comprised 10% of our total net sales for each of the years ended December 31, 2013, 2012 and 2011.
Specialty Infant Formulas and Supplements
        Our specialty infant formulas include: (1) formulas for severe intolerance, (2) formulas for premature and low birth weight infants and (3) medical nutrition products. Specialty infant formulas comprised 8% of our total net sales for each of the years ended December 31, 2013, 2012 and 2011.
Formulas for Severe Intolerance
        We design formulas for severe intolerance to be used on the specific recommendation and under the supervision of a doctor. We specially formulate these products for use by infants displaying symptoms of certain conditions or diagnosed with special medical needs.
        Nutramigen infant formula was the first infant formula to include protein hydrolysate in the United States. This ingredient is easier for infants with severe intolerance to digest because its protein is extensively hydrolyzed (or broken down into peptides, a process that would otherwise be performed in the infant’s stomach). We designed Nutramigen infant formula for use by infants with cow’s milk protein allergies. Nutramigen with LGG infant formula is a variant of Nutramigen. LGG is a probiotic ingredient that has been associated with reduced incidence of infant atopic dermatitis, a non-contagious skin disease characterized by chronic inflammation of the skin, resulting from an allergy to cow’s milk. Puramino infant formula is an amino acid formula that we formulated with fully broken-down proteins, which can be consumed without the need for digestion of the protein. We designed this product for infants who experience a severe allergy to cow’s milk or multiple other food allergies. Pregestimil infant formula is a variation of the Nutramigen formulation designed mainly for fat malabsorption. It contains medium chain triglycerides oil instead of fat.
Formulas and Supplements for Premature and Low Birth Weight Infants
        We also design products for premature and low birth weight infants to meet these infants’ unique needs under the supervision of a doctor, most often in the hospital. Typically, such infants need extra assistance obtaining the requisite nutrition. They require a higher density of nutrients and calories because they cannot take in enough volume of breast milk or routine infant formula. Enfamil Premature is an infant formula used primarily in the hospital. EnfaCare infant formula is a hypercaloric formula available through retail channels for

3



premature babies when they are able to go home. Furthermore, we designed our Enfamil Human Milk Fortifier product as a supplement to a mother’s breast milk that improves nutritional density.
Medical Nutrition
        We also produce medical foods, or foods for special medical purposes, for nutritional management of individuals with rare, inborn errors of metabolism such as maple syrup urine disease (Mead Johnson BCAD) and phenylketonuria (Mead Johnson Phenyl-Free). Category 1 products are intended for infants and young children from zero to three years of age and Category 2 products are suitable for children and adults. We produce approximately 17 formulas targeted at specific disorders for use under the direct and continuous supervision of a physician. We market these medical nutrition products under the Mead Johnson brand name.
Children’s Nutrition Products
        Children’s nutrition products are designed to provide children with enhanced nutrition. Our children’s nutrition business is present primarily in Asia and Latin America. We separate our children’s nutrition products into two categories: (1) Enfa branded children’s nutrition products and (2) other children’s nutrition products. The table below illustrates our key children’s nutrition products:
ENFA BRANDED CHILDREN’S NUTRITION PRODUCTS
 
OTHER CHILDREN’S NUTRITION PRODUCTS
Enfagrow
 
Sustagen KID
Enfagrow A+
 
Lactum
Enfagrow Premium
 
Alacta
 
 
 
ChocoMilk
 
 
 
Cal-C-Tose
 
 
 
SanCor Bebé
 
 
 
SanCor Bebé Premium

Enfa Branded Children’s Nutrition Products
        We market children’s nutrition products under the Enfa family of brands. We design these products to meet the changing nutrition needs of children at different stages of development. We offer products at Stages 3, 4 and 5 that are designed for children’s nutritional needs at one to three years of age, three to five years of age and beyond five years of age, respectively. These products are not breast milk substitutes and are not designed for use as the sole source of nutrition but instead are designed to be a part of a child’s appropriate diet. Enfa branded children's nutrition products comprised 29%, 27% and 27% of our total net sales for the years ended December 31, 2013, 2012, 2011, respectively.
Other Children’s Nutrition Products

We also offer other children's products in select markets to meet specific nutritional needs. We offer products at Stages 3, 4 and 5 designed to complete children's dietary requirements. Sustagen Kid is a nutritionally-balanced milk supplement for children targeting unique nutritional needs during specific stages of development. Lactum and Alacta are also powered milk supplements intended to ensure that essential nutrients are incorporated into children's diets.
We make ChocoMilk and Cal-C-Tose which are “milk modifiers” in powder form that, when added to a glass of milk, maximize the milk's nutritional value. These products contain a unique blend of important vitamins and minerals, including iron and calcium, and are intended to ensure that essential nutrients are incorporated into children's diets.
Other children's products comprised 10%, 11% and 11% of our total net sales for the years ended December 31, 2013, 2012, 2011, respectively.
Other Products
        We also produce a range of other products, including pre-natal and post-natal nutritional supplements for expectant and nursing mothers, including Expecta and EnfaMama. Our products for expectant or nursing mothers provide the developing fetus or breastfed infant with vitamin supplements and/or an increased supply of DHA for brain development. These products also supplement the mother’s diet by providing DHA with increased proteins, as well as 24 vitamins and minerals. Our pediatric vitamin products sold in some geographies, such as Enfamil Poly-Vi-Sol, provide a range of benefits for infants, including multivitamins and iron supplements. Other products comprised 2%, 3% and 3% of our total net sales for the years ended December 31, 2013, 2012, 2011, respectively.

4



The Special Supplemental Nutrition Program for Women, Infants, and Children (“WIC”)
        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 12-month period ended December 31, 2013 benefited from the WIC program. The USDA program is administered individually by each state.
        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. Our financial results reflect net WIC sales, after taking into account the rebates we paid to the state WIC agencies, which represented approximately 6% of our U.S. net sales and 1% of our global net sales in the year ended December 31, 2013.
        Most state WIC programs provide vouchers that participants use at authorized food stores to obtain the products covered by the program, including infant formula. State WIC agencies enter into contracts with manufacturers, pursuant to which the state agency provides mothers with vouchers for a single manufacturer’s brand of infant formula and, in return, the manufacturer gives the state agency a rebate for each can of infant formula redeemed by WIC participants. Retailers purchase infant formula directly from the manufacturer, paying the manufacturer’s published wholesale price. Mothers redeem the vouchers received from the WIC agency for infant formula at authorized retailers. The retailer is then reimbursed the full retail price by the WIC agency for redeemed vouchers. On a monthly basis, each state WIC agency invoices the contracted manufacturer for an amount equal to the number of cans of infant formula for which vouchers were redeemed by the agency and reimbursed to retailers during the month multiplied by the agreed rebate per can.
        The bid solicitation process is determined by each state’s procurement laws, but the process is relatively standardized across the WIC program. Some states form groups and hold their bid processes jointly while other states solicit bids individually. Some states split bids between separate contracts for milk- and soy-based formulas. During the bid process, each manufacturer submits a sealed bid. The manufacturer with the lowest net price, calculated as the manufacturer’s published wholesale price less the manufacturer’s rebate bid, is awarded the contract. No other factors are considered. WIC contracts are generally three years in duration with some contracts providing for extensions. Specific contract provisions can vary significantly from state to state.
        Manufacturers that choose to compete for WIC contracts must have a widely distributed infant formula brand in order to meet the requirements of the contract bidding process. As of December 31, 2013, we held the contracts that supplied approximately 39% of WIC births in the United States.
        As of December 31, 2013, we held the exclusive WIC contract for the following states:
State
 
Date of Expiration
 
% of Total
WIC Infant
Participation (1)
California (2)
 
July 31, 2015
 
14.3%
Colorado (2)
 
December 31, 2014
 
1.1%
Connecticut (2)
 
September 30, 2014
 
0.7%
Illinois (2)
 
January 31, 2016
 
3.7%
Louisiana (2)
 
September 30, 2015
 
1.9%
Maine (2)
 
September 30, 2014
 
0.3%
Massachusetts (2)
 
September 30, 2014
 
1.4%
Michigan
 
October 31, 2016
 
3.2%
Missouri (2)
 
September 30, 2014
 
1.9%
Nebraska (2)
 
September 30, 2014
 
0.5%
New Hampshire (2)
 
September 30, 2014
 
0.2%
New Jersey (2)
 
September 30, 2015
 
1.9%
New York (2)
 
June 30, 2014
 
5.9%
North Dakota (2)
 
June 30, 2015
 
0.2%
Rhode Island (2)
 
September 30, 2014
 
0.3%
South Dakota (2)
 
September 30, 2014
 
0.2%
WSCA Consortium - Soy Infant Formula Only (2) (3)
 
September 30, 2015
 
1.1%
 
(1)
As of October 2013, as reported by the United States Department of Agriculture Food and Nutrition Service (the USDA FNS).
(2)
Contract contains extension provisions.
(3)
The WSCA (Western States Contracting Alliance) Consortium includes the states of Alaska, Arizona, Delaware, District of Columbia, Hawaii, Idaho, Kansas, Maryland, Montana, Nevada, Oregon, Utah, Washington, West Virginia and Wyoming.

5



Sales and Marketing
        We conduct regional marketing in North America, Europe, Asia and Latin America within a global strategic framework focused on both parents and health care professionals in compliance with our policy with respect to the International Code of Marketing of Breast-milk Substitutes (the “WHO Code”). See “ – Regulatory – Global Policy and Guidance – WHO.” We maintain a health care professional sales force and retail sales organization throughout the world. Our marketing activities vary from region to region depending on our market position, consumer trends and the regulatory environment. Our marketing teams seek to anticipate market and consumer trends, and attempt to capture consumer insights to determine strategy for brand communication, product innovation and demand-generation programs. The marketing teams work with external agencies to create strong marketing campaigns for consumers, health care professionals and retail sales organizations, as permitted under the WHO Code and individual countries’ laws and regulations.
Consumers
        Parental preference plays an important role in brand selection with influence from health care professionals. We participate in a variety of marketing activities, where permitted by regulation and policy, including print and television advertising, direct mail, online / internet, digital and promotional programs. Our marketing is evidence-based and emphasizes our superior nutritional science. In particular, our digital marketing program provides new or prospective parents with many resources to help them with their newborns, including free samples, nutritional and developmental information for mothers and widely accepted instantly redeemable coupons, where permitted by regulation and policy. We are increasing our investment in direct marketing with a focus on emerging channels such as social media and mobile.
Health Care Professionals
        Our sales force educates health care professionals about the benefits of our infant formula products in each of the countries where we market our infant formula products. We focus our product detailing efforts on neonatal intensive care units, physicians and other health care professionals, hospital group purchasing organizations and other integrated buying organizations. We also support health care professionals by organizing continuing medical education programs, symposia and other educational interfaces.
Retail Sales Organization
        Our sales force markets our products to each of the retail channels where our products are purchased by consumers, including mass merchandisers, club stores, grocery stores, drug stores and, to a limited extent, convenience stores. The size, role and purpose of our retail sales organization varies significantly from country to country depending on our market position, the consolidation of the retail trade, shopper trends and the regulatory environment. In North America, Eastern Europe, Latin America and Asia, we focus on all retail channels, while in Western Europe we focus primarily on specialty products sold through pharmacies. We have entered into logistics partnerships with distributors and wholesalers in most of our markets.
Global Supply Chain
        We manage sourcing, manufacturing and distribution through our fully integrated global supply chain. We currently operate in-house production facilities at eight different locations around the world and additionally use third-party manufacturers for a portion of our requirements.
Locations
        Our manufacturing and finishing facilities are located in the United States, Mexico, the Netherlands, China, the Philippines, Thailand and Brazil. Our new manufacturing and technology center in Singapore is currently under construction and is expected to be operational in the second half of 2014. See “Item 2. Properties” for a description of our global manufacturing facilities.
        As the production process advances, regional or sub-regional teams support the global team, overseeing manufacturing activities such as the finishing of our products. Our four regional quality departments perform regional and manufacturing site quality control and assurance. These departments focus on regulatory requirements, food safety, pest control, continuous quality improvement, third-party compliance and ingredient supplier manufacturing operations.

6



Suppliers
        We generally enter into long-term supply agreements. We source approximately 80% of our materials from approximately 52 suppliers. Through these suppliers, we obtain key raw materials and primary packaging materials.
        We procure key raw materials and primary packaging materials on a global basis. Certain raw materials, while managed and contracted on a global basis, are subject to regional and local variations in price under the terms of the supply agreement. These raw materials are subject to review and approval by our regional teams to ensure compliance with regulatory requirements. For example, milk prices vary at the local level around the world partly due to government pricing regulation. We saw a significant rise in dairy prices in 2013. Dairy products, consisting primarily of milk powders, non-fat dry milk, lactose and whey protein concentrates, accounted for approximately 43% of our global expenditures for raw materials in the year ended December 31, 2013.
Distribution
        We manage our distribution networks locally with regional oversight. We generally enter into distribution agreements with third-party logistics providers and distributors and maintain a small staff at the local or regional level to track performance and implement initiatives.
Customers
        Our products are sold principally to wholesale and retail customers, both nationally and internationally. Sales to two of our customers, DKSH International Ltd. (primarily in Asia and including sales to its regional affiliates) and Wal-Mart Stores, Inc. (including sales to Sam’s Club), accounted for approximately 16%, 15% and 14%, and approximately 10%, 11% and 12% of our gross sales for the years ended December 31, 2013, 2012, and 2011, respectively.
Competition
        We compete in two primary categories, infant formula and children’s nutrition. The competitive landscape in each category is similar around the world, as the majority of the large global players are active in these categories. Our main global competitors for sales of infant formula and children’s nutrition products are Abbott Laboratories, Danone and Nestlé S.A.
        Other companies, including manufacturers of private label, store brand and economy products, manufacture and sell one or more products that are similar to those marketed by us. We believe sources of our competitive advantage include clinical claims for efficacy and product quality, brand image and associated value, broad distribution capabilities and consumer satisfaction. Significant expenditures for advertising, promotion and marketing, where permitted by regulation and policy, are generally required to achieve acceptance of products among consumers and health care professionals.
Research and Development
        Continuing to invest in research and development (“R&D”) capabilities is an important part of our business. Our R&D organization consists of professionals, many of who have extensive industry experience and advanced educational backgrounds. Our global R&D operations are headquartered in Evansville, Indiana, and our additional key R&D facilities are located in Mexico, Thailand, China and the Netherlands. Our Pediatric Nutrition Institutes ("PNI") are located in Evansville, Indiana; Mexico City, Mexico and Guangzhou, China. In 2014 we expect to complete our new manufacturing and technology center in Singapore which will include a fourth PNI.
        We organize our research and development on a global basis because our science-based products address nutritional needs that are broadly common around the world. We then rely on our regional R&D teams to incorporate any geographic-specific consumer behaviors and preferences. 
        We have a global formulation management system that supports our innovative portfolio management and product development process. This system provides significant benefits throughout the product development and manufacturing process.
        We also have strong external development relationships that complement our internal research and development capabilities. We manage our research and development activities in collaboration with leading scientists and institutes around the world and we have an active portfolio of projects involving commercial technology suppliers. We believe this approach allows us to be at the forefront of scientific and technological developments relevant for pediatric nutrition. Research and development expense was $102.4 million, $95.4 million, and $92.5 million in the years ended December 31, 2013, 2012, and 2011, respectively.

7



Intellectual Property
Patents
        We own or license approximately 56 active U.S. patents and 370 active non-U.S. patents and have 88 pending U.S. patent applications and 775 pending non-U.S. patent applications as of December 31, 2013.
Trademarks
        We file and maintain our trademarks in those countries in which we have, or desire to have, a business presence. We hold an extensive portfolio of trademarks across our key geographies. We maintain more than 6,100 trademark registrations and applications in more than 100 countries worldwide.
Regulatory
        We are subject to the laws and regulations in each country in which we market our products. We have proven processes, systems and resources in place to manage the current regulatory requirements and to participate proactively in the shaping of future country, regional and global policy, guidance and regulations.
United States Food and Drug Administration
        One of the main regulatory bodies in the United States is the United States Food and Drug Administration (“U.S. FDA”). The U.S. FDA’s Center for Food Safety and Applied Nutrition is responsible for the regulation of food, including infant formula. The Office of Nutrition, Labeling, and Dietary Supplements (“ONLDS”) has program responsibility for, among other matters, infant formula while the Office of Food Additive Safety (“OFAS”) has program responsibility for food ingredients and packaging. ONLDS evaluates whether the infant formula manufacturer has met the requirements under the Federal Food, Drug and Cosmetic Act (“FFDCA”) and consults with OFAS regarding the safety of ingredients in infant formula and of packaging materials for infant formula.
        All manufacturers of pediatric nutrition products must begin with safe food ingredients, which are either generally recognized as safe or approved as food additives. The specific requirements for infant formula are governed by the Infant Formula Act of 1980, as amended (“Formula Act”). The purpose of the Formula Act is to ensure the safety and nutrition of infant formulas, including minimum and, in some cases, maximum levels of specified nutrients.
        Once an infant formula product is formulated, the manufacturer must provide regulatory agencies assurance of the nutritional quality of that particular formulation before marketing the infant formula. The U.S. FDA has established requirements for certain labeling, nutrient content, manufacturer quality control procedures (to assure the nutrient content of infant formulas), as well as company records and reports. A manufacturer must notify the U.S. FDA 90 days before market introduction of any infant formula that differs fundamentally in processing or in composition from any current or previous formulation produced by the manufacturer.
        In addition, as part of its responsibility to implement the provisions of the Formula Act, the U.S. FDA continuously monitors infant formula products. The Formula Act requires infant formula manufacturers to test product composition during production and shelf-life, to keep records on production, testing and distribution of each batch of infant formula and to use good manufacturing practices and quality control procedures. In addition, the Formula Act requires infant formula manufacturers to maintain records of all complaints, some of which are reviewed to evaluate the possible existence of a hazard to health. The U.S. FDA conducts yearly inspections of all facilities that manufacture infant formula.
Outside of the United States

Country-specific regulations and laws have provisions that include requirements for compositional criteria, quality criteria and labeling, as well as other specific standards with which manufacturers must comply, including requirements for placing new formulas on the market.  Most country regulatory provisions are comparable to or will refer to the general conditions defined by Codex Alimentarius (“Codex”) standards, described below, or will refer to globally recognized regulatory authorities (e.g. the European Commission and the U.S. FDA) and the scientific opinions issued by expert authorities (e.g. the European Food Safety Authority).

8



Global Policy and Guidance
WHO
        The World Health Organization (“WHO”) is the directing and coordinating authority for health within the United Nations system. It is responsible for providing leadership on global health matters, shaping the health research agenda, articulating policy recommendations, providing technical support to countries and monitoring and assessing health trends.
        In 1981, many Member States of the WHO’s World Health Assembly voted to adopt the WHO Code. The WHO Code aims to protect and promote breastfeeding and to ensure the proper use of breast-milk substitutes, when they are necessary, on the basis of adequate information and through appropriate marketing and distribution. Countries have taken variable action to enact legislation based on the recommendations of the WHO Code. In 1983, we believe we were the first U.S. infant formula manufacturer to develop internal marketing guidelines for developing countries based on the WHO Code. While the WHO Code is not international law, it is our policy to comply with all applicable laws and regulations and take guidance from the WHO Code in developing countries.
Codex

The Codex, or the food code, has become the global reference point for consumers, food producers and processors, national food control agencies and the international food trade. The Codex system, established in 1963 by the United Nations Food and Agriculture Organization and the WHO, presents a unique opportunity for all countries to join the international community in formulating and harmonizing food standards and fostering their global implementation. It also allows them a role in the development of codes governing hygienic processing practices and recommendations relating to compliance with those standards. The Codex regulatory provisions have been established for formulas and foods for infants and young children. It is usual practice for countries in Latin America, Africa and Asia to incorporate Codex standards either directly or with minor modifications into national law. It is our policy to comply with all national laws and with Codex standards where national regulatory requirements have not yet been enacted.
International Association of Infant Food Manufacturers

The International Association of Infant Food Manufacturers (“IFM”) is an international association of some of the leading global and regional infant food manufacturers. We are a member of the IFM and, in 2013, signed the IFM Rules of Responsible Conduct (the “IFM Rules”). The IFM Rules are a set of voluntary commitments detailing how IFM member companies will conduct themselves in most markets around the world with regard to topics such as safety, marketing, interactions with health care professionals and disaster aid. The IFM Rules were drafted by IFM members in order to clarify and bring specificity to the aims and principles of the WHO Code. We are committed to respecting and adhering to all local laws and regulations related to topics addressed in the IFM Rules.
Environmental, Health and Safety
        Our facilities and operations are subject to various environmental, health and safety ("EHS") laws and regulations in each of the jurisdictions in which we operate. We have programs that are designed to ensure that our operations and facilities meet or exceed standards established by applicable EHS rules and regulations globally. Each of our manufacturing facilities undergoes periodic internal audits relating to EHS requirements and we incur operating and capital costs to improve our facilities or maintain compliance with applicable requirements on an ongoing basis.
Insurance
        Our business involves an inherent risk of product liability and any claims of this type could have an adverse impact on us. We will take what we believe are appropriate precautions to provide adequate coverage for possible product liability claims. Though our insurance coverage and cash flows have been adequate to provide for liability claims in the past, product liability claims could exceed our insurance coverage limits and cash flows, and insurance may not be available on commercially reasonable terms or at all. We evaluate our insurance requirements on an ongoing basis to ensure we maintain adequate levels of coverage.

9



Employees
        As of December 31, 2013, we employed approximately 7,200 people worldwide. Our manufacturing workforces in Zeeland, Michigan; Evansville, Indiana; Guangzhou, China; and Chonburi, Thailand are not unionized. The manufacturing workforces in Delicias, Mexico, and São Paulo, Brazil, are unionized and covered by collective bargaining agreements that are negotiated annually. The manufacturing workforce and non-supervised sales force in Makati, Philippines, are unionized and covered by a three-year collective bargaining agreement, which was renewed effective January 2014. In addition, European Works Councils represent the manufacturing workforce in Nijmegen, the Netherlands, and the commercial organizations in France and Spain.
Available Information
        Our internet website address is www.meadjohnson.com. On our website, we make available, free of charge, our annual, quarterly and current reports, including amendments to such reports, as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the United States Securities and Exchange Commission (the “SEC”). Stockholders and other interested parties may request email notification of the posting of these documents through the section of our website captioned “Investors.”
        The information on our website is not, and shall not be deemed to be, a part of this Annual Report on Form 10-K or incorporated into any other filings we make with the SEC.


Item 1A.    RISK FACTORS.
        In addition to the other information in this Annual Report on Form 10-K, any of the factors described below could significantly and negatively affect our business, prospects, financial condition or operating results, which could cause the trading price of our securities to decline.
Risks Relating to Our Business
Our success depends on sustaining the strength of our brands, particularly our Enfa family of brands.
        The Enfa family of brands accounts for a significant portion of our net sales. 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 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 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 mislabeling or product tampering could result in our recall of 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. Because the possibility of environmental contamination exists, we conduct numerous quality checks during production to confirm that our products are free of contaminants when they leave our facilities. Furthermore, 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 our products or those of other manufacturers of pediatric nutrition products could adversely impact our sales. Such reports or allegations could contribute to a perceived safety risk for our products or for pediatric nutrition products generally and adversely impact our sales or otherwise disrupt our business.

10



Moreover, the risk of reputational harm may be magnified and/or distorted through the rapid dissemination of information over the Internet, including through news articles, blogs, chat rooms and social media sites. For example, unfounded media reports in late 2011 alleging cronobacter contamination of one of our products in the United States resulted in several retailers temporarily removing such product from their store shelves. Such actions, whether or not justified, could have a material adverse effect on our reputation, brand image and results of operations. Moreover, federal, state and local governments and municipalities could propose or pass legislation banning the use of such products. 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 foreign laws and U.S. federal and state laws, including the 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 product manufacturing, the environment, employee health and safety, hygiene, quality control, advertising and tax laws. It can be costly to comply with these regulations and to develop compliant product processes. In particular, if government regulations (e.g. China’s new food safety law and related regulations) impact how and where we are able to manufacture or source product, we may face unfavorable cost pressure and a significant change in our geographic earnings mix. Because we operate in markets with significant variances in effective tax rates, such change in geographic earnings mix could have a material adverse effect on our global tax liability. Further, our activities may be subject to barriers or sanctions imposed by countries or international organizations limiting international trade. For example, in 2013, the Hong Kong government imposed a regulation designed to limit the flow of products out of the territory. Regulations may also dictate the specific content of our products and limit information and advertising about the benefits of products that we market. Public policy 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 advocates, along with governmental agencies and non-governmental organizations, have lobbied against the marketing and sale of some pediatric nutrition products. These efforts could result in increased governmental restrictions on our activities in the future. Our activities could be materially adversely affected by any significant changes in such policies or their enforcement. Our ability to anticipate and comply with changing global standards requires significant investment in monitoring the global external environment and we may be unable to comply with changes in policies 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.
        Our business is particularly vulnerable to commodity price increases. Commodity prices impact our business directly through the cost of raw materials used to make our products (such as skim milk powder, whole 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, availability of supply, weather, consumer demand and changes in governmental agricultural programs. Dairy costs are the largest component of our cost of goods sold. We recently saw a significant rise in dairy prices which we expect to impact our gross margin in the short term. In general, increases in the price of dairy and other raw materials negatively impact our gross margins if we are unable to offset such increases by raising our selling price, changes 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. Although we monitor our exposure to commodity prices as an integral part of our overall risk management program and, from time to time, attempt to mitigate some of this risk with commodity hedging activities, continued volatility in the prices of commodities we purchase could increase the costs of our products and we may experience lower profitability and be unable to maintain historical levels of productivity. Furthermore, increases in our selling prices imposed to offset increases in commodity prices could result in lower sales volume; as such, we may be unable to offset increased commodity costs with price increases if such price increases were to weaken demand for our product.
         We employ various purchasing and pricing contract techniques in an effort to minimize commodity price volatility. Generally, these techniques include incorporating clauses setting forth unit pricing that is based on an average commodity price over a corresponding period of time. If we fail to manage our commodity price exposure adequately, our business may be materially adversely affected.

11



Our profitability may suffer as a result of competition in our markets.
        The pediatric nutrition industry is intensely competitive. Our primary competitors, including Abbott Laboratories, Danone and Nestlé S.A., 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 brand 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. Market share losses could also lead to higher than necessary inventory levels held by our customers. Competitive and customer pressures, as well as price controls, 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 could cause consumers to shift their purchases from our higher-priced premium products to lower-priced products, 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 may shift their purchases from our higher-priced premium products to lower-priced products or delay having children.
Volatility in the financial markets could adversely affect our liquidity, cash flow and financial flexibility, as well as the demand for our products.
        Volatility in the financial markets could adversely affect economic activity and credit markets in the United States and other regions of the world in which we do business. This could have an adverse impact on our customers, distributors, suppliers, counterparties to certain financial instruments, financial service providers and other service providers.

Our operations face significant foreign currency exchange exposure that 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 Hong Kong dollar,  the euro, the Philippine peso, the Malaysian ringitt and the Mexican peso.  Because our financial statements are presented in U.S. dollars, we must translate our assets, liabilities, sales and expenses into U.S. dollars at the then-applicable exchange rates.  Consequently, changes in the value of the U.S. dollar versus these non-U.S. currencies may negatively affect the value of these items in our financial statements, even if their value has not changed in their original currency.  Currency rates in smaller markets, such as Venezuela and Argentina, could also impact our results due to high volatility in exchange rates in such markets.  While we attempt 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 exposure. 

High volatility in exchange rates may also require us to apply inflationary accounting.  For example, we apply highly inflationary accounting to our business in Venezuela, the impact of which on our consolidated financial statements is dependent upon movements in the official exchange rate, including devaluations, between the Bolivares Fuertes and the U.S. dollar. The operating environment in Venezuela could include high inflation, governmental restrictions in the form of currency exchange, price and margin controls, and the possibility of further government actions such as further devaluations or other business intervention.  In addition, the foreign exchange controls in Venezuela limit our ability to repatriate earnings and our Venezuela subsidiary’s ability to remit dividends and pay intercompany balances at

12



any official exchange rate or at all.  For additional information, see “Item 7A. Quantitative and Qualitative Disclosures About Market Risk - Venezuela Risk”. 

Foreign governments may also restrict our ability to exchange local currencies for more marketable currencies and may limit our ability to pay dividends, to pay non-local currency accounts payable or to obtain currencies (other than the local currency) which may be more desirable to hold.  Foreign governments may also simultaneously restrict our ability to increase prices in inflationary environments where local currencies are under significant pressure.  Without the ability to increase prices to offset the impact of local currency devaluation, our ability to manage foreign exchange risk may be further limited.
The global nature of our business subjects us to additional business risks that could cause our sales and profitability to decline.
        We operate our business and market our products internationally in more than 50 countries. For the years ended December 31, 2013, 2012, and 2011, 77%, 75%, and 72%, 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;

adverse tax consequences from the repatriation of earnings;

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;
 
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.
        These and other risks could have a material adverse effect on our business.
Our global 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 operations in regions, including Asia, Latin America, the Indian subcontinent and eastern Europe, which are less developed, have less stability in legal systems and financial markets, and are 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 standards of business conduct and ethics or any other of our policies, applicable anti-corruption laws, including the FCPA, or other legal requirements. If we fail to enforce our policies and procedures properly, detect violations in a timely manner or maintain adequate record-keeping and internal accounting practices to accurately record our transactions, we may be subject to regulatory sanctions. If 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 investigate or have outside counsel

13



investigate the relevant facts and circumstances. If violations are found or suspected, we 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. See Item 3. Legal Proceedings for further information regarding the company’s ongoing investigation. In addition, some of our competitors may not be subject to the FCPA or other anti-corruption laws.
Our China operations subject us to risks that could negatively affect our business.
        A significant portion of our revenue and profit is derived from sales in China. Consequently, our overall financial results are dependent on this market, and our business is exposed to risks there. These risks include changes in economic conditions (including wage and commodity inflation, consumer spending and unemployment levels), tax rates, laws and consumer preferences, changes in the regulatory environment and increased competition, and potential non-compliance with local laws and regulations. In 2013, China's National Development and Reform Commission ("NDRC") assessed a $33.4 million administrative penalty against us in connection with their antitrust review of the infant formula industry's resale pricing practices. In addition, the translation into U.S. dollars of our operating results and asset value in China is affected by fluctuations in currency exchange rates, which may adversely affect reported earnings. There can be no assurance as to the future effect of any such changes on our results of operations, financial condition or cash flows.
        Furthermore, any significant or prolonged deterioration in China’s relations with the U.S. and other countries could adversely affect our China business. Certain risks and uncertainties of doing business in China are solely within the control of the Chinese government, and Chinese law regulates the scope of our foreign investments and business conducted within China. There are also uncertainties regarding the interpretation and application of laws and regulations and the enforceability of intellectual property and contract rights in China. If we were unable to enforce our intellectual property or contract rights in China, our business could be materially adversely impacted.
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 to develop, offer and communicate the benefits of new products rapidly enough to meet those changes.
        Our success depends on our ability to define the benefits of our products and to effectively communicate these benefits in the current regulatory environment. Our success also 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 and their reduction of inventory levels 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. 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. In addition to reducing their inventory levels, these customers 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 and primary packaging materials (such as cans). In particular, Royal DSM N.V. (“DSM”) (which acquired Martek Biosciences Corporation) 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 DSM, 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. In addition, quality concerns could result from contamination, spoilage or other adulteration of raw materials shipped to us by third-party suppliers and utilized in our products. An ensuing recall by either us or our supplier could have a material adverse effect on our business.

14



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 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, such batch may have to be discarded. This could, among other things, lead to increased costs, lost sales, 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 and raw materials 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 (such as our manufacturing and technology center in Singapore) 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 raw materials or goods in and out of foreign countries. In particular, if government regulations (e.g. China’s new food safety law and related regulations) impact how and where we are able to manufacture or source product, we may face unfavorable cost pressure and a significant change in our geographic earnings mix. Because we operate in markets with significant variances in effective tax rates, such change in geographic earnings mix could have a material adverse effect on our global tax liability.
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 time to build. Delays in increasing capacity could also limit our ability to continue our growth and materially adversely affect our business. For example, we are currently in the process of completing the construction of our new manufacturing and technology center in Singapore; any potential delays could have an adverse impact on 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, changes in government regulations 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.
Changes in WIC, or our participation in it, could materially adversely affect our business.
        Participation in WIC involves a competitive bidding process and is an important part of our U.S. business based on the volume of infant formula sold under the program. As of December 31, 2013, we held the contracts that supply approximately 39% of WIC births in the United States. 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.

15



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. Difficulties or failure to implement our information technology initiatives by us or our service providers or 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, invoicing and receiving payments from our customers or performing other information technology, administrative or outsourcing services on a timely basis.
Increased IT security threats and more sophisticated and targeted computer crime could pose a risk to our systems, networks, products, solutions and services.
        Increased global IT security threats and more sophisticated and targeted computer crime pose a risk to the security of our systems and networks and the confidentiality, availability and integrity of our data. While we attempt to mitigate these risks by employing a number of measures, our systems, networks, products, solutions and services remain potentially vulnerable to advanced persistent threats. Depending on their nature and scope, such threats could potentially lead to the compromising of confidential information, improper use of our systems and networks, manipulation and destruction of data, defective products, production downtimes and operational disruptions, which in turn could materially adversely affect our reputation, competitiveness and results of operations.
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 to gain a deep understanding of the composite ingredients of breast milk, as well as the optimal nutritional requirements of infants and children. 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, but may require an even longer timeline. 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. In addition, new regulations or changes to existing regulations may have a negative effect on innovations in our pipeline, especially late-stage pipeline products. 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;
 
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;

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

changing and increasing obstacles to achieving regulatory approval in key markets.
        We cannot assure you that any of our products currently in our development pipeline will be commercially successful.

16



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 safety 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 production operations in the food and drug industry, and some substances used in such production require proper controls in their storage and disposal. We were named as a “potentially responsible party,” or were involved in investigation and remediation, at three third party disposal sites (see “Item 3. Legal Proceedings”). 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 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. We also cannot be certain that the steps we have taken to protect our brands will be sufficient to discourage or eliminate counterfeiting of our products. Our trademark registrations and applications can potentially be challenged and canceled or narrowed. Moreover, some of the countries in which we operate offer less protection for these rights, 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.
        We rely on 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 on 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 on 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

17



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.
Our sales and marketing practices may be challenged by consumers and competitors, which could harm our business.
        We participate in a variety of marketing activities, including print and television advertising, direct mail, online/internet and promotional programs. We work with external agencies to create strong marketing campaigns for consumers, health care professionals and retail sales organizations. Although our marketing is evidence-based and emphasizes our superior nutritional science, consumers and competitors may challenge, and have challenged, certain of our practices by claiming, among other things, false and misleading advertising with respect to advertising for certain of our products. Such challenges could result in our having to pay monetary damages or limit our ability to maintain current sales and marketing practices.
Increases in costs of current and post-retirement benefits may reduce our profitability.
        Our profitability may be affected by increases in costs of current and post-retirement medical and other employee benefits, particularly within the United States. These costs can vary substantially as a result of changes in both health care costs and health care regulation, 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 medical and other 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.
        Our manufacturing workforces in Zeeland, Michigan; Evansville, Indiana; Guangzhou, China; and Chonburi, Thailand are not unionized. The manufacturing workforces in Delicias, Mexico, and São Paulo, Brazil, are unionized and covered by collective bargaining agreements that are negotiated annually. The manufacturing workforce and non-supervised sales force in Makati, Philippines, are unionized and covered by a three-year collective bargaining agreement, which was renewed effective January 2014. In addition, European Works Councils represent the manufacturing workforce in Nijmegen, the Netherlands, and the commercial organizations in France and Spain. 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 people in a competitive environment.
        Our business strategy and future success depends, in part, on our ability to attract, hire and retain, in a competitive environment, highly-skilled and diverse leaders, managers and professionals who are critical to our business functions and growth strategy. 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 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 attract and retain 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 sales from two customers. The loss of either of these customers could materially adversely affect our financial performance.
        Our products are sold principally to the wholesale and retail trade, both nationally and internationally, and sales to two customers, DKSH International Ltd. and Wal-Mart Stores, Inc. (including sales to Sam’s Club), accounted for approximately 16% and 10%, respectively, of our gross sales for the year ended December 31, 2013. If either of these customers ceases doing business with us or if we encounter any difficulties in our relationship with either of them, our business could be materially adversely affected.
An adverse change in 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 global awareness of the importance of pediatric nutrition on wellness and health outcomes. 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, or a continued decline in birth rates 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 had total indebtedness of $1.5 billion as of December 31, 2013. See “Item 8. Financial Statements – Note 15. Debt” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”

18



        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 payments on this debt;
requiring us to repay the full amount of our debt upon a change of control triggering event;
making it more difficult to satisfy other obligations;
increasing the risk of future credit rating downgrades 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 as we are;
limiting our ability to borrow additional funds as needed or take advantage of business opportunities as they arise; and
limiting our ability to 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 could incur substantial cost if we need to repatriate earnings to the United States in order to repay such debt. Further, we may not be able to borrow money, sell assets or otherwise raise funds on acceptable terms, or at all, to refinance our debt. Specifically, $500M of our long term debt comes due November 2014; if we are unable to refinance this debt on favorable terms, or at all, our results of operations may be materially affected. Further, if the terms of the debt cause our existing hedge to be ineffective, all or a portion of the hedge instrument would need to be recognized immediately, which may also have a material impact.
        In order to achieve a desired proportion of variable versus fixed rate debt, we have in the past entered into and exited interest rate swap agreements. Developing an effective strategy for dealing with risks from movements in interest rates is complex, and no strategy can completely insulate us from risks associated with such fluctuations. In addition, we are exposed to counter-party credit risk for nonperformance and, in the event of nonperformance, to market risk for changes in interest rates. Finally, our interest rate risk management activities could expose us to substantial losses if interest rates move materially differently from our expectations. As a result, our economic hedging activities may not effectively manage our interest rate sensitivity or have the desired beneficial impact on our financial condition or results of operations. Further discussion of our hedging of interest rate risk is included in “Item 7A. Quantitative and Qualitative Disclosures About Market Risk.”
We could evaluate acquisitions, joint ventures and other strategic initiatives, any of which could distract our management or otherwise have a negative effect on our sales, 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. We could evaluate potential mergers, acquisitions, joint ventures, 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;

19



the potential discovery of latent unethical business practices;
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 ours, and market expectations, and our stock price could, accordingly, decline. In addition, we may not be able to complete desirable transactions for various reasons.
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 and certain intellectual property. Our subsidiaries conduct substantially all of our operations and own substantially all of our assets and intellectual property. 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 this “Risk Factors” section.
        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 and legal restrictions. Under certain circumstances, legal restrictions may limit or delay 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.

Risks Related to Our Relationship with Our Former Parent
If our split-off from Bristol-Myers Squibb Company (“BMS”) fails to qualify for non-recognition of gain and loss, we may in certain circumstances be required to indemnify BMS for any resulting taxes and related expenses, and we believe that the payment if required could have a material adverse effect on our financial condition and results of operations.
In connection with our split-off from BMS on December 23, 2009, BMS and its counsel have relied on certain assumptions and representations as to factual matters from us, as well as certain covenants by us regarding the future conduct of our business and other matters, the incorrectness or violation of which could affect the qualification for non-recognition of gain and loss of our split-off from BMS. As a result, we agreed, generally, to indemnify BMS for taxes and certain related expenses resulting from the failure of our split-off from BMS to qualify for non-recognition of gain and loss to the extent attributable to (i) the failure of any of our representations to be true or the breach by us of any of our covenants, (ii) the application of Section 355(e) or Section 355(f) of the Internal Revenue Code to any acquisition of our stock or assets or any of our affiliates or (iii) certain other acts or omissions by us or our affiliates. To the extent we become obligated to make an indemnification payment to BMS, we believe that the payment could have a material adverse effect on our financial condition and results of operations.


20



Risks Related to Our Common Stock
Our failure to successfully execute our growth strategy could adversely affect our business and results of operations and cause our stock price to decline.
        Our continued success in part depends on our ability to successfully execute our growth strategy. We intend to grow our business profitably through several strategic initiatives, including geographic and category expansion and productivity savings. There can be no assurance that we will be successful in achieving our strategic plan. If we fail to fully implement any material part of our strategic initiatives, or if we achieve these initiatives and they fail to yield the expected benefits, there could be an adverse effect on our business and results of operations. Any such adverse effect on our business and results of operations could result in a decline in the price of our common stock.
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 common stock.
        Several provisions of our certificate of incorporation and 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.
        These provisions include:
authorizing our board of directors to issue “blank check” preferred shares without stockholder approval;
 
prohibiting cumulative voting in the election of directors;
 
prohibiting shareholder action by written consent;
 
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.
        Additionally, we are subject to Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any interested stockholder for a period of three years following the date on which the stockholder became an interested stockholder.
        These anti-takeover provisions could substantially impede the ability of our common stockholders to benefit from a change of control and, as a result, could materially adversely affect the market price of our common stock and our stockholders’ ability to realize any potential change-in-control premium.

Item 1B.    UNRESOLVED STAFF COMMENTS
        None.
Item 2.    PROPERTIES.
        Our corporate headquarters are located in Glenview, Illinois, where we lease office space. We maintain our global supply chain and R&D headquarters in Evansville, Indiana, where we own office, operations and laboratory buildings comprising approximately 1,200,000 square feet. We also own or lease the manufacturing facilities identified in the table below. For additional information related to our manufacturing facilities around the world, see “Item 1. Business – Global Supply Chain.” We lease the vast majority of our office facilities worldwide. 

21



        The following table illustrates our global manufacturing locations, the approximate square footage of the facilities, the reportable segment served by such locations and whether the facility is owned or leased:
Location
Square Feet
Segment(s) Served
Owned / Leased
Zeeland, Michigan, United States(1)
691,043
All segments
Owned
Evansville, Indiana, United States(1)(2)
301,389
All segments
Owned
Nijmegen, The Netherlands(1)
109,792
All segments
Owned
Delicias, Chihuahua, Mexico(1)
134,549
North America / Europe
Latin America
Owned
Chonburi, Thailand(1)
158,456
Asia
Owned
Guangzhou, China(1)
149,944
Asia
Owned(4)
Makati, Philippines(1)
85,487
Asia
Owned(4)
Sao Bernardo do Campo, Brazil(1)
64,583
Latin America
Leased
Singapore (3)
466,077
Asia
Owned(4)
(1)    Powder manufacturing facility.
(2)    Liquid manufacturing facility.
(3)
Our new manufacturing and technology center in Singapore is currently under construction and is expected to be operational in the second half of 2014.
(4)
The land on which this facility is built is subject to a long term lease.

Item 3.    LEGAL PROCEEDINGS.
        In the ordinary course of business, we are 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.
       From time to time, we may be responsible under various state, federal and foreign laws, including CERCLA, for certain costs of investigating and/or remediating substances at our current or former sites, and/or at waste disposal or reprocessing facilities operated by third parties. Liability under CERCLA and analogous state or foreign laws may be imposed without regard to knowledge, fault, or ownership at the time of the disposal or release. Most of our facilities have a history of production operations in the food and drug industry, and some substances used in such production require proper controls in their storage and disposal. We were named as a “potentially responsible party”, or were involved in investigation and remediation, at three third-party disposal sites. As of December 31, 2013, two of these matters have been settled in their entirety. With regard to the third such matter, the substance of this matter has been resolved, and management believes that any actual or expected remediation cost related to such matter, individually or in the aggregate, would be immaterial.
        We were served with a lawsuit filed on October 16, 2012 in St. Clair County (Illinois) Circuit Court under the caption Shelby Schrack, et al. v. Mead Johnson Nutrition Company and Mead Johnson & Company, which lawsuit alleges that certain bacteria in powdered formula were responsible for the death of one infant and serious illness in two others and seeks unspecified monetary damages. These events were widely publicized in December 2011 and January 2012. The infants allegedly consumed formula from batches that were extensively tested by the Company, the Centers for Disease Control (“CDC”) and the U.S. FDA. These tests detected no bacteria in our infant formula. The CDC further noted that while these bacteria have sometimes been found in formula, they also exist in the environment and may potentially cause illness through person to person contact or through contamination of infant feedings at the point of use. We believe that the claims in this matter are without merit. Nevertheless, in November 2013, the Company and the plaintiffs agreed to settle the disputed claims asserted in this litigation, and on December 12, 2013, we obtained court approval of the proposed settlement and release of all such claims. The settlement did not materially affect our consolidated financial position, results of operations or cash flows.

        We record accruals for contingencies when it is probable that a liability will be incurred and the loss can be reasonably estimated. Although we cannot predict with certainty the final resolution of lawsuits, investigations and claims asserted against us, we do not believe any currently pending legal proceeding to which we are a party will have a material effect on our business or financial

22



condition, although an unfavorable outcome in excess of amounts recognized as of December 31, 2013, with respect to one or more of these proceedings could have a material effect on our results of operations and cash flows for the periods in which a loss is recognized.

        Following an SEC request for documents relating to certain business activities of the Company’s local subsidiary in China, the Company is continuing an internal investigation of such business activities. The Company’s investigation is focused on certain expenditures that were made in connection with the promotion of the Company’s products or may have otherwise been made. Certain of such expenditures were made in violation of Company policies and may have been made in violation of applicable U.S. and/or local laws, including the U.S. Foreign Corrupt Practices Act (the “FCPA”).  The investigation is being conducted by outside legal counsel and overseen by a committee of independent members of the Company’s board of directors. The status and results of the investigation are being discussed with the SEC and other governmental authorities.  At this time, the Company is unable to predict the scope, timing or outcome of this ongoing matter or any regulatory or legal actions that may be commenced related to this matter.  If a violation of the FCPA or other laws is determined to have occurred, the Company could become subject to monetary penalties as well as civil and criminal sanctions.


Item 4.    MINE SAFETY DISCLOSURES
        Not applicable.


23



PART II

Item 5.
MARKET FOR REGISTRANT’S COMMON STOCK, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Prices and Dividend Information
        Mead Johnson Nutrition Company common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “MJN.” The following table describes the per share range of high and low sales prices, as reported by the NYSE, for shares of our common stock and dividends declared per share of our common stock for the quarterly periods indicated.
 
 
Market Price for
MJN Common Stock
 
Dividends
Declared
Per Share
  
High
 
Low
2012
 
 
 
 
 
First Quarter
$
83.95

 
$
70.38

 
$
0.30

Second Quarter
$
88.72

 
$
77.72

 
$
0.30

Third Quarter
$
82.30

 
$
68.09

 
$
0.30

Fourth Quarter
$
74.25

 
$
61.27

 
$
0.30

2013
 
 
 
 
 
First Quarter
$
81.04

 
$
65.38

 
$
0.34

Second Quarter
$
86.87

 
$
74.44

 
$
0.34

Third Quarter
$
80.98

 
$
66.80

 
$
0.34

Fourth Quarter
$
86.63

 
$
73.69

 
$
0.34

Holders of Common Stock
        The number of record holders of our common stock at December 31, 2013 was 1,357. The number of record holders is based upon the actual number of holders registered on our books at such date and does not include holders of shares held in “street name” or persons, partnerships, associations, corporations or other entities identified in security position listings maintained by depository trust companies.

Issuer Purchases of Equity Securities

The following table includes information about our stock repurchases during the three-month period ended December 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)
October 1, 2013 through October 31, 2013
437

$
74.14

437

$
502.1

November 1, 2013 through November 30, 2013
35,000

84.04

35,000

499.1

December 1, 2013 through December 31, 2013
105,000

83.99

105,000

490.3

 
140,437

$
83.97

140,437

$
490.3


(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 and performance share awards.
(2) 
Average Price Paid per Share includes commissions.
(3)
On March 17, 2010, we announced that our board of directors authorized the repurchase of up to $300.0 million of Company common stock (the “2010 Authorization”). The 2010 Authorization ends on May 1, 2015; however, during the three-month period ended December 31, 2013, we completed all purchases remaining under the 2010 Authorization. On September 11, 2013, we announced that our board of directors approved a new, additional share repurchase authorization of up to an additional $500.0 million of Company common stock (the “2013 Authorization”). The 2013 Authorization does not have an expiration date. As of December 31, 2013, we had $490.3 million remaining available under the 2013 Authorization.

24



Performance Graph
Comparison of Cumulative Total Return
The following graph compares the cumulative total return on our common stock for the periods indicated with the performance of the Standard & Poor's 500 (S&P 500) Stock Index, the S&P 500 Packaged Foods Index and the Mead Johnson custom performance peer group index described below. Starting with the year ended December 31, 2013, for comparative purposes, Mead Johnson is converting from a custom performance peer group index to the commonly used S&P 500 Packaged Foods Index. We have reviewed our post-IPO practices with regard to this graph and have concluded that the utilization of a published index, and, in particular, the S&P 500 Packaged Foods Index, is consistent with the practice of a majority of our peers.
The Mead Johnson custom performance peer group index consisted of the following corporations considered to be comparable companies in the food and beverage and consumer products industries on the basis of industry leadership and global focus: Campbell's Soup Company, Colgate-Palmolive Company, General Mills, Inc., H.J. Heinz Company, The Hershey Company, The J.M. Smucker Company, Kellogg Company, McCormick & Company, Incorporated and Sara Lee Corp. Sara Lee Corp is included through its last day of trading prior to June 29, 2012, when Sara Lee effected a 1-for-5 reverse stock split of Sara Lee common stock and changed its name to The Hillshire Brands Company. This occurred immediately after Sara Lee's separation of certain businesses and prior to the market open on June 29, 2012. The Hillshire Brands Company is not a comparable peer to Mead Johnson for this purpose and is not included in the Peer Group Index. Additionally, on June 7, 2013, H. J. Heinz Company was acquired by H.J. Heinz Holding Corporation, a Delaware corporation controlled by Berkshire Hathaway Inc. and 3G Special Situations Fund III, L.P. As a result of the merger, H.J. Heinz Company common stock is no longer publicly traded, and is included in this graph through its last day of trading prior to June 7, 2013.
The graph assumes $100 invested on February 11, 2009, the date shares of our common stock commenced trading, in each of Mead Johnson common stock, the S&P 500 Index, the S&P 500 Packaged Foods Index as well as our custom performance peer group index, and the reinvestment of all dividends for each of the reported time periods.
Comparison of Cumulative Total Return
Among Mead Johnson Nutrition
Company, the S&P 500 Index, S&P 500 Packaged Foods Index and a Peer Group
Assumes Initial Investment of $100

 
2/11/2009
12/31/2009
12/31/2010
12/31/2011
12/31/2012
12/31/2013
Mead Johnson Nutrition Company
100.00
168.49
244.03
273.70
266.55
344.86
S&P 500 Index
100.00
136.57
157.14
160.46
186.13
246.42
S&P 500 Packaged Foods Index
100.00
122.78
142.87
167.43
184.83
241.83
Peer Group
100.00
128.16
140.86
161.10
181.97
227.55


25



Item 6.    SELECTED FINANCIAL DATA.
  
For the Years Ended December 31,
(In millions, except per share data) 
2013
 
2012
 
2011
 
2010
 
2009
Net Sales
$
4,200.7

 
$
3,901.3

 
$
3,677.0

 
$
3,141.6

 
$
2,826.5

Earnings before Interest and Income Taxes
$
924.6

 
$
870.0

 
$
774.1

 
$
682.9

 
$
679.6

Interest Expense—net
$
50.6

 
$
65.0

 
$
52.2

 
$
48.6

 
$
92.6

Net Earnings Attributable to Shareholders
$
649.5

 
$
604.5

 
$
508.5

 
$
452.7

 
$
399.6

Basic Earnings Per Share Attributable to Shareholders*
$
3.20

 
$
2.96

 
$
2.48

 
$
2.20

 
$
1.99

Diluted Earnings Per Share Attributable to Shareholders*
$
3.19

 
$
2.95

 
$
2.47

 
$
2.20

 
$
1.99

Cash Dividends Declared Per Share*
$
1.36

 
$
1.20

 
$
1.04

 
$
0.90

 
$
0.70

Weighted-average Shares - basic*
202.4

 
203.6

 
204.3

 
204.7

 
200.6

Depreciation and Amortization
$
83.1

 
$
76.9

 
$
75.3

 
$
64.7

 
$
58.9

Cash Paid for Capital Expenditures
$
240.4

 
$
124.4

 
$
109.5

 
$
172.4

 
$
95.8

 
  
As of December 31,
(In millions) 
2013
 
2012
 
2011
 
2010
 
2009
Total Assets
$
3,474.1

 
$
3,258.2

 
$
2,766.8

 
$
2,293.1

 
$
2,070.3

Short-Term Borrowings and Current Portion of Long-Term Debt
$
507.6

 
$
187.0

 
$

 
$
1.2

 
$
120.0

Long-Term Debt
$
1,009.1

 
$
1,523.2

 
$
1,531.9

 
$
1,532.5

 
$
1,484.9

Total Equity (Deficit)
$
300.5

 
$
29.0

 
$
(168.0
)
 
$
(358.3
)
 
$
(664.3
)
 
 
 
 
 
 
 
 
 
 
* On February 17, 2009, we completed the offering of 34.5 million shares of common stock in an initial public offering.
 
 


Item 7.    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 “Item 1A. Risk Factors” for a discussion of the uncertainties, risks and assumptions associated with those statements. The following discussion should be read in conjunction with our audited financial statements and the notes to our audited financial statements. Our 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.”


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. Previously, we aggregated these four geographic segments into two reportable segments: Asia/Latin America and North America/Europe. In the fourth quarter of 2013, we expanded the number of reportable segments to three as we separated the Asia/Latin America segment into two reportable segments: Asia and Latin America. The North America/Europe reportable segment remains unchanged. This change in segment reporting presentation does not change any consolidated totals. We made this segment reporting change because we believe that the new presentation will provide investors with greater insight into our consolidated results and operating performance. Throughout this filing, all segment information for the years ended December 31, 2012 and 2011 has been recast to conform to the new segment reporting presentation.


26



Executive Summary
        For the year ended December 31, 2013, sales grew 8% compared to 2012. Sales increased by double-digits from category growth and market share gains and higher pricing throughout each of our Asia and Latin America segments offset in part by unfavorable currency impacts. North America/Europe sales decreased slightly compared to the prior year period driven by the impact of the late 2012 exit of certain non-core businesses and the continued decline of U.S. category consumption, partially offset by U.S. price increases.
        Earnings per share grew by 8% in 2013. This growth was primarily attributable to sales growth and an improved gross margin, which was driven by higher pricing as well as strong productivity. These increases were partially offset by higher demand-generation investment and costs for an administrative penalty assessed by China’s NDRC as described below.
Results of Operations
Year Ended December 31, 2013 Compared to Year Ended December 31, 2012
Below is a summary of comparative results of operations for the years ended December 31, 2013 and 2012: 

 
 
 
 
 
 
 
% of Net Sales
(In millions, except per share data)
2013
 
2012
 
% Change
 
2013
 
2012
Net Sales
$
4,200.7

 
$
3,901.3

 
8
 %
 
 
 
 
Earnings before Interest and Income Taxes
924.6

 
870.0

 
6
 %
 
22
 %
 
22
 %
Interest Expense—net
50.6

 
65.0

 
(22
)%
 
1
 %
 
1
 %
Earnings before Income Taxes
874.0

 
805.0

 
9
 %
 
21
 %
 
21
 %
Provision for Income Taxes
219.1

 
192.6

 
14
 %
 
5
 %
 
5
 %
    Effective Tax Rate
25.1
%
 
23.9
%
 
 
 
 
 
 
Net Earnings
654.9

 
612.4

 
7
 %
 
16
 %
 
16
 %
Less: Net Earnings Attributable to Noncontrolling Interests
5.4

 
7.9

 
(32
)%
 
(1
)%
 
(1
)%
Net Earnings Attributable to Shareholders
649.5

 
604.5

 
7
 %
 
15
 %
 
15
 %
Weighted-Average Common Shares— Diluted
203.1

 
204.3

 
 
 
 
 
 
Earnings per Common Share—Diluted
$
3.19

 
$
2.95

 
8
 %
 
 
 
 

        The results for the years ended December 31, 2013 and 2012 included 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:
 
 
Years Ended December 31,
(In millions)
 
2013
 
2012
IT/other separation costs
 
$

 
$
19.9

Gain on sale of certain non-core intangible assets
 

 
(6.5
)
Severance and other costs
 
2.6

 
21.1

Administrative penalty (China)
 
33.4

 

Legal, settlements and related costs
 
9.2

 
2.8

Specified Items
 
$
45.2

 
$
37.3

Tax matters and the income tax impact on Specified Items
 
(3.3
)
 
(11.7
)
Specified Items attributable to Noncontrolling Interests
 
(3.8
)
 

Specified Items after taxes
 
$
38.1

 
$
25.6


        For the year ended December 31, 2013, the Specified Items after taxes increased compared to the prior year. In 2013, the Company incurred costs for an administrative penalty assessed by China’s NDRC in connection with the NDRC’s antitrust review of the infant formula industry’s resale pricing practices (the “China Antitrust Review”), and had higher legal, settlements and related costs primarily due to costs associated with our ongoing internal investigation.

        The 2012 IT/other separation costs related to the completion of our stand-alone operating structure. The 2012 severance and other costs related primarily to the relocation of our regional office in Asia and the implementation of our new business model in Europe.





27



Net Sales
       Our net sales by reportable segment:
 
 
Years Ended December 31,
 
 
 
% Change Due to
(Dollars in millions)
 
2013
 
2012
 
% Change
 
Volume
 
Price/Mix
 
Foreign
Exchange
Asia
 
$
2,179.3

 
$
1,967.0

 
11
 %
 
8
 %
 
2
%
 
1
 %
Latin America
 
861.4

 
752.5

 
14
 %
 
11
 %
(1
)
11
%
 
(8
)%
North America/Europe
 
1,160.0

 
1,181.8

 
(2
)%
 
(5
)%
 
3
%
 
 %
Net Sales
 
$
4,200.7

 
$
3,901.3

 
8
 %
 
5
 %
 
4
%
 
(1
)%
(1) Our 2012 acquisition in Argentina represented 2% of Latin America net sales increase.

        Asia sales increased 11% compared to the prior year and accounted for more than 50% of MJN's net sales. The growth was largely driven by volume attributable to market share gains, including the recovery of market share in China and category growth. The impact of higher prices in a majority of markets in the segment were partially offset by slightly lower prices in China.
        Latin America sales increased 14% in comparison to the prior year. Sales volume grew due to continued category growth and market share gains throughout the segment. Price grew by 11% with the largest contribution from high inflation in the markets of Venezuela and Argentina, but were largely offset by weaker local currency rates in these markets. At this time, we are unable to predict with certainty how recent and future developments in Venezuela and Argentina will affect our sales growth or operations in 2014.
North America/Europe sales decreased 2% compared to the prior year. Volume was lower by 5%, with 3% of this decline due to the impact of the late 2012 exit of certain non-core businesses. The balance of the volume reduction was primarily driven by the continued decline of U.S. category consumption, partially offset by market share gains in Canada. Price increases were realized primarily in the U.S.
        Our net sales by product category are shown in the table below:
 
 
Years Ended December 31,
 
 
(Dollars in millions)
 
2013
 
2012
 
% Change
Infant Formula
 
$
2,459.7

 
$
2,295.5

 
7
 %
Children’s Nutrition
 
1,653.3

 
1,487.0

 
11
 %
Other
 
87.7

 
118.8

 
(26
)%
Net Sales
 
$
4,200.7

 
$
3,901.3

 
8
 %

        In 2013, Infant Formula accounted for the large majority of our sales in North America/Europe and approximately half of our sales in each of our Asia and Latin America segments. Given this product category mix, lower sales in North America/Europe reduced the year-over-year growth rate of Infant Formula products. At the same time, stronger growth in each of our Asia and Latin America segments positively impacted the year-over-year growth of Children’s Nutrition products. Other category sales declined due to the prior year exit 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:
 
 
Years Ended December 31,
 
% of Gross Sales
(Dollars in millions)
 
2013
 
2012
 
2013
 
2012
Gross Sales
 
$
5,346.6

 
$
5,038.5

 
100
%
 
100
%
Gross-to-Net Sales Adjustments
 
 

 
 

 
 

 
 

WIC Rebates
 
702.3

 
730.0

 
13
%
 
14
%
Sales Discounts
 
215.5

 
191.9

 
4
%
 
4
%
Returns
 
81.0

 
82.5

 
1
%
 
2
%
Cash Discounts
 
44.6

 
45.2

 
1
%
 
1
%
Coupons and Other Adjustments
 
72.2

 
55.6

 
1
%
 
1
%
Prime Vendor Charge-Backs
 
30.3

 
32.0

 
1
%
 
1
%
Total Gross-to-Net Sales Adjustments
 
1,145.9

 
1,137.2

 
21
%
 
23
%
Total Net Sales
 
$
4,200.7

 
$
3,901.3

 
79
%
 
77
%

        The total dollar amount of WIC rebates in the United States decreased due to the loss of certain WIC contracts during late 2012.


28



Gross Profit
 
 
Years Ended December 31,
 
 
(Dollars in millions)
 
2013
 
2012
 
% Change
Net Sales
 
$
4,200.7

 
$
3,901.3

 
8
%
Cost of Products Sold
 
1,532.8

 
1,485.3

 
3
%
Gross Profit
 
$
2,667.9

 
$
2,416.0

 
10
%
Gross Margin
 
63.5
%
 
61.9
%
 
 


        Gross margin improvement versus the prior year was driven by pricing as well as strong productivity. In the fourth quarter of 2013, MJN saw a significant rise in dairy prices which we expect to have a negative impact on our gross margin for 2014.
Expenses
 
 
Years Ended December 31,
 
 
 
% of Net Sales
(Dollars in millions)
 
2013
 
2012
 
% Change
 
2013
 
2012
Selling, General and Administrative
 
$
918.0

 
$
877.8

 
5
%
 
22
%
 
23
%
Advertising and Promotion
 
645.1

 
552.8

 
17
%
 
15
%
 
14
%
Research and Development
 
102.4

 
95.4

 
7
%
 
2
%
 
2
%
Other Expenses/(Income)—net
 
77.8

 
20.0

 
289
%
 
2
%
 
1
%

Selling, General and Administrative Expenses
        Selling, general and administrative expenses (“SG&A”) increased year over year due to higher sales force, performance-based compensation and marketing expenses. Such higher expenses were partially offset by the elimination of prior year expenses for IT/other separation costs related to the completion of our stand-alone operating structure, the relocation of our regional office in Asia and the implementation of our new business model in Europe.
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 in support of our strategic growth initiatives.
Research and Development Expenses
        Our R&D expenses include the continued investment in our innovation capability, product pipeline and quality compliance programs.
Other Expenses—net
 
 
Years Ended December 31,
(In millions)
 
2013
 
2012
Foreign exchange (gains)/losses—net
 
$
9.3

 
$
(3.1
)
Administrative penalty (China)
 
33.4

 

Severance and other costs
 
2.2

 
8.0

Pension settlements and curtailments
 
29.3

 
15.2

Gain on sale of non-core intangible assets
 

 
(6.5
)
Legal settlements
 
7.0

 

Other—net
 
(3.4
)
 
6.4

Other expenses—net
 
$
77.8

 
$
20.0


        In 2013, we had higher cost related to pension settlements and curtailments as a result of higher lump-sum settlements made to retirees in the U.S. pension plan as compared to 2012. In addition, an administrative penalty was assessed by China’s NDRC in connection with the China Antitrust Review.
Earnings before Interest and Income Taxes
       Earnings before interest and income taxes (“EBIT”) from our three reportable segments, Asia, Latin America and North America/Europe, is reduced by Corporate and Other expenses. Corporate and Other consists of unallocated general and administrative expenses and global

29



business support activities, including R&D, 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.
 
 
Years Ended December 31,
 
 
 
% of Net Sales
(Dollars in millions)
 
2013
 
2012
 
% Change
 
2013
 
2012
Asia
 
$
795.8

 
$
725.3

 
10
 %
 
37
%
 
37
%
Latin America
 
207.2

 
176.0

 
18
 %
 
24
%
 
23
%
North America/Europe
 
248.5

 
246.1

 
1
 %
 
21
%
 
21
%
Corporate and Other
 
(326.9
)
 
(277.4
)
 
(18
)%
 
n/a

 
n/a

EBIT
 
$
924.6

 
$
870.0

 
6
 %
 
22
%
 
22
%

        The Asia increase in EBIT was primarily related to sales growth and improved gross margin, partially offset by higher demand-generation investments.

         The Latin America increase in EBIT was primarily related to sales growth and improved gross margin, partially offset by higher demand-generation investments.

         The North America/Europe increase in EBIT was primarily related to an improved gross margin due to pricing and our new business model in Europe, offset by higher demand-generation investments.
 
         Corporate and Other expenses increased compared to the prior year period primarily as a result of the $33.4 million charge related to the administrative penalty assessed by China’s NDRC in connection with the China Antitrust Review, increased pension settlement expense and current year foreign exchange transaction losses. These increased expenses were partially offset by the elimination of prior year IT/other separation costs related to the completion of our stand-alone operating structure, the prior year relocation of our regional office in Asia and the 2012 implementation of our new business model in Europe.
Interest Expense—net
        Interest expense-net for the year ended December 31, 2013 totaled $50.6 million, down $14.4 million from the prior year. The decrease in interest expense is primarily a result of the July 2013 retirement of the short-term note payable incurred in connection with our 2012 acquisition in Argentina (the “Argentine Acquisition”), increased capitalization of interest expense associated with the construction of our new manufacturing and technology center in Singapore and higher interest income. The weighted-average interest rate on our long-term debt, including the impact of terminated interest rate swaps and the 2013 retirement of the note payable related to the Argentine Acquisition (the “Argentine Acquisition Note Payable”), was 4.2% and 4.5% for the years ended December 31, 2013 and 2012, respectively.
Income Taxes
        The effective tax rate (“ETR”) for the year ended December 31, 2013 and 2012 was 25.1% and 23.9%, respectively. The higher effective tax rate was primarily attributable to favorable adjustments in 2012 associated with prior years' tax filings and the 2013 administrative penalty related to the China antitrust review, which is non-deductible for tax purposes.
Net Earnings Attributable to Noncontrolling Interests
       Net earnings attributable to noncontrolling interests consists of approximately 20%, 11% and 10% interest held by third parties in the our operating entities in Argentina, China and Indonesia, respectively.
Net Earnings Attributable to Shareholders
        For the foregoing reasons, net earnings attributable to shareholders for the year ended December 31, 2013 increased 7% to $649.5 million compared with the year ended December 31, 2012.



30



Results of Operations
Year Ended December 31, 2012 Compared to Year Ended December 31, 2011
Below is a summary of comparative results of operations for the years ended December 31, 2012 and 2011:

 
 
 
 
 
 
 
% of Net Sales
(In millions, except per share data)
2012
 
2011
 
% Change
 
2012
 
2011
Net Sales
$
3,901.3

 
$
3,677.0

 
6
 %
 
 
 
 
Earnings before Interest and Income Taxes
870.0

 
774.1

 
12
 %
 
22
 %
 
21
%
Interest Expense—net
65.0

 
52.2

 
25
 %
 
1
 %
 
1
%
Earnings before Income Taxes
805.0

 
721.9

 
12
 %
 
21
 %
 
20
%
Provision for Income Taxes
192.6

 
202.9

 
(5
)%
 
5
 %
 
6
%
    Effective Tax Rate
23.9
%
 
28.1
%
 
 
 
 
 
 
Net Earnings
612.4

 
519.0

 
18
 %
 
16
 %
 
14
%
Less: Net Earnings Attributable to Noncontrolling Interests
7.9

 
10.5

 
(25
)%
 
(1
)%
 
%
Net Earnings Attributable to Shareholders
604.5

 
$
508.5

 
19
 %
 
15
 %
 
14
%
Weighted-Average Common Shares— Diluted
204.3

 
205.0

 
 
 
 
 
 
Earnings per Common Share—Diluted
$
2.95

 
$
2.47

 
19
 %
 
 
 
 

        The results for the years ended December 31, 2012 and 2011 included Specified Items and are listed in the table below:
 
 
Years Ended December 31,
(In millions)
 
2012
 
2011
IT/other separation costs
 
$
19.9

 
$
74.7

Gain on sale of certain non-core intangible assets
 
(6.5
)
 

Severance and other costs
 
21.1

 
11.6

Legal, settlements and related costs
 
2.8

 
7.6

Specified Items before income taxes
 
$
37.3

 
$
93.9

Income tax impact on items above
 
(11.7
)
 
(29.3
)
Specified Items after taxes
 
$
25.6

 
$
64.6


        The decrease in specified items reflects the completion of our stand-alone operating infrastructure.

Net Sales
        Our net sales by reportable segment are shown in the table below:
 
 
Years Ended December 31,
 
 
 
% Change Due to
(Dollars in millions)
 
2012
 
2011
 
% Change
 
Volume
 
Price/Mix
 
Foreign
Exchange
Asia
 
$
1,967.0

 
$
1,827.8

 
8
 %
 
 %
 
7
%
 
1
 %
Latin America
 
752.5

 
619.4

 
21
 %
 
20
 %
(1
)
7
%
 
(6
)%
North America/Europe
 
1,181.8

 
1,229.8

 
(4
)%
 
(7
)%
 
4
%
 
(1
)%
Net Sales
 
$
3,901.3

 
$
3,677.0

 
6
 %
 
1
 %
 
6
%
 
(1
)%
(1) Our acquisition in Argentina represented 10% of Latin America net sales increase.


        Asia sales accounted for more than 50% of our net sales in 2012 and grew 8% year over year primarily as a result of price increases throughout the segment. Volume increased due to broad-based category growth but was offset in its entirety by market share loss in China that occurred towards the end of the second quarter. However, during the second half of 2012, we made significant progress in recovering this market share. In addition, although distributors’ inventory levels increased in China in the first half of 2012 as a result of the market share decline, by year end they had returned to levels similar to those seen at the beginning of the year.

Latin America sales increased 21%, of which 10% was due to the Argentine Acquisition. The increase in volume was driven by broad gains in market share across the segment. Price increases in Venezuela, Mexico and Brazil helped mitigate the impact of high inflation in these markets.

31



The decrease in sales in North America/Europe reflected lower U.S. market share as well as lower category consumption and births, partially offset by higher prices. Market share was lower in comparison to the prior year when we benefited from a competitor’s recall and due to the impact in 2012 of the unfounded media reports in December 2011 alleging product contamination in the United States. Investigating governmental agencies found no contamination in sealed containers of our product, but the resulting uncertainty caused some consumers to switch away from our brand.
        Our net sales by product category are shown in the table below:
 
 
Years Ended December 31,
 
 
(Dollars in millions)
 
2012
 
2011
 
% Change
Infant Formula
 
$
2,295.5

 
$
2,188.7

 
5
%
Children’s Nutrition
 
1,487.0

 
1,394.4

 
7
%
Other
 
118.8

 
93.9

 
27
%
Net Sales
 
$
3,901.3

 
$
3,677.0

 
6
%

        Infant formula accounts for approximately 90% of our sales in North America/Europe and approximately half of our sales in each of our Asia and Latin America segments.
        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:
 
 
Years Ended December 31,
 
% of Gross Sales
(Dollars in millions)
 
2012
 
2011
 
2012
 
2011
Gross Sales
 
$
5,038.5

 
$
4,730.7

 
100
%
 
100
%
Gross-to-Net Sales Adjustments
 
 

 
 
 
 

 
 

WIC Rebates
 
730.0

 
700.7

 
14
%
 
15
%
Sales Discounts
 
191.9

 
149.8

 
4
%
 
3
%
Returns
 
82.5

 
81.8

 
2
%
 
2
%
Cash Discounts
 
45.2

 
47.5

 
1
%
 
1
%
Coupons and Other Adjustments
 
55.6

 
42.4

 
1
%
 
1
%
Prime Vendor Charge-Backs
 
32.0

 
31.5

 
1
%
 
%
Total Gross-to-Net Sales Adjustments
 
1,137.2

 
1,053.7

 
23
%
 
22
%
Total Net Sales
 
$
3,901.3

 
$
3,677.0

 
77
%
 
78
%

        Total gross-to-net sales adjustments were consistent as a percentage of gross sales with the prior year. The total dollar amount of WIC rebates in the United States increased due to retail list price increases and changes in certain WIC contracts during 2012 and the second half of 2011.

Gross Profit
 
 
Years Ended December 31,
 
 
(Dollars in millions)
 
2012
 
2011
 
% Change
Net Sales
 
$
3,901.3

 
$
3,677.0

 
6
%
Cost of Products Sold
 
1,485.3

 
1,362.3

 
9
%
Gross Profit
 
$
2,416.0

 
$
2,314.7

 
4
%
Gross Margin
 
61.9
%
 
63.0
%
 
 


        The gross margin decline was attributable entirely to the North America/Europe segment and resulted from higher commodity costs, primarily dairy inputs, and unfavorable manufacturing variances attributed largely to lower production volumes. These factors were partially offset by increased prices and productivity gains.

Expenses
 
 
Years Ended December 31,
 
 
 
% of Net Sales
(Dollars in millions)
 
2012
 
2011
 
% Change
 
2012
 
2011
Selling, General and Administrative
 
$
877.8

 
$
926.8

 
(5
)%
 
23
%
 
25
%
Advertising and Promotion
 
552.8

 
501.7

 
10
 %
 
14
%
 
14
%
Research and Development
 
95.4

 
92.5

 
3
 %
 
2
%
 
3
%
Other Expenses/(Income)—net
 
20.0

 
19.6

 
2
 %
 
1
%
 
1
%

32



Selling, General and Administrative Expenses
        SG&A decreased due to the completion of our stand-alone operating infrastructure and lower performance-based compensation expense, partially offset by an increase in sales force and distribution expenses supporting sales growth.
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 in support of our strategic growth initiatives.
Research and Development Expenses
        Our R&D expenses include the continued investment in our innovation capability, product pipeline and quality compliance programs.
Other Expenses—net
  
Years Ended December 31,
(In millions) 
2012
 
2011
Foreign exchange (gains)/losses—net
$
(3.1
)
 
$
(9.7
)
Severance and other costs
8.0

 
9.9

Pension settlements and curtailments
15.2

 
9.7

Gain on sale of non-core intangible assets
(6.5
)
 

Other—net
6.4

 
9.7

Other expenses—net
$
20.0

 
$
19.6

       In 2012, we had higher cost related to pension settlements and curtailments primarily as a result of lump sum payments made to retirees in the U.S. pension plan.
Earnings before Interest and Income Taxes
        EBIT from our three reportable segments, Asia, Latin America and North America/Europe, is reduced by Corporate and Other expenses. Corporate and Other consists of unallocated general and administrative expenses and global business support activities, including R&D, 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.

 
 
Years Ended December 31,
 
 
 
% of Net Sales
(Dollars in millions)
 
2012
 
2011
 
% Change
 
2012
 
2011
Asia
 
$
725.3

 
$
672.5

 
8
 %
 
37
%
 
37
%
Latin America
 
176.0

 
139.1

 
27
 %
 
23
%
 
22
%
North America/Europe
 
246.1

 
308.4

 
(20
)%
 
21
%
 
25
%
Corporate and Other
 
(277.4
)
 
(345.9
)
 
(20
)%
 
n/a

 
n/a

EBIT
 
$
870.0

 
$
774.1

 
12
 %
 
22
%
 
21
%

        The increase in EBIT for Asia was primarily related to sales growth and a higher gross margin, partially offset by higher expenses, such as advertising and promotion and sales force growth.
        The increase in EBIT for Latin America was primarily related to sales growth, partially offset by higher expenses, such as advertising and promotion.
        The North America/Europe decline in EBIT was primarily attributable to a decline in sales, along with a lower gross margin due to higher commodity costs, primarily dairy inputs, and unfavorable manufacturing variances attributed largely to lower production volumes in the United States.
        Corporate and Other expenses decreased due to the completion of our stand-alone operating infrastructure and lower performance-based
compensation expense.




33



Interest Expense—net
        Interest expense for the year ended December 31, 2012 primarily represented interest incurred on $1.5 billion of long-term notes and the short-term note payable related to our Argentine Acquisition. The increase in interest expense reflected the prior year's termination of our fixed-to-floating interest rate swaps and the Argentine Acquisition Note Payable. The weighted-average interest rate on our long-term debt, including the impact of the swaps and Argentine Acquisition Note Payable, was 4.5% and 4.0% for the years ended December 31, 2012 and 2011, respectively.
Income Taxes
        The ETR for the year ended December 31, 2012 and 2011 was 23.9% and 28.1%, respectively. The ETR was primarily attributable to favorable adjustments associated with prior years’ tax filings, changes in management’s assertion that certain current and prior years’ foreign earnings and profits are permanently invested abroad and changes in the geographic earnings mix.
Net Earnings Attributable to Noncontrolling Interests
        Net earnings attributable to noncontrolling interests consists of approximately 20%, 11% and 10% interest held by third parties in our operating entities in Argentina, China and Indonesia, respectively.
Net Earnings Attributable to Shareholders
        For the foregoing reasons, net earnings attributable to shareholders for the year ended December 31, 2012 increased 19% to $604.5 million compared with the year ended December 31, 2011.


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 capital expenditures for equipment, buildings and computer software and acquisitions. Cash flows used in financing activities primarily represent dividend payments, proceeds and repayments of short-term borrowings and share repurchases.
        Cash and cash equivalents totaled $1,050.8 million at December 31, 2013 of which $692.5 million was held outside of the United States. Cash and cash equivalents totaled $1,042.1 million as of December 31, 2012, of which $486.7 million was held outside of the United States.

        During 2013, we repatriated approximately $74 million of cash to the United States from multiple jurisdictions whose earnings and profits are not permanently invested abroad. During 2012, we repatriated approximately $660 million of cash to the United States from multiple jurisdictions of which approximately $409 million was repatriated as a return of basis.  We have no current plans to repatriate cash in a similar return of basis transaction.

        As a result of our evaluation of our global cash position, management has asserted that current and prior year earnings and profits in certain foreign jurisdictions are permanently invested abroad. We will continue to evaluate our global cash position and our determination as to whether earnings and profits of certain other foreign jurisdictions are permanently invested abroad. As of December 31, 2013, approximately $343 million of cash and cash equivalents were held by foreign subsidiaries whose undistributed earnings 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, we would be required to provide U.S. taxes on these amounts.

        The declaration and payment of dividends is at the discretion of our board of directors and depends on many factors, including our financial condition, earnings, legal requirements, restrictions under the terms of our debt agreements and other relevant factors. Cash dividends paid for the years ended December 31, 2013, 2012 and 2011 were $267.7 million, $236.7 million and $205.7 million, respectively.
        Our board of directors previously authorized the repurchase of up to $300.0 million of our common stock (the “2010 Authorization”). The 2010 Authorization was primarily intended to offset the dilutive effect on earnings from stock-based compensation. The 2010 Authorization ends on May 1, 2015; however, during the year ended December 31, 2013, we completed all purchases remaining under the

34



2010 Authorization. From the date of such authorization through December 31, 2013, 4.2 million shares were repurchased at an average cost per share of $71.21.
        In September 2013, our board of directors approved a new share repurchase authorization of up to an additional $500.0 million of our common stock (the "2013 Authorization"). The 2013 Authorization is intended to offset the dilutive effect on earnings per share from stock-based compensation and allow for opportunistic stock purchases to return capital to stockholders. The 2013 Authorization does not have an expiration date. From the date of such authorization through December 31, 2013, 0.1 million shares were repurchased at an average cost of $84.06. As of December 31, 2013, we had $490.3 million available for further repurchases under the authorization.
Cash Flows
        We believe that cash on hand, cash from operations, and the available credit facility will be sufficient to support our working capital needs, pay our operating expenses, satisfy debt obligations, fund capital expenditures and make dividend payments.

 
 
Years Ended December 31,
 
 
(Dollars in millions)
 
2013
 
2012
 
2011
Cash flow provided by/(used in):
 
 

 
 

 
 

Operating Activities
 
 

 
 

 
 

Net Earnings
 
$
654.9

 
$
612.4

 
$
519.0

Depreciation and Amortization
 
83.1

 
76.9

 
75.3

Other
 
87.7

 
72.5

 
28.0

Changes in Assets and Liabilities
 
0.3

 
(40.8
)
 
20.2

Pension and Other Post-Retirement Benefits Contributions
 
(19.4
)
 
(28.3
)
 
(9.7
)
Total Operating Activities
 
806.6

 
692.7

 
632.8

Investing Activities
 
(240.5
)
 
(228.8
)
 
(112.6
)
Financing Activities
 
(545.7
)
 
(267.5
)
 
(275.2
)
Effects of Changes in Exchange Rates on Cash and Cash Equivalents
 
(11.7
)
 
5.4

 
(0.3
)
Net Increase in Cash and Cash Equivalents
 
$
8.7

 
$
201.8

 
$
244.7

Year Ended December 31, 2013 Compared to Year Ended December 31, 2012
        Cash flow provided from operating activities increased by $113.9 million in 2013 compared to 2012. Higher net earnings, along with lower cash paid for income taxes and performance-based compensation as well as lower cash contributions to our U.S. defined benefit pension plan partially offset a higher requirement for working capital, defined as accounts receivable plus inventory less accounts payable.
        Cash flow used in investing activities increased $11.7 million in 2013 compared to 2012 due primarily to higher capital expenditures partially offset by the Argentine Acquisition.
        Cash flow used in financing activities was $545.7 million for the year ended December 31, 2013, consisting primarily of $267.7 million of dividend payments, $165.4 million repayments of short-term borrowings and $106.0 million of treasury stock repurchases. Cash flow used in financing activities was $267.5 million for the year ended December 31, 2012, primarily from dividend payments of $236.7 million, treasury stock repurchases of $154.9 million and the Argentine Acquisition Note Payable of $52.6 million, offset by revolver borrowings of $161.0 million.
Year Ended December 31, 2012 Compared to Year Ended December 31, 2011
        Cash flow provided from operating activities increased by $59.9 million in 2012 compared with 2011. Higher earnings and lower requirements for working capital were offset partially by higher cash paid for income taxes. The 2012 decrease in inventories reflected the impact from the December 2011 advance purchase of approximately $80 million for select dairy inputs.
        Cash flow used in investing activities increased $116.2 million in 2012 compared to 2011 due primarily to the Argentine Acquisition.
        Cash flow used in financing activities was $267.5 million for the year ended December 31, 2012, primarily from dividend payments of $236.7 million, treasury stock repurchases of $154.9 million and the Argentine Acquisition Note Payable of $52.6 million, offset by revolver borrowings of $161.0 million.

35



Capital Expenditures
        Capital expenditures and the cash outflow for capital expenditures were as follows:
(In millions)
 
Capital expenditures
 
Cash outflow for capital
expenditures
Year ended December 31, 2013
 
$
251.1

 
$
240.4

Year ended December 31, 2012
 
170.3

 
124.4

Year ended December 31, 2011
 
121.6

 
109.5


        Capital expenditures included investments primarily in a new spray dryer and research and development capabilities. In December 2011, we announced a three-year planned capital expenditure for a new manufacturing and technology center in Singapore. In 2013, we spent approximately $142 million for the second year of the capital expenditure in Singapore bringing our spending to date for the project to $220 million. In 2014, we expect capital expenditures to be approximately $180 million, including $35 million for the third year of the capital expenditure in Singapore, and continued emphasis on growth and innovation. We expect to fund capital expenditures from our cash flow generated by operations.
Revolving Credit Facility Agreement
        In June 2011, the Company entered into a five-year revolving credit facility agreement (“Credit Facility”). Borrowings from the Credit Facility are to be used for working capital and other general corporate purposes. The Credit Facility is unsecured and repayable at maturity in June 2016, and 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 our request and with the consent of the lenders, subject to satisfaction of customary conditions.
        The Credit Facility contains customary covenants, including covenants applicable to limiting liens, substantial asset sales and mergers. Most of these restrictions are subject to certain minimum thresholds and exceptions. 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. We were in compliance with all financial covenants as of December 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, we incur an annual 0.2% facility fee on the entire facility commitment of $500.0 million.
        If our corporate credit rating falls below (i) Baa3 by Moody's Investors Service, Inc. (“Moody's”) and (ii) BBB- by Standard & Poor's Ratings Service (“S&P”), then Mead Johnson & Company shall automatically be deemed to guarantee the obligations under the Credit Facility. Moody's credit rating for MJN is currently Baa1. S&P's credit rating for MJN is currently BBB.
        As of December 31, 2013, we had no borrowings outstanding under our Credit Facility. As of December 31, 2012, we borrowed $161.0 million against our Credit Facility for general corporate purposes, including payment for acquisition debt obligations and funding of current and future capital expenditures.

Argentine Acquisition Note Payable
 
        On March 15, 2012, we completed the Argentine Acquisition (See “Item 8. Financial Statements - Note 8. Redeemable Noncontrolling Interest” for discussion of the Argentine Acquisition). Of the ARS850.7 million purchase price payable, ARS377.6 million was financed through a note payable. The remaining balance of the note payable was paid on July 10, 2013. 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, the annual interest rate was automatically reduced to 0.85%, and the note accrued interest at that rate through our final payment.
 


36



Long-Term Debt
        The components of our long-term debt are detailed in the table below:
Description
 
Principal Amount
 
Interest Rate
 
Maturity
2014 Notes
 
$500.0 million
 
3.50% fixed
 
November 1, 2014
2019 Notes
 
$700.0 million
 
4.90% fixed
 
November 1, 2019
2039 Notes
 
$300.0 million
 
5.90% fixed
 
November 1, 2039
        Our long-term debt has a principal value of $1,500 million, of which $500 million is considered current as it matures on November 1, 2014. As we plan to refinance a portion of our long-term notes in 2014, we entered into interest rate forward starting swaps with a combined notional value of $500 million. The forward starting rates of the swaps range from 3.79% to 3.94% and an effective date of October 31, 2014. The forward starting swaps effectively mitigate the interest rate exposure associated with our planned refinancing of a portion of our long-term debt.  
        Our long-term debt may be prepaid at any time, in whole or in part, at a redemption price equal to the greater of par value or an amount calculated based upon the sum of the present values of the remaining scheduled payments. Upon a change of control, we may be required to repurchase the notes in an amount equal to 101% of the then outstanding principal amount plus accrued and unpaid interest. Interest on the notes are due semi-annually, and the notes are not subject to amortization.
        For additional information on our long-term debt, acquisition and interest rate swaps, see “Item 8. Financial Statements – Note 15. Debt and Note 16. Derivatives.”

Contractual Obligations
        As of December 31, 2013, our contractual obligations and other commitments were as follows:
  
 
Payments due by December 31,
(In millions)
 
2014
 
2015
 
2016
 
2017
 
2018
 
Thereafter
 
Total
Operating lease obligations
 
$
36.4

 
$
29.5

 
$
20.8

 
$
15.5

 
$
14.3

 
$
22.3

 
$
138.8

Capital lease obligations
 
1.2

 
1.1

 
0.9

 
0.4

 

 

 
$
3.6

Purchase obligations
 
139.3

 
52.2

 
54.6

 
41.0

 
40.3

 
49.5

 
$
376.9

Short-term borrowings
 
2.0

 

 

 

 

 

 
$
2.0

Long-term debt
 
500.0

 

 

 

 

 
1,000.0

 
$
1,500.0

Interest payments
 
69.7

 
52.0

 
52.0

 
52.0

 
52.0

 
406.0

 
$
683.7

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
748.6

 
$
134.8

 
$
128.3

 
$
108.9

 
$
106.6

 
$
1,477.8

 
$
2,705.0

        Our operating lease obligations are generally related to real estate leases for offices, manufacturing-related leases, and vehicle leases. Capital lease obligations relate to assets used for interplant transportation of materials and finished goods. Purchase obligations are for unconditional commitments related to a master service agreement with IBM for information technology, accounting and indirect procurement services; for the purchase of materials used in manufacturing; and for promotional services. The future interest payments include coupon payments on our long-term debt.
Additionally, liabilities for uncertain tax positions and pension and other post retirement benefits are excluded from the table above as we are unable to reasonably predict the ultimate amount or timing of a cash settlement of such liabilities. See “Item 8. Financial Statements – Note 4. Income Tax and Note 7. Employee Benefits” for more information.

Off-Balance Sheet Arrangements
        Pursuant to an Amended and Restated Tax Matters Agreement with BMS, we agreed to indemnify BMS for (i) any tax payable with respect to any separate tax return that we are required to file or cause to be filed, (ii) any tax incurred as a result of any gain that may be recognized by a member of the BMS affiliated group with respect to a transfer of certain foreign affiliates by us in preparation for our 2009 initial public offering (“IPO”), and (iii) any tax arising from the failure or breach of any representation or covenant made by us which failure or breach results in the intended tax consequences of the split-off transaction not being achieved.
        We do not 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.


37



Significant Accounting Estimates
        In presenting our financial statements in accordance with accounting principles generally accepted in the United States (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 on-going 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 significant accounting estimates listed below involve our more significant judgments, assumptions and estimates and, therefore, could have the greatest potential impact on our financial statements.
        For information on our accounting policies, see “Item 8. Financial Statements – Note 2. Accounting Policies.”
Revenue Recognition
        We recognize revenue when substantially all the risks and rewards of ownership have transferred to the customer. Revenue is recognized on the date MJN’s products are received 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. Provisions are made at the time of revenue recognition for these items based on historical experience, updated for changes in facts and circumstances, as appropriate. Such provisions are recorded as a reduction of revenue.
        WIC Rebates—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 our 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. WIC rebate accruals were $199.7 million and $206.5 million at December 31, 2013 and 2012, respectively, and are included in accrued rebates and returns on our balance sheet. Rebates under the WIC program reduced revenues by $702.3 million, $730.0 million, and $700.7 million in the years ended December 31, 2013, 2012 and 2011, respectively.
        Sales Returns—We account for sales returns 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 such as discontinuations and new product introductions. Sales return accruals were $44.8 million and $46.4 million at December 31, 2013 and 2012, respectively, and are included in accrued rebates and returns on our balance sheet. Returns reduced sales by $81.0 million, $82.5 million, and $81.8 million for the years ended December 31, 2013, 2012 and 2011, respectively.
Income Taxes
        The ETR reflects statutory tax rates in the various jurisdictions in which we operate, including tax rulings and agreements, management’s assertion that certain foreign earnings and profits are permanently invested abroad and management’s estimate of appropriate reserves against uncertain tax positions. Significant judgment is required in determining the ETR and in evaluating the uncertainty in tax positions.
        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 earnings 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. The ultimate liability incurred by us may differ from the provision estimates based on a number of factors, including interpretations of tax laws and the resolution of examinations by the taxing authorities.

38