VENEZUELA MATTERS

3 Months Ended

Mar. 31, 2016

VENEZUELA CURRENCY MATTERS [Abstract]

VENEZUELA MATTERS

VENEZUELA MATTERS

Discussion of Venezuela Exchange Rates

In January 2014, the Venezuelan government enacted changes affecting the country’s currency exchange and other controls, and established a new foreign currency administration, the National Center for Foreign Commerce (“CENCOEX”). CENCOEX assumed control of the sale and purchase of foreign currency in Venezuela, and established the official exchange rate (“Official Rate”) of 6.3 Bolivares Fuertes (“VEF”) to 1.0 U.S. dollar (“USD”). Additionally, the government expanded the types of transactions that may be subject to the weekly auction mechanism under the Complimentary Currency Administration System (“SICAD I”). For a period of time, the Venezuelan government announced plans for the Alternative Foreign Exchange System, also known as SICAD II, which was intended to more closely resemble a market-driven exchange.

In February 2015, the Venezuelan government combined the SICAD I and SICAD II (“SICAD”) exchange rate mechanisms and created a new market based SIMADI rate, which was based on supply and demand. The changes created a three tiered system. As of December 31, 2015, CENCOEX traded at 6.3 VEF to 1.0 USD, the SICAD auction markets traded at 13.5 VEF to 1.0 USD and the SIMADI traded at 198.7 VEF to 1.0 USD.

In March 2016, the Venezuelan government devalued its currency and reduced its existing three tiered system to a two tiered system by eliminating the intermediary SICAD rate. The CENCOEX Official Rate, which continues to be used for purchases of certain essential goods, was changed to 10.0 VEF to 1.0 USD and is now referred to as DIPRO. Additionally, the SIMADI rate was replaced by a new market based rate known as DICOM, which governs all transactions not covered by DIPRO. As of March 31, 2016, DIPRO traded at 10.0 VEF to 1.0 USD and DICOM traded at 272.9 VEF to 1.0 USD.

Effect on the Company’s Results

Due to the elimination of the SICAD rate in March 2016, the Company adopted the DICOM rate for purposes of remeasuring the monetary assets and liabilities of its Venezuela subsidiary effective March 10, 2016 because the Company believes the DICOM rate would now be used to settle future intercompany dividend remittances. The remeasurement impact of this adoption was a loss of $32.3 million, which was recognized as a component of other (income)/expenses - net.

As a result of the change in the Venezuelan exchange rates, the Company concluded that an impairment indicator existed at March 31, 2016 and evaluated the carrying value of the long-lived assets of its Venezuelan subsidiary for impairment, which includes administrative office space, land and a partially completed distribution warehouse facility. Based on this evaluation, the Company concluded that the carrying value of the long-lived assets was no longer recoverable and recorded an impairment charge of $45.9 million to write down the carrying value of the assets to their fair value, which was recognized during the three months ended March 31, 2016 as a component of other (income)/expenses - net. The fair value measurements were based on market quotes from local real estate broker service firms as well as internal assessments of the best information available about the local business conditions and the political environment, including the risks associated with the local currency that would be indicative of what the assets could be sold for and are considered to be Level 3 measurements.

For the three months ended March 31, 2016, the Venezuelan subsidiary’s net sales were negligible as a percentage of total Company net sales. For the three months ended March 31, 2015, the Venezuelan subsidiary’s net sales were 2.5% of total Company net sales. The Venezuelan subsidiary’s earnings were not a material component of MJN consolidated results during the three months ended March 31,2016 and 2015.

Remaining Asset Exposures

The following sets forth selected information of our Venezuelan subsidiary as of March 31, 2016:    

Net Monetary Assets:    $1.1 million (300.2 million Venezuelan Bolivares; DICOM of 272.9 VEF to 1.0 USD)

Net Non-Monetary Assets:    $8.1 million (2,210.5 million Venezuelan Bolivares; based on a DICOM rate of 272.9 VEF to 1.0 USD)

MJN Intercompany Payables:    $52.0 million (U.S Dollar denominated)

The intercompany payable represents amounts owed by our Venezuelan subsidiary to our subsidiaries in Mexico and the U.S. for purchases of inventory.