10-K 1 mjn2016form10-k.htm 10-K Document


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, 2016
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. ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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 30, 2016, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $16.7 billion.
As of February 22, 2017, there were 183,429,210 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 2017 Annual Meeting of Stockholders. In the event the registrant does not file a Proxy Statement for its 2017 Annual Meeting of Stockholders with the United States Securities and Exchange Commission within 120 days after the end of the registrant’s 2016 fiscal year, this information will be included in an amendment to this Annual Report on Form 10-K.




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.
 
Item 16.
 






PART I
Item 1.    BUSINESS.
Our Company
Mead Johnson Nutrition Company is a global leader in pediatric nutrition with approximately $3.7 billion in net sales for the year ended December 31, 2016. 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, and accounted for approximately 80% of our net sales for the year ended December 31, 2016. 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 category-defining products across our product portfolio. 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 Asia, North America, Latin America and Europe. Our three reportable segments are Asia, Latin America and North America/Europe, which comprised 50%, 17% and 33%, respectively, of our net sales for the year ended December 31, 2016. See “Item 8. Financial Statements and Supplementary Data—Note 5. Segment Information” for additional financial information by segment and geographical area. For the year ended December 31, 2016, 72% of our net sales were generated outside of the United States.
We believe parents and health care professionals associate the Mead Johnson name and our Enfa family of brands with quality, science-based pediatric nutrition products. Our products are marketed around the world through our global sales and marketing efforts. We believe that the strength of our brands allows us to create and maintain consumer loyalty across our product portfolio.
In this Annual Report on Form 10-K, we refer to Mead Johnson Nutrition Company and its subsidiaries throughout as “the Company,” “MJN,” “Mead Johnson,” “we” or “us.” For purposes of this Annual Report on Form 10-K, the term China refers to the Company’s businesses in mainland China and Hong Kong.
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 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 expanded our operations into extensive geographies outside of the United States 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.
In 1967, we became a wholly-owned subsidiary of Bristol-Myers Squibb Company (“BMS”). In February 2009, we completed our initial public offering of common stock, following which BMS retained a significant ownership interest in the Company.  BMS then completed a split-off of its remaining interest in Mead Johnson in December 2009 making Mead Johnson an independent public company.  The Company is currently headquartered in Glenview, Illinois and is scheduled to relocate its corporate headquarters to Chicago, Illinois in the first half of 2017.
Merger Agreement
On February 10, 2017, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Reckitt Benckiser Group plc, a company incorporated in England and Wales (“Reckitt Benckiser”), and Marigold Merger Sub, Inc., a Delaware corporation and a wholly owned indirect subsidiary of Reckitt Benckiser (“Merger Sub”), pursuant to which Reckitt Benckiser will indirectly acquire the Company by means of a merger of Merger Sub with and into the Company on the terms and subject to the conditions set forth in the Merger Agreement (the “Merger”). The Merger Agreement and the consummation of the transactions contemplated by the Merger Agreement have been unanimously approved by the Company’s board of directors.
At the effective time of the Merger (the “Effective Time”), on the terms and subject to the conditions set forth in the Merger Agreement, each share of the Company’s common stock outstanding immediately prior to the Effective Time (other than (i) each share held by the Company as treasury stock (other than shares held for the account of clients, customers or other persons), (ii) each share held by Reckitt Benckiser or by any subsidiary of either the Company or Reckitt Benckiser and (iii) each share held by a holder who has not voted in favor of the Merger or consented thereto in writing and who has demanded appraisal for such shares in accordance with Delaware law) will be converted into the right to receive $90.00 in cash, without interest.


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Consummation of the Merger is subject to the satisfaction or waiver of certain customary closing conditions, including, among others: (i) the affirmative vote of the holders of a majority of the Company's outstanding shares of common stock; (ii) the affirmative vote of a simple majority of Reckitt Benckiser’s shareholders at a shareholder meeting; (iii) the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the receipt of certain other non-United States regulatory approvals required to consummate the Merger; and (iv) in the case of Reckitt Benckiser's obligations to consummate the Merger, the absence of a Company Material Adverse Effect (as defined in the Merger Agreement). Reckitt Benckiser and Merger Sub's respective obligations to consummate the Merger are not subject to any financing condition or other contingency.

Additional information about the Merger Agreement is set forth in our Current Report on Form 8-K filed with the United States Securities and Exchange Commission (the “SEC”) on February 13, 2017.
Our Product Portfolio
Our product portfolio, which addresses a wide range of pediatric nutritional needs, consists of two principal product categories: infant formula and children’s nutrition, which represented 59% and 40%, respectively, of our net sales for the year ended December 31, 2016. Our product categories can be separated into the following general product types: (i) routine infant, (ii) solutions, (iii) specialty, (iv) children’s nutrition and (v) other. Our routine infant formula is intended for healthy consumers while our solutions and specialty products are offered for infants with common feeding problems and special nutritional needs. Our children’s nutrition products are designed to meet the nutritional needs of children at different stages of development. Our other products (representing approximately 1% of net sales) include maternal nutrition products, vitamins, supplements and oral electrolyte solutions for infants and children. We market products under different names in various regions across the world based on marketing strategies and brand recognition.
Our most prominent product form around the world is milk-based powder. We also produce several products in liquid form for sale primarily in North America. In relevant markets, liquids are available in routine, solutions, specialty and children’s nutrition products. In addition, we have introduced certain non-GMO products in an effort to provide parents with options that meet a variety of preferences.
Routine Infant Formula. We design routine infant formula 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. Our key routine infant formula products include Enfamil Premium, Enfamil A+, Enfalac Premium and Enfapro A+. We endeavor to develop routine infant formula that includes the most beneficial attributes of breast milk. Each product is referred to as a “formula,” as it is formulated for the specific nutritional needs of an infant at a given age. Generally, our routine infant formulas have 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 docosahexaenoic acid (“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. In certain geographies, we have introduced a premium-priced product (Enfinitas in China and Enspire in the United States). This premium-priced formulation has two innovative components, lactoferrin and milk fat globule membrane (“MFGM”), both of which are naturally found in human breast milk and provide important benefits (lactoferrin to support immune health and MFGM to foster cognitive development). MFGM is also present in our Enfa products in several other markets.
Solutions Products. We design several solutions formulas to address common feeding tolerance problems, including spit-up, fussiness, gas and lactose intolerance. Our primary solutions products include Enfamil Gentlease (for fussiness and gas), Enfamil A.R. (to reduce spit-up), Enfamil ProSobee (a soy-based formula) and Enfamil LactoFree (for lactose intolerance).
Specialty Products. We design specialty formulas to address certain conditions or special medical needs, including Nutramigen (for cow’s milk protein allergies) and Puramino (an amino acid formula for severe cow’s milk protein allergies or multiple other food allergies). We design products such as Enfamil Premature to meet the unique needs of premature and low birth weight infants under the supervision of a doctor, most often in the hospital, and EnfaCare, a hypercaloric formula for premature babies at home. 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). Certain of these products are intended for infants and young children while others are suitable for children and adults.
Children’s Nutrition Products. We design our children’s products to meet the changing nutritional needs of children at different stages of development (i.e. toddlers and older children). Our primary children’s nutrition products include Enfagrow, Sustagen and Lactum. These products are not breast milk substitutes and are not designed as a sole source of nutrition but instead are designed to be a part of a child’s appropriate diet. MFGM is present in certain of our children’s Enfa products as well. We also offer “milk modifiers” (ChocoMilk and Cal-C-Tose) that, when added to a glass of milk, enhance the milk’s nutritional value. In China, we have introduced a premium-priced, children’s nutrition product (Enfinitas, discussed above).

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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 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. Our Enfalyte product, sold in North America, is an oral electrolyte solution designed for infants and children to quickly replace electrolytes and water to help restore hydration.
The following table shows sales for each of the above-described product types as a percentage of our total net sales over each of the past three fiscal years.

% of Total Net Sales
 
2016
 
2015
 
2014
Routine Infant Formula
 
36
%
 
37
%
 
38
%
Solutions Products*
 
13
%
 
13
%
 
11
%
Specialty Products*
 
10
%
 
9
%
 
8
%
Total Infant
 
59
%
 
59
%
 
57
%
 
 
 
 
 
 
 
Children’s Nutrition Products
 
40
%
 
39
%
 
41
%
Total Children’s
 
40
%
 
39
%
 
41
%
 
 
 
 
 
 
 
Other
 
1
%
 
2
%
 
2
%
Total Other
 
1
%
 
2
%
 
2
%
 
 
 
 
 
 
 
* These products can be consumed by children; however, a majority of such products are consumed by infants.

Global Supply Chain
We manage sourcing, manufacturing and distribution of our product portfolio through our global supply chain.
Sourcing. We source approximately 75% of our materials from approximately 40 suppliers worldwide. Through our suppliers, we obtain key raw materials and primary packaging materials on a global basis. These raw materials are subject to review and approval by our regional teams to ensure compliance with regulatory requirements and quality standards. Certain raw materials, while managed and purchased by contract on a global basis, are subject to regional and local variations in price under the terms of these supply agreements. For example, the cost of dairy, agricultural oils, and packaging materials are affected by global commodity changes. As such, we are often exposed to price volatility related to market conditions outside of our control. Dairy products, consisting primarily of milk powders, non-fat dry milk, lactose and whey protein concentrates, accounted for approximately 32% of our global expenditures for raw materials and approximately 19% of our cost of goods sold for the year ended December 31, 2016.
Manufacturing and Finishing Locations; Quality Departments. We currently operate in-house production facilities at different locations around the world. Our manufacturing and finishing facilities are located in the United States, the Netherlands, Mexico, Brazil, Singapore, Thailand, China and the Philippines. See “Item 2. Properties” for a description of our global manufacturing facilities. We also use third-party manufacturers for a portion of our production requirements. As the production process advances, regional or sub-regional teams support the global team by overseeing manufacturing activities such as the finishing of our products. As we adapt to Chinese consumers’ shifting demand for fully imported products, we increasingly manufacture and finish our products in the Netherlands for shipment to China.
Our four regional quality departments located in the United States, the Netherlands, Mexico and Singapore perform regional and manufacturing site quality control and assurance.  The quality assurance work in the regions is supported by a Global Quality Assurance group which provides additional expertise for specific areas. Our products undergo extensive quality and safety checks throughout the manufacturing process, from raw materials to finished product.  Our regional quality departments perform routine manufacturing site inspections focused on regulatory requirements, food safety, continuous quality improvement, ingredient supplier quality and third-party compliance.  Our products meet all local and nationally required regulatory, safety and nutrition requirements, including the Codex Alimentarius, or food code, standards where applicable, the U.S. Infant Formula Act in the United States and specific national, local and regional requirements elsewhere (See “—Regulatory and Legal” below for further details).   Nevertheless, the Company is constantly driving improvement in quality and, as such, these regulations are seen as the minimum requirements; our internal rigorous standards and quality ambition meet or exceed such requirements.

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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.
Sales and Marketing
We conduct regional marketing within a strategic framework focused on both parents and health care professionals in accordance with country-specific regulatory requirements. We maintain both a health care professional sales force and a retail sales organization within our regions 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-creation programs. The marketing teams work with external agencies to create marketing campaigns for consumers, health care professionals and retail sales organizations, where permitted.
Consumers. Parental preference plays an important role in brand selection. Where permitted, we participate in a variety of evidence-based marketing activities for consumers that emphasize our superior nutritional science, including digital, print and television advertising, direct mail, internet and promotional programs. In particular, we have invested in targeted digital marketing programs that allow us to attract new or prospective parents’ attention online, engage with potential consumers by connecting them to relevant content reflective of their needs and then provide targeted, specific information and product offers. We have developed technology platforms to support e-commerce and mobile commerce within our regions across the globe. Moreover, we have invested significant resources to support trends in consumer preference for premium products in key markets.
Health Care Professionals. Our health care professional sales force educates health care professionals, as permitted, 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. Our retail sales force markets our products to each of the retail channels where our products are purchased by consumers, including mass merchandisers (e.g. Walmart), e-commerce retailers, baby stores, 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, emphasis on e-commerce, shopper trends and the regulatory environment.
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 46% of all infants born in the United States during the 12-month period ended December 31, 2016 benefited from the WIC program. The USDA program is administered individually by each state.
Most state WIC programs provide vouchers that participants use at authorized food stores to obtain the products covered by the program, including infant formula. Following a sealed, competitive bidding process, state WIC agencies enter into contracts with manufacturers, pursuant to which the state WIC agency provides mothers with vouchers for a single manufacturer’s brand of infant formula and, in return, the manufacturer gives the state WIC agency a rebate for each unit 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 state WIC agency for infant formula at authorized retailers. The retailer is then reimbursed the full retail price by the state 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 units of infant formula for which vouchers were redeemed by the state WIC agency and reimbursed to retailers during the month multiplied by the agreed rebate per unit.

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 usually awarded the contract. WIC contracts are generally three years in duration with some contracts providing for extensions. Specific contract provisions can vary significantly from state to state.

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Participation in the WIC program is an important part of our U.S. business based on the volume of infant formula sold under the program. As of December 31, 2016, we held the contracts that supplied approximately 43% of WIC births in the United States. WIC sales represented approximately 16% of our global gross sales in the year ended December 31, 2016. After taking into account the rebates we paid to the state WIC agencies, net WIC sales represented approximately 1% of our global net sales in the year ended December 31, 2016. The general benefits that we derive from holding the WIC contract in a particular state extend beyond the actual sales made in connection with the WIC program in the relevant state. Such benefits include full price sales from product purchased in excess of the rebated volume and the increased presence of our products in hospitals and at retailers. See “Item 1A. Risk Factors—Changes in WIC, or our participation in it, could materially adversely affect our business.
Customers
Our products are sold principally to distributors and retail customers, both nationally and internationally. Sales to two of our customers, DKSH International Ltd., a distributor serving primarily Asia (including sales to its regional affiliates), and Wal-Mart Stores, Inc. (including sales to Sam’s Club), accounted for approximately 14%, 14% and 16%, and approximately 12%, 12% and 11%, of our gross sales for the years ended December 31, 2016, 2015, and 2014, respectively.
Research and Development
Investing in innovation through our research and development (“R&D”) capabilities and projects 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 centers are located in the United States, Mexico, Thailand, China, the Netherlands and Singapore. Our four Pediatric Nutrition Institutes (“PNI”) are located in the United States, Mexico, China and Singapore.
We organize our R&D 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. This is especially relevant when we make adjustments to our children’s product range and/or when we respond to local and regional changes in the regulatory landscape.
We also have external development relationships that complement our internal R&D capabilities. We manage our R&D activities in collaboration with leading scientists, institutes and commercial suppliers around the world. We believe this approach allows us to be at the forefront of scientific and technological developments relevant for pediatric nutrition. R&D expense was $97.4 million, $108.4 million and $115.1 million in the years ended December 31, 2016, 2015, and 2014, respectively.
Intellectual Property
We own patents and have submitted patent applications both in the United States and in other countries of interest to Mead Johnson. Our patent rights relate primarily to ingredients (and combinations thereof) that we use in our products. We augment our portfolio by licensing technology from suppliers of a variety of ingredients used in our products. We believe that our patent portfolio is designed such that the expiration of any single patent would not have a material impact on our business. We also hold an extensive portfolio of trademarks across our key markets. Our trademark rights relate primarily to our Enfa family of brands and other important brands. We file and maintain trademarks in those countries in which we have, or desire to have, a business presence. In addition to patents, licenses and trademark protections, we rely on a combination of security measures, confidentiality policies, contractual arrangements and trade secret laws to protect our proprietary formulas and other valuable trade secrets.
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 include Nestlé, Danone and Abbott. We have local and regional competitors as well. Other companies, including manufacturers of branded products, private label and store brand products, manufacture and sell one or more products with a similar purpose to those marketed by us. We believe sources of our competitive advantage include the unique nutrition science and innovation behind our products, clinical claims for efficacy and product quality, brand image and associated value, broad sales force and distribution capabilities and consumer satisfaction. Significant expenditures for product development, advertising, promotion and marketing, where permitted, are generally required to achieve acceptance of products among consumers and health care professionals and to support the trend in consumer preferences for premium products in key markets.

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Regulatory and Legal

We are subject to laws and regulations in each country in which we market our products. We have processes, systems and resources in place to manage compliance with current regulatory requirements and to participate proactively in the shaping of future country, regional and global policy, guidance and regulations.

Rules and Regulations. In the United States, infant formula manufacturers are governed by the rules and regulations of the U.S. Food and Drug Administration (“U.S. FDA”) and its Center for Food Safety and Applied Nutrition in connection with the Infant Formula Act of 1980. Outside of the United States, country-specific regulations define the requirements with which infant and children’s formula must comply with regard to definition, composition, safety, quality, labeling and marketing as well as requirements for placing new formulas on the market. Many country-specific requirements are comparable to or will refer to regulations, guidelines and policies promulgated by the U.S. FDA, the European Commission, the Codex Alimentarius and/or the World Health Organization (discussed below). Global regulatory provisions that govern our ability to bring innovative formulas to market have become increasingly stringent with regard to requirements for scientific substantiation for innovation. Similarly, regulatory criteria with respect to safety and quality requirements have become increasingly stringent. It is our policy to comply with all applicable laws and regulations in each country in which we do business.

Policy and Guidance. The Codex Alimentarius (also referred to as “the Codex” or “the food code”) is a collection of internationally recognized standards, codes of practice, guidelines and other recommendations related to foods. The Codex, managed jointly by the United Nations Food and Agriculture Organization (“FAO”) and the World Health Organization, has become the global reference point for consumers, food producers and processors, national food control agencies and the international food trade. The Codex includes several standards regarding formulas and foods for infants and young children. World Health Organization (“WHO”) policies and, in particular, the WHO’s International Code of Marketing of Breastmilk Substitutes (the “WHO Code”), are relevant to infant formula manufacturers, particularly when the WHO Code is incorporated into country-specific regulatory requirements. Certain advocates and governmental and non-governmental organizations (particularly in Hong Kong, Mexico, the Philippines, Thailand, Malaysia, Vietnam, Indonesia, Colombia and Singapore) have advocated for heightened restrictions on the marketing, labeling and even the sale of some pediatric nutrition products as well as trademark restrictions, restrictions on interactions with health care providers and bans on claims for products covering children up to three years of age, including the “Guidance on Ending the Inappropriate Promotion of Foods for Infants and Young Children” that was published by the WHO in 2016. The Company and other industry participants were unable to persuade the WHO to modify its guidance to recognize the scientifically proven benefits of infant formula products. The WHO guidance is now under consideration for potential legislation in several countries where we market our products.
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 enhance our facilities or maintain compliance with applicable requirements on an ongoing basis.
Employees
As of December 31, 2016, we employed approximately 7,600 people worldwide.
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 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.


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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.
Risk Factors Related to the Merger
The Merger may not be completed within the expected timeframe, or at all, and the failure to complete the Merger could adversely affect our business and the market price of our common stock.
On February 10, 2017 we entered into the Merger Agreement with Reckitt Benckiser and Merger Sub, a wholly owned subsidiary of Reckitt Benckiser. The Merger Agreement is an executory contract subject to closing conditions beyond our control, and there is no guarantee that these conditions will be satisfied in a timely manner or at all. Completion of the Merger is subject to various conditions, including approval of the Merger by an affirmative vote of the holders of a majority of the outstanding shares of the Company’s common stock, approval of the Merger by an affirmative vote of a simple majority of Reckitt Benckiser’s shareholders and the receipt of required antitrust approvals, among other things. If any of the conditions to the Merger are not satisfied (or waived by the other party), the Merger may not be completed. In addition, the Merger Agreement may be terminated under certain specified circumstances, including a change in the recommendation of our board of directors or our termination of the Merger Agreement to enter into an agreement for a superior proposal (as defined in the Merger Agreement).
Failure to complete the Merger could adversely affect our business and the market price of our common stock in a number of ways, including the following:
If the Merger is not completed, and there are no other parties willing and able to acquire the Company at a price of $90 per share or higher, on terms acceptable to us, our stock price will likely decline as our stock has recently traded at prices based on the proposed per share consideration for the Merger.
We have incurred, and will continue to incur, significant costs, expenses and fees for professional services and other transaction costs in connection with the Merger, for which we will have received little or no benefit if the Merger is not completed. Many of these fees and costs will be payable by us even if the Merger is not completed and may relate to activities that we would not have undertaken other than to complete the Merger.
A failed Merger may result in negative publicity and a negative impression of us in the investment community.
Upon termination of the Merger Agreement by the Company or Reckitt Benckiser under specified circumstances, we would be required to pay a termination fee of $480 million.
The Merger Agreement contains provisions that could discourage or make it difficult for a third party to acquire us prior to the completion of the Merger.
The Merger Agreement contains provisions that restrict our ability to entertain a third party proposal to acquire us. These provisions include the general prohibition on our soliciting or engaging in discussions or negotiations regarding any alternative acquisition proposal, subject to certain exceptions. We are also required to pay a termination fee of $480 million if the Merger Agreement is terminated in specified circumstances, including if we enter into a definitive agreement for a superior proposal. These provisions might discourage an otherwise-interested third party from considering or proposing an acquisition transaction, even one that may be deemed of greater value than the Merger to our stockholders. Furthermore, even if a third party elects to propose an acquisition, the requirement on our part to pay a termination fee may result in that third party offering a lower value to our stockholders than such third party might otherwise have offered.
The announcement of the Merger could adversely affect our business, financial condition, and results and operations.
The announcement and pendency of the Merger could cause disruptions in and create uncertainty surrounding our business, which could have an adverse effect on our business, financial condition, and results and operations, regardless of whether the Merger is completed. These risks to our business include the following, all of which could be exacerbated by a delay in the completion of the Merger:
the diversion of significant management time and resources towards the completion of the Merger;
the impairment of our ability to attract, retain, and motivate key personnel, including our senior management;
difficulties maintaining relationships with customers, suppliers, and other business partners;
the inability to pursue alternative business opportunities or make appropriate changes to our business because of requirements in the Merger Agreement that we conduct our business in the ordinary course of business consistent with past practice and not engage in certain kinds of transactions prior to the completion of the Merger; and
litigation relating to the Merger and the costs related thereto.

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Risks Relating to Our Business
We operate in an intensely competitive business where many factors, including competitive price-based promotional activity, may impact demand for our products.
Our primary competitors have substantial financial, marketing and other resources. They have diversified product portfolios and may benefit from greater economies of scale due to their size and global footprint. In most product categories, we compete not only with other widely advertised branded products, but also with private label and store brand products that are generally sold at lower prices. We compete based on the following factors: innovation and nutrition science; brand recognition and loyalty; product quality; effectiveness of marketing, promotional activity and the ability to identify and satisfy consumer preferences; price; distribution and availability of products. Continued price-based promotional activity has negatively impacted, and may continue to negatively impact, revenues and demand for our products. Competitive pressures may lead us to reduce product prices. Such pressures may also restrict our ability to increase prices in response to commodity, wage and other cost increases. If we are unable to compete effectively, our financial condition and operating results may suffer.
Our China operations are subject to risks that could negatively affect our business.
A significant portion of our revenue is derived from operations in China. Consequently, our overall financial results are dependent on this market and our business is exposed to significant risks, particularly with regard to China’s evolving regulatory landscape as it applies to our business. Our success may be adversely affected by the need to adjust our product manufacturing, distribution, labeling and marketing to comply with China’s evolving laws and regulations, including those related to trade restrictions, product quality requirements, product labeling rules, advertising regulations and limitations on the number of brands and formulations manufactured in one location. Risks associated with our China operations also include changes in economic conditions (including potential slowdowns in China’s economy, wage and cost inflation, currency exchange rates, consumer spending and employment levels), changes in tax rates, potential tariffs, duties and other trade barriers and increased competitive promotional activity. Moreover, our success in China depends on our ability to predict, identify, interpret and react to changes in consumer product and sales channel preferences. The shift in consumer demand towards fully imported products and the increased interest in premium-priced products has negatively impacted, and may continue to negatively impact, demand for our locally manufactured products.

Moreover, as consumer demand for fully imported products evolves and we expand direct shipments of such products into the region, ongoing sales channel shifts have, and may continue to, negatively impact our Hong Kong sales. Our Hong Kong sales have traditionally been weighted towards retail sales to non-local consumers from mainland China. Due to regulations, political factors and a decrease in visitors from mainland China, we have experienced a decline in traditional retail sales. This trend has been exacerbated by consumer demand for fully imported products through e-commerce channels. While we have begun to transition to fast growing online sales channels, we have, and may continue to, experience lower than expected sales from Hong Kong to mainland China customers. There can be no assurance as to the future effect of any such risks and uncertainties on our results of operations, financial condition or cash flows.

We are subject to extensive governmental regulations, and it can be costly to comply with these regulations. Changes in governmental regulations or other policies could harm our business.

As an infant nutrition company, our business is subject to extensive government regulation with respect to product manufacturing and labeling, the environment, employee health and safety, hygiene, quality control, advertising, marketing, privacy and tax laws. It can be costly to comply with these regulations. Global regulatory provisions that govern our ability to bring innovative formulas to market have become increasingly stringent with regard to requirements for scientific substantiation for innovation. Similarly, regulatory criteria with respect to safety and quality requirements have become increasingly stringent. A failure to comply with such laws and regulations could subject us to sales bans, product recalls, lawsuits, administrative penalties and other remedies. In addition, changes in laws or regulations could further restrict our actions and significantly increase our cost of doing business, causing our results of operations to be adversely affected. For example, government regulations impacting how and where we manufacture or source product may cause unfavorable cost outlay, pricing pressure, a significant change in our offerings or geographic earnings mix and/or an adverse effect on the related global tax liability. See also “Our China operations are subject to risks that could negatively affect our business.” Barriers or sanctions imposed by countries or international organizations limiting international trade may limit our cross-border activities and sales. Governmental pricing actions may limit our ability to increase, or force us to reduce, prices in various jurisdictions throughout the world. Moreover, regulations that restrict marketing, promotion, availability and sale of our products, interactions with health care professionals, product content (including the regulations related to genetically modified organisms), as well as the manufacture, labeling and intellectual property rights for our products, could have a material adverse impact on our business.

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We may experience liabilities or negative effects on our reputation as a result of real or perceived quality issues, including product recalls, injuries or other claims.
We may 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. Powdered infant formula and powdered milk products are not sterile. A risk of contamination or adulteration exists at each stage of the production cycle, including the purchase and incorporation of raw food materials/ingredients into the final product, the processing and packaging steps in making the product and upon handling and use by health care professionals, hospital personnel and consumers. In the event that our products are found, or are alleged, to have suffered contamination or adulteration, whether or not such products were under our control, our brand reputation and business could be materially adversely affected. Furthermore, whether real or perceived, contamination or spoilage, product mislabeling or product tampering could result in product recalls. No such recalls have been material to our global business. However, a future product recall could be material and have a negative impact on our sales and profitability.
Whether real or perceived, reports of inadequate quality control (with respect to either our products or those of other manufacturers in our segment) could adversely impact our business by contributing to a perceived safety risk throughout the industry. The risk of reputational harm is magnified through rapid, digital dissemination of information through news reports, social media or otherwise. Federal, state and local governments and municipalities could also propose or pass legislation banning the use of our products.

Our business is subject to anti-infant formula policies and legislation in various jurisdictions, many of which may impact our operations and effectiveness.

Certain advocates and governmental and non-governmental organizations (particularly in Hong Kong, Mexico, the Philippines, Thailand, Malaysia, Vietnam, Indonesia, Colombia and Singapore) have advocated for heightened restrictions on the marketing, labeling and even the sale of some pediatric nutrition products as well as trademark restrictions, restrictions on interactions with health care providers and bans on claims for products covering children up to three years of age, including the “Guidance on Ending the Inappropriate Promotion of Foods for Infants and Young Children” that was published by the WHO in 2016. We and other industry participants were unable to persuade the WHO to modify its guidance to recognize the scientifically proven benefits of infant formula products. The WHO guidance is now under consideration for potential legislation in several countries where we market our products. Because our success depends, in large part, on our ability to define the benefits of our products, to effectively communicate our science-based benefits and to connect with our consumers, any such restrictions or prohibitions could have a material adverse effect on our sales, profitability and market share.

Our significant international operations are subject to extensive risk.

For the year ended December 31, 2016, 72% of our net sales were generated outside of the United States. Our significant international operations are subject to a number of risks related to doing business internationally, any of which could materially harm our business. These risks include:
multiple regulatory requirements that could restrict our ability to manufacture, market or sell our products;
foreign currency exchange rates;
compliance with anti-corruption regulations;
differing local product preferences and product requirements;
programs and policies intended to discourage the use of our products;
trade protection measures and exchange controls;
price controls;
unauthorized sales of our products through parallel markets;
restrictions on the transfer of funds to and from foreign countries, including potentially negative tax consequences;
political and economic instability;
changes in foreign medical reimbursement policies and programs; and
diminished protection of intellectual property.

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Our operations and financial results face significant foreign currency exchange exposure.
Our financial performance measured on a U.S. dollar denominated basis is subject to fluctuations in currency exchange rates. A substantial portion of our sales are outside of the U.S. and the U.S. dollar has recently been strengthening in relation to many relevant currencies. These fluctuations could cause material variations in our results of operations, particularly as the U.S. dollar strengthens or does so at an accelerated pace. 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 impacts on our financial statements. Currency rates in some markets could impact our results due to high exchange rate volatility, potentially or actually requiring us to apply inflationary accounting. For example, our business in Argentina may be subject to hyperinflationary accounting in the future, the impact of which on our consolidated financial statements is dependent upon movements in the exchange rate, including devaluations. Operating in high inflationary environments could subject us to additional government actions, devaluations and other business restrictions (see “Item 7A. Quantitative and Qualitative Disclosures About Market Risk”).
Moreover, foreign governments may 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 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.
Economic downturns could limit consumer demand for our products.
The willingness of consumers to purchase premium brand pediatric nutrition products (and, in particular, premium-priced products) depends in part on local economic conditions. For example, consumers may shift their purchases from our higher-priced premium products to lower-priced products or delay having children. During economic downturns, a decrease in the number of working mothers could constrict our customer base, further reducing our sales.
Commodity price increases raise our operating costs and may reduce our profitability.
Our business is particularly vulnerable to commodity price increases in 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. Commodity price volatility is caused by conditions such as fluctuating 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. Increases in commodity costs generally impact our gross margins if we are unable to offset such increases by raising prices, changing our product mix or other efforts. Price increases, in turn, could weaken demand for our product. We monitor our exposure to commodity prices as part of our risk management program and attempt to mitigate risk with commodity hedging activities or contractual agreements; however, continued commodity price volatility and ineffective commodity risk management could lead to lower profitability.
Our business is subject to the risks inherent in global manufacturing and sourcing activities.
We manufacture and source products and materials on a global scale; therefore, we are subject to risks inherent in these activities such as:
raw material, product quality or safety issues, and related shortages or recalls by either us or our third-party suppliers;
supply chain disruptions due to weather, natural disaster, fire, terrorism, strikes, various contagious diseases, changes in government regulations or other factors over which we have no control;
loss or impairment of key global manufacturing sites or a failure to maintain compliant manufacturing practices at either our sites or third-party manufacturing sites;
limits on production and manufacturing capabilities due to physical capacity limitations, regulatory requirements, or export / import restrictions associated with the transport of raw goods or material;
significant difficulties with the highly exacting and complex processes required to manufacture our products, including equipment malfunction, failure to follow specific protocols and the related need to discard product batches; and
strikes, labor disputes, industrial accidents or other occupational health and safety issues.
Reduced manufacturing capacity without adequate redundancy could result in an inability to meet market demand and lost market share. While we have business continuity plans in place for certain manufacturing sites and the supply of raw materials, significant disruption in global manufacturing and sourcing activities for any of the above reasons could interrupt our business and lead to increased costs, lost sales, reputational damage and expense. If not remedied, these factors could have a material adverse effect on our business. Moreover, such significant disruptions may limit our ability to introduce and distribute products, including our existing pipeline of new or improved products, or otherwise take advantage of opportunities in new and existing markets.

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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. We may be unable to manufacture our products in a timely manner, or at all, if any of our third-party suppliers should cease or interrupt production or otherwise fail to supply us, or if the supply agreements are suspended, terminated or otherwise expire without renewal, resulting in a material adverse effect on our business. We also use third-party distributors in many countries throughout the world, including in developing countries. We could experience disruptions that lead to a loss of sales or claims against the Company and irreparable damage to our reputation if any of our third-party distributors either fail to deliver on their commitments in a timely manner or at all (whether due to financial instability, non-compliance with applicable regulations, disruptions in local infrastructure or otherwise) or purport to represent the Company in an unauthorized manner. While we utilize a third-party due diligence process, in light of our global distributor network and the related risks of doing business in developing countries, it is possible that our due diligence process may not successfully identify all relevant risks. See also “Our global operations are subject to political and economic risks of developing countries, and risks associated with doing business in developing markets.” Moreover, if our distribution agreements are suspended, terminated or otherwise expire without renewal, our sales and profitability could be materially adversely affected.
We are increasingly dependent on information technology. Increased IT security threats could pose a risk to our systems, networks, products, solutions, services and data integrity.
We rely on our information technology, administrative and outsourcing systems (including cloud or partner systems and third-party providers) to effectively manage our business data, communications, supply chain, order entry and fulfillment and other business processes.  We also rely on such systems to protect employee and, at times, customer data, including personally identifiable information, which we may collect and retain. These systems may be susceptible to damage or interruption due to system failures, computer viruses, security breaches, telecommunication failures, user error, catastrophic events or other factors.  If our information technology, administrative and outsourcing systems suffer severe damage or interruption or intrusion, and our business continuity plans do not effectively resolve the issue in a timely manner, our business could suffer as we could experience business disruption, transaction errors, processing inefficiencies, a loss of customer or employee data and a loss of sales or customers.  Moreover, increasing global 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.  We invest in training and security technology to protect our data and business processes against risk of data security breach and cyber attack.  There can be no assurance, however, that our efforts will prevent breakdowns or breaches that could adversely affect our business.  Such threats, if they materialize, could compromise confidential information or lead to the improper use of our systems and networks, the manipulation and destruction of data, defective products, production downtimes and operational disruptions.  If we are unable to prevent security breaches or disclosure of confidential information, we may suffer financial and reputational damage.
Our growth depends on certain demographic trends as well as scientific opinion regarding our products.
Our growth plan relies on favorable demographic trends in various markets, including birth rates, rising incomes in emerging markets, increasing number of working mothers and increasing consumer global awareness of the importance of pediatric nutrition. If any of these demographic trends change in an adverse way (due to macroeconomic factors, epidemics such as the Zika virus or other factors beyond our control), our business could be materially impacted. In addition, an adverse change in scientific opinion regarding our products, such as the health benefits of DHA, could materially adversely affect our business.
Our sales and marketing initiatives may be unsuccessful and our sales and marketing practices may be challenged by consumers and competitors, which could harm our business.
We participate in a variety of trade and marketing activities, where permitted. We work with external agencies to create marketing campaigns for consumers, health care professionals and retail sales organizations. We may increase spending on marketing, advertising and new product innovation to maintain or increase market share. The success of these initiatives is subject to risk, including uncertainties about trade and consumer acceptance of our efforts, our ability to communicate our key brand and corporate messages to a growing number of social media users and inventory levels. The success of these initiatives is also subject to potential restrictions on our product marketing (see “—We are subject to extensive governmental regulations, and it can be costly to comply with these regulations. Changes in governmental regulations or other policies could harm our business” and “—Our business is subject to anti-infant formula policies and legislation in various jurisdictions, many of which may impact our operations and effectiveness.”) Further, although our marketing is evidence-based and emphasizes our nutritional science, consumers and competitors have and may challenge certain of our practices by claiming, among other things, false and misleading advertising. A significant claim or judgment against us could result in monetary damages, limit our ability to maintain current sales and marketing practices and negatively impact our profitability. Even if such claim is unsuccessful or unwarranted, the negative publicity surrounding such assertions could negatively impact our business.

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Our global operations are subject to political and economic risks of developing countries, and risks associated with doing business in developing markets.
We operate our business and market our products internationally in more than 50 countries. We focus on increasing our sales and operations in various regions throughout the world, which are less developed, have less stability in legal systems and financial markets, and are potentially more uncertain business environments than the United States, and therefore present greater political, economic and operational risks. We have in place controls, policies and procedures, which include ongoing training of employees with regard to business ethics and many key legal requirements, such as applicable anti-corruption laws (e.g. the United States Foreign Corrupt Practices Act (“FCPA”) and the UK Bribery Act (“UKBA”)). However, there can be no assurance that our employees will adhere to our standards of business conduct and ethics or any of our other policies, applicable anti-corruption laws or other legal requirements. If we fail to enforce our policies and procedures, detect violations in a timely manner or maintain adequate record-keeping and internal accounting practices, we may be subject to regulatory sanctions and suffer damage to our reputation. If we believe or have reason to believe that our employees have or may have violated applicable anti-corruption laws or other laws or regulations, we investigate or have outside counsel investigate the relevant facts and circumstances. If violations are suspected or found, 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.
Our current and historical effective tax rate may not be indicative of future rates.
In light of our global earnings mix, our current and historical effective tax rate may not be indicative of future rates due to changes in domestic and international tax laws (including potential U.S. tax reform), changes in our global earnings mix, the need to repatriate future earnings to the United States to satisfy U.S. cash needs, and changes to our tax positions by taxing authorities in the various jurisdictions in which we operate.  For example, at the present time, the United States generally taxes a company’s foreign earnings upon the repatriation of such earnings, and these tax rules may change in the foreseeable future.  Moreover, given the organization of our business and the locations of our manufacturing operations, cross border transactions among our affiliates are a significant part of the manner in which we operate.  Although we believe that we transact intercompany business in accordance with arms-length principles, taxing authorities may not view such transactions as satisfying such arms-length principles and our tax positions may not be upheld by taxing authorities upon audit of our results. Additionally, the impact of the base erosion and profit shifting (“BEPS”) project undertaken by the Organization for Economic Cooperation and Development (“OECD”) and the European Commission’s investigations into illegal state aid may result in changes to long-standing tax principles which could adversely impact our effective tax rate.
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. The general benefits that we derive from holding the WIC contract in a particular state extend beyond the actual sales made in connection with the WIC program in the relevant state. Such benefits include full price sales from product purchased in excess of the rebated volume and the increased presence of our products in hospitals and at retailers. See “Item 1. Business—The Special Supplemental Nutrition Program for Women, Infants and Children (“WIC”)” for a full description of the WIC program and competitive bidding process.
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 U.S. sales based on the general benefits of holding these contracts. A number of state WIC contracts expire and are subject to renewed bids by the end of 2017, which could negatively impact future results if we are not successful in retaining currently held WIC contracts. Moreover, under recently awarded WIC contracts, trends have been towards higher rebate levels. If these trends continue, the cost of retaining WIC contracts could adversely affect our U.S. sales and/or operating results. Finally, any changes to how the WIC program is administered, any changes to rebate levels and renewal patterns for WIC contracts, any changes to the eligibility requirements and/or overall participation in the WIC program and any failure to maintain fulfillment or other obligations in connection with current WIC contracts could also 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 and our ability to translate these insights into commercially viable new products. This requires significant investment in research and development and testing of new ingredients, formulas and new production processes. The R&D process is expensive and prolonged and entails considerable uncertainty. Products may appear promising in development but fail to reach market within the expected time frame, or at all. We may face significant challenges with regard to a key product launch. Further, products also may fail to achieve commercial viability. Finally, there is no guarantee that our development teams will be able to successfully respond to competitive products that could render our products obsolete. 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 time periods varies considerably from product to product and country to country. Because of the complexities, uncertainties and cost associated with R&D, products that we are currently developing may not complete the development process or

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obtain the regulatory approvals required for us to market such products successfully. New regulations or changes to existing regulations may have a negative effect on innovations in our pipeline, especially late-stage pipeline products. In addition, even when important, clinically demonstrated benefits are achieved in our innovations, regulations in specific countries may not allow us to communicate these benefits, or may severely restrict our ability to do so, even to health care professionals.
Our intellectual property rights are valuable, and any inability to protect them could reduce the value of our products and brands.
Given the importance of brand recognition to our business, we have invested considerable effort in trademark protection for our brands, including the Enfa family of brands. In addition, we rely on a combination of security measures, confidentiality policies, contractual arrangements and trade secret laws to protect our proprietary formulas and other valuable trade secrets. We also rely on patent, copyright and trademark laws to further protect our intellectual property rights. Uncertainties inherent in enforcing our intellectual property rights make the outcome and associated costs difficult to predict. A failure to obtain or adequately protect intellectual property rights, or any change in law or other change that serves to lessen or remove the current legal protections of our intellectual property, may diminish our competitiveness and could materially harm our business. In addition, 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. Despite our efforts to enforce our intellectual property rights on a global basis, counterfeit product or product associated with the illegal use of our intellectual property could cause significant reputational harm.
There can be no assurance that third parties will not assert infringement claims against us or that any infringement claim will not result in costly litigation, substantial damages, the need to refrain from selling our products or the need to obtain a license to use third-party intellectual property (which license we may be unable to obtain on favorable terms, or at all). Even if we prevail against such claims, intellectual property litigation could be costly and time-consuming and could divert the attention of our management and key personnel from our business operations.
If we are not able to successfully implement our productivity program referred to as “Fuel for Growth,” our consolidated results of operations could be negatively affected.
We have implemented a productivity program referred to as “Fuel for Growth” designed to improve operating efficiencies and reduce costs. While we expect this program to improve profitability and create additional investments behind brand building and growth initiatives, there are no assurances that such measures will prove to be successful or that the results we achieve through Fuel for Growth will be consistent with our expectations. We cannot provide assurance that we will realize cost savings, operating efficiencies or earnings growth in connection with Fuel for Growth. As a result, our results of operations could be negatively impacted. Finally, the timing and implementation of these plans require compliance with numerous laws and regulations, including local labor laws, and the failure to comply with such requirements may result in damages, fines and penalties which could adversely affect our business.
Labor disputes may cause work stoppages, strikes and disruptions.
Our manufacturing workforces in Zeeland, Michigan (U.S.); Evansville, Indiana (U.S.); Chonburi, Thailand and Singapore are not unionized. The manufacturing workforces in Guangzhou, China are unionized, but operate without a collective bargaining agreement. The manufacturing workforces in Delicias, Mexico, and São Bernardo do Campo, Brazil, are unionized and covered by collective bargaining agreements that are negotiated annually. The manufacturing workforce and non-supervisory sales force in Makati, Philippines are unionized and covered by a three-year collective bargaining agreement that was renewed effective January 2017. In addition, European Works Councils represent the manufacturing workforce in Nijmegen, the Netherlands, and the commercial organizations in France, Spain and Poland. Any labor disputes, including work stoppages, strikes and disruptions, could have a material adverse impact on our business.
Failure to comply with our debt covenants could have an adverse effect on our ability to obtain future financing at competitive rates and/or our ability to refinance our existing indebtedness.
There are various financial covenants and other restrictions in our debt instruments. If we fail to comply with any of these requirements, the related indebtedness could become due and payable prior to its stated maturity and our ability to obtain additional or alternative financing may be adversely affected. Further, we could incur an adverse impact on our effective tax rate if we need to repatriate earnings to the United States in order to repay such debt.
We may not successfully identify or complete acquisitions, joint ventures or other strategic initiatives.
From time to time, we evaluate potential acquisitions, joint ventures and other strategic initiatives and complete such transactions. We may consider divesting businesses that do not meet our strategic objectives or growth / profitability targets. We may also consider expanding our product portfolio by adding new product categories or expanding our operations through acquisitions of manufacturing and other facilities. For instance, on February 27, 2017, the Company announced that it has reached an agreement to acquire assets from Bega Cheese Limited (“Bega”).  In connection with this transaction, the Company is acquiring from Bega a spray dryer and a finishing plant in Australia and entering into a service agreement to support the operation of those assets. The aggregate consideration

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for this asset purchase is approximately AUD $200 million. The Company expects the transaction to close in the second quarter of 2017.
These activities may present financial, managerial, and operational risk including diversion of management’s attention from our existing business, business integration challenges, effective control implementation across a diverse employee population, the failure to achieve anticipated synergies, unanticipated liabilities and potential disputes. These activities may also include inherent risks associated with entering a geographic area which has less political, social or economic stability, less developed infrastructure and legal systems and in which we have no or limited prior operating experience. In addition, we may not be able to complete desirable transactions or initiatives for various financial, regulatory, technological or other reasons. Any of these factors could materially and adversely affect our financial condition and operating results.
Risks Related to Our Relationship with Our Former Parent
If our split-off from 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.
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 through the relevant audit years, we believe that such payment could be material and could have a material adverse effect on our financial condition and operating results.
Item 1B.    UNRESOLVED STAFF COMMENTS.
None.


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Item 2.    PROPERTIES.
Our corporate headquarters are located in Glenview, Illinois, where we lease office space. We have committed to a long-term lease obligation related to a planned relocation of our corporate headquarters to Chicago, Illinois in the first half of 2017.
We maintain our global supply chain and R&D headquarters in Evansville, Indiana, where we own office, operations and laboratory buildings comprising approximately 1,269,000 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.
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
 
698,773
 
All segments
 
Owned
Evansville, Indiana, United States
 
458,595
 
All segments
 
Owned
Nijmegen, The Netherlands
 
205,134
 
All segments
 
Owned
Delicias, Mexico
 
134,549
 
North America / Europe
Latin America
 
Owned
São Bernardo do Campo, Brazil
 
64,583
 
Latin America
 
Leased
Singapore
 
466,077
 
Asia
 
  Owned(1)
Chonburi, Thailand
 
158,456
 
Asia
 
Owned
Guangzhou, China
 
149,944
 
Asia
 
  Owned(1)
Makati, Philippines
 
85,487
 
Asia
 
  Owned(1)
(1) 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. As of December 31, 2016, we were still named as a “potentially responsible party,” or were involved in investigation and remediation, at one third-party disposal site. With regard to such matter, the substantive issues have been resolved, and management believes that any actual or expected additional remediation cost related to such matter, individually or in the aggregate, would be immaterial.
Litigation Related to the Merger
On February 14, 2017, a stockholder of the Company filed a purported stockholder class action lawsuit in Cook County, Illinois, captioned Kirkham v. Altschuler, et al., 2017-CH-02109. The defendants are the Company, its board of directors, Reckitt Benckiser and Merger Sub. The lawsuit alleges that the Company’s board of directors violated their fiduciary duties and that the Company, Reckitt Benckiser and Merger Sub aided and abetted such breaches, in each case in connection with the transactions contemplated by the Merger Agreement. The lawsuit seeks, among other things, to enjoin consummation of the Merger. The Company and its directors intend to vigorously defend against the allegations in the complaint.
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 impact on our business or financial condition, results of operations or cash flows.

Item 4.    MINE SAFETY DISCLOSURES.
Not applicable.

15



Executive Officers of the Registrant
Set forth below are the names each of the Company’s executive officers and their ages and positions as of February 27, 2017. Also included below is biographical information relating to each of the Company’s executive officers. Each of the executive officers is elected by and serves at the pleasure of the board of directors.
Name
 
Position(s)
Peter Kasper Jakobsen
President and Chief Executive Officer; Director
Michel Cup
Executive Vice President and Chief Financial Officer
Charles M. Urbain
Executive Vice President and Chief Operating Officer
Patrick M. Sheller
Senior Vice President, General Counsel and Secretary
James Jeffrey Jobe
Senior Vice President, Global Operations
Dirk Hondmann, Ph.D. 
Chief Scientific Officer
Ian E. Ormesher
Senior Vice President, Global Human Resources
James E. Shiah
Senior Vice President, Finance and Controller

Peter Kasper Jakobsen
 
Age 54
Mr. Jakobsen has been our President and Chief Executive Officer since April 2013, prior to which he served as the Company’s Executive Vice President and Chief Operating Officer since January 2012. Mr. Jakobsen previously had been our President, Americas from January 2009 through December 2011 and has been employed continuously by Mead Johnson since March 1998 in various capacities. From October 2006 to January 2009, he served as Senior Vice President, Asia Pacific. From February 2004 to October 2006, Mr. Jakobsen served as Vice President, South Asia, and from June 2001 to June 2004, he served as General Manager, Philippines. He currently serves as a member of the Company’s Board of Directors and as a member of the board of directors of SC Johnson.
Michel Cup
 
Age 47
Mr. Cup has been our Executive Vice President and Chief Financial Officer since September 2015. Before joining the Company, through January 2015, Mr. Cup was the Chief Financial Officer of D.E Master Blenders 1753, an international coffee and tea business headquartered in the Netherlands. Prior to joining D.E Master Blenders 1753, Mr. Cup served as Chief Financial Officer of Provimi from 2010-2011 and as Finance Director of Akzonobel’s Decorative Paints business in Europe from 2009-2010. Mr. Cup has also held senior finance roles in Numico’s Baby and Medical Nutrition business from 1999-2008, including CFO Baby Nutrition Asia Pacific. Mr. Cup began his career with Deloitte where he held various audit and accounting roles from 1993-1999.
Charles M. Urbain
 
Age 62
Mr. Urbain has been the Company’s Executive Vice President and Chief Operating Officer since September 2015. He previously served as the Interim Chief Financial Officer from March 2015 through August 2015, as well as serving as the Interim Controller and Treasurer from May 2015 through August 2015. Before holding these positions, Mr. Urbain had served as our Senior Vice President, Stakeholder Relations and Chief Development Officer since January 2012, which role included leadership of the Company’s global human resources function. Mr. Urbain previously had been our President, Asia and Europe from January 2009 through December 2011 and has been employed continuously by Mead Johnson or BMS since February 1987 in various capacities. From June 2008 to January 2009, he served as Senior Vice President, North America, Latin America and Europe. From June 2007 to June 2008, Mr. Urbain served as Senior Vice President, North America and Europe. From January 2004 to June 2007, Mr. Urbain served as Senior Vice President, International, and from January 2001 to January 2004, he served as Senior Vice President, Latin America, Canada and Europe. From January 1999 to December 2000, Mr. Urbain served as Chief Financial Officer of the Mead Johnson division of BMS.
Patrick M. Sheller
 
Age 55
Mr. Sheller has been our Senior Vice President, General Counsel and Secretary since January 2015. Prior to joining the Company, Mr. Sheller served as Senior Vice President, General Counsel, Secretary and Chief Administrative Officer of Eastman Kodak Company (‘‘Kodak’’). He served as Kodak’s General Counsel since 2011, as its Chief Administrative Officer since 2012 and as Secretary to Kodak’s Board of Directors since 2009. In 2011, Mr. Sheller was named Kodak’s Deputy General Counsel, and from 2005 to 2011, he served as Kodak’s Chief Compliance Officer. Prior to that time, Mr. Sheller held various senior counsel roles with Kodak, including Chief Antitrust Counsel, division counsel to the Health Group and international commercial counsel to the Europe, Africa & Middle East Region. He also held operational roles in Kodak’s Health Group as Director of Strategic Planning and Business Development of the Health Care Information

16



Systems business and Director of Operations for the Health Informatics business. Before joining Kodak, Mr. Sheller was in private law practice with the firm of McKenna Conner & Cuneo (now Dentons) and served as an attorney advisor with the Federal Trade Commission, both in Washington, D.C.
James Jeffrey Jobe
 
Age 57
Mr. Jobe has been our Senior Vice President, Global Operations since December 2016, before which time he served as our Senior Vice President, Technical Operations since October 2014. Previously, Mr. Jobe served as our Senior Vice President, Global Supply Chain since November 2005. Mr. Jobe has been continuously employed by Mead Johnson since 1988. From May 2003 to November 2005, Mr. Jobe served as Senior Director, North America Supply Chain. From March 2000 to May 2003, Mr. Jobe served as Senior Director, International Supply Chain.

Dirk Hondmann, Ph.D.
 
Age 53
Dr. Hondmann has been our Chief Scientific Officer since October 2014, prior to which time he served as our Senior Vice President, Global Research and Development since joining Mead Johnson in October 2005. From October 2002 to October 2005, Mr. Hondmann served as vice president, research and development of Slimfast, an affiliate of the Unilever Group, an international manufacturer of food, home care, and personal care products.
Ian E. Ormesher
 
Age 54
Mr. Ormesher has been our Senior Vice President, Global Human Resources since September 2014. Before joining the Company, Mr. Ormesher served as the Vice President, Human Resources - Western Europe at Carlsberg Breweries A/S from October 2012 to September 2014. From January 2011 to September 2012, he was the Vice President, Human Resources - Asia at Carlsberg Breweries. Prior to that time, Mr. Ormesher spent 12 years with SABMiller, where he served in a variety of HR and organizational development roles of increasing responsibility, including as HR Director of its business in China, and ultimately as its Group Marketing Capability Director from October 2008 to January 2011.
James E. Shiah
 
Age 57
Mr. Shiah has been our Senior Vice President, Finance and Controller since December 2015, prior to which time he served as our Senior Vice President, Finance since June 2015. Before holding this position, Mr. Shiah served as the Senior Vice President, Chief Accounting and Compliance Officer of Coty Inc. from 2011 to 2014. In this position, Mr. Shiah was Coty’s principal accounting officer responsible for overseeing various activities including financial reporting, systems of internal control and other compliance programs. Mr. Shiah was Coty’s Senior Vice President Finance and Global Controller from 2006 to 2011 and its Vice President and Corporate Controller from 2001 to 2006. Mr. Shiah began his career at Deloitte & Touche and is a Certified Public Accountant.


17



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
2015
 
 
 
 
 
First Quarter
$
105.45
 
 
$
97.09
 
 
$
0.4125
 
Second Quarter
$
104.34
 
 
$
89.26
 
 
$
0.4125
 
Third Quarter
$
91.89
 
 
$
69.20
 
 
$
0.4125
 
Fourth Quarter
$
84.49
 
 
$
69.31
 
 
$
0.4125
 
2016
 
 
 
 
 
 
 
 
 
 
 
First Quarter
$
85.25
 
 
$
65.53
 
 
$
0.4125
 
Second Quarter
$
92.01
 
 
$
81.53
 
 
$
0.4125
 
Third Quarter
$
94.40
 
 
$
76.26
 
 
$
0.4125
 
Fourth Quarter
$
81.91
 
 
$
70.25
 
 
$
0.4125
 

Under the Merger Agreement described in “Part I. Item 1. Business—Merger Agreement,” we are prohibited from declaring, setting aside or paying any dividend or other distribution in respect of our common stock or other securities, except for our regular quarterly dividend of up to $0.4125 per share per quarter with record and payment dates consistent with the quarterly record and payment dates in 2016.
Holders of Common Stock
The number of record holders of our common stock at December 31, 2016 was 1,065. 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, 2016:
(Dollars in millions, except per share data)

Period
Total Number of
Shares Purchased
(1)
Average Price
Paid per Share
(2)
Total Number of
Shares Purchased
as Part of Publicly
Announced Programs
Approximate Dollar
 Value of Shares
that May Yet Be
Purchased Under
the Programs
(3)
October 1, 2016 through October 31, 2016

$


$
500.0

November 1, 2016 through November 30, 2016
1,380,155

72.46
 
1,380,155

400.0
 
December 1, 2016 through December 31, 2016

 

400.0
 
 
1,380,155

$
72.46

1,380,155

$
400.0


(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 and discounts.

18



(3)
On October 22, 2015, the Company announced that, on October 20, 2015, its board of directors approved a share repurchase authorization of $1,500.0 million of the Company’s common stock (the “2015 Authorization”). The 2015 Authorization does not have an expiration date. As of December 31, 2016, the Company had $400.0 million remaining available under the 2015 Authorization.
Under the Merger Agreement described in “Part I. Item 1. Business—Merger Agreement,” we are prohibited from redeeming, repurchasing or otherwise acquiring or offering to redeem, repurchase, or otherwise acquire our common stock or other securities, other than shares surrendered to us to pay the exercise price in connection with the exercise of employee stock options and shares surrendered to us 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.
Performance Graph
Comparison of Cumulative Total Return
The following graph compares the cumulative total return on an investment in our common stock with the cumulative total return on an investment in each of the Standard & Poor’s 500 Stock Index (“S&P 500 Index”) and the S&P 500 Packaged Foods Index. The graph assumes that the value of the investment in our common stock and in each index was $100 and that all dividends were reinvested.
Comparison of 5-Years Cumulative Total Return
Among Mead Johnson Nutrition Company, the S&P 500 Index
and the S&P 500 Packaged Foods Index
Assumes Initial Investment of $100
finalperformancegraph.jpg
 
12/31/2011
12/31/2012
12/31/2013
12/31/2014
12/31/2015
12/31/2016
Mead Johnson Nutrition Company
100.00
97.39
126.00
153.73
123.06
112.66
S&P 500 Stock Index
100.00
116.00
153.57
174.60
177.01
198.18
S&P 500 Packaged Foods Index
100.00
110.39
144.43
161.07
189.07
206.34



19



Item 6.    SELECTED FINANCIAL DATA.
  
For the Years Ended December 31,
(Dollars in millions, except per share data) 
2016
 
2015
 
2014
 
2013
 
2012
Net Sales
$
3,742.7

 
$
4,071.3

 
$
4,409.3

 
$
4,200.7

 
$
3,901.3

Earnings before Interest and Income Taxes
$
818.7

 
$
936.2

 
$
988.3

 
$
974.9

 
$
835.3

Interest Expense—net
$
105.4

 
$
65.0

 
$
60.3

 
$
50.6

 
$
65.0

Net Earnings Attributable to Shareholders
$
544.9

 
$
653.5

 
$
719.8

 
$
683.8

 
$
580.4

Basic Earnings Per Share Attributable to Shareholders
$
2.93

 
$
3.28

 
$
3.55

 
$
3.37

 
$
2.84

Diluted Earnings Per Share Attributable to Shareholders
$
2.92

 
$
3.27

 
$
3.54

 
$
3.36

 
$
2.83

Cash Dividends Declared Per Share
$
1.65

 
$
1.65

 
$
1.50

 
$
1.36

 
$
1.20

Weighted-average Shares - basic
185.5

 
199.0

 
202.1

 
202.4

 
203.6

Weighted-average Shares - diluted
185.8

 
199.4

 
202.7

 
203.1

 
204.3

Depreciation and Amortization
$
99.6

 
$
99.1

 
$
91.6

 
$
83.1

 
$
76.9

Cash Paid for Capital Expenditures
$
149.0

 
$
173.7

 
$
186.6

 
$
240.4

 
$
124.4

  
As of December 31,
(Dollars in millions) 
2016
 
2015
 
2014
 
2013
 
2012
Total Assets
$
4,087.7

 
$
3,998.1

 
$
3,763.8

 
$
3,465.7

 
$
3,247.2

Short-Term Borrowings and Current Portion of Long-Term Debt
$
3.9

 
$
3.0

 
$
4.1

 
$
507.6

 
$
187.0

Long-Term Debt
$
2,976.2

 
$
2,981.0

 
$
1,492.8

 
$
1,002.0

 
$
1,514.7

Total Equity/(Deficit)
$
(472.1
)
 
$
(592.5
)
 
$
583.8

 
$
300.5

 
$
29.0



20




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 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 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 category-defining products across our product portfolio. We operate in four geographies which represent our operating segments: Asia, North America, Latin America and Europe. Due to similarities between North America and Europe, we aggregated these two operating segments into one reportable segment. As a result, the Company has three reportable segments: Asia, Latin America and North America/Europe.

Our financial results continue to be significantly affected by changes in foreign currency exchange rates. With a global footprint, we have faced challenges throughout 2016 from weakness in many economies throughout Asia and Latin America and the devaluation of their respective currencies. Adverse foreign exchange impacts were prominent in markets such as China, Mexico and Argentina. We remain cautious of the impact of such exchange rates on our reported results because a substantial portion of our business is outside of the U.S. and the U.S. dollar has recently been strengthening in relation to many relevant currencies. We have implemented certain measures to offset some of the impact of adverse foreign exchange. However, if the U.S. dollar continues to strengthen or does so at an accelerated pace, we may experience a greater impact to our business.

Merger Agreement
On February 10, 2017, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Reckitt Benckiser Group plc, a company incorporated in England and Wales (“Reckitt Benckiser”), and Marigold Merger Sub, Inc., a Delaware corporation and a wholly owned indirect subsidiary of Reckitt Benckiser (“Merger Sub”), pursuant to which Reckitt Benckiser will indirectly acquire the Company by means of a merger of Merger Sub with and into the Company on the terms and subject to the conditions set forth in the Merger Agreement (the “Merger”). The Merger Agreement and the consummation of the transactions contemplated by the Merger Agreement have been unanimously approved by the Company’s board of directors.
Consummation of the Merger is subject to the satisfaction or waiver of certain customary closing conditions, including, among others: (i) the affirmative vote of the holders of a majority of the Company's outstanding shares of common stock; (ii) the affirmative vote of a simple majority of Reckitt Benckiser's shareholders at a shareholder meeting; (iii) the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the receipt of certain other non-United States regulatory approvals required to consummate the Merger; and (iv) in the case of Reckitt Benckiser's obligations to consummate the Merger, the absence of a Company Material Adverse Effect (as defined in the Merger Agreement). Reckitt Benckiser and Merger Sub's respective obligations to consummate the Merger are not subject to any financing condition or other contingency.

Additional information about the Merger Agreement is set forth in our Current Report on Form 8-K filed with the SEC on February 13, 2017.


21



Results of Operations
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Summary of Results:
 
 
 
 
 
 
 
% of Net Sales
(Dollars in millions, except per share data)
2016
 
2015
 
% Change
 
2016
 
2015
Net Sales
$
3,742.7

 
$
4,071.3

 
(8)%
 
 
 
 
Earnings before Interest and Income Taxes
818.7

 
936.2

 
(13)%
 
22%
 
23%
Interest Expense—net
105.4

 
65.0

 
62%
 
3%
 
2%
Earnings before Income Taxes
713.3

 
871.2

 
(18)%
 
19%
 
21%
Provision for Income Taxes
164.0

 
215.9

 
(24)%
 
4%
 
5%
    Effective Tax Rate
23.0
%
 
24.8
%
 
 
 
 
 
 
Net Earnings
549.3

 
655.3

 
(16)%
 
15%
 
16%
Less: Net Earnings Attributable to Noncontrolling Interests
4.4

 
1.8

 
n/m
 
—%
 
—%
Net Earnings Attributable to Shareholders
544.9

 
653.5

 
(17)%
 
15%
 
16%
Weighted-Average Common Shares—Diluted
185.8

 
199.4

 
 
 
 
 
 
Earnings per Common Share—Diluted
$
2.92

 
$
3.27

 
(11)%
 
 
 
 

The results for the years ended December 31, 2016 and 2015 included several items that affected the comparability of these results. These items include significant expenses/(income) not indicative of underlying operating results (“Specified Items”) and are listed in the table below:
 
 
Years Ended December 31,
(Dollars in millions)
 
2016
 
2015
Venezuela long-lived asset impairments, foreign exchange losses and other related charges
 
$
81.8

 
$

Restructuring, severance and other related costs
 
30.5

 
28.3

Pension and other post-employment adjustments
 
(7.4
)
 
8.2

Settlement related to the China investigation
 

 
12.0

Legal, settlements and related costs
 
0.2

 
1.7

Marketable securities (gain)/loss
 

 
(5.6
)
Other
 
3.0

 

Income tax impact on Specified Items
 
(17.9
)
 
(11.2
)

For the year ended December 31, 2016, Specified Items included $81.8 million of long-lived asset impairment charges, foreign exchange losses and other asset write-offs in Venezuela. Restructuring, severance and other related costs include $29.2 million of charges related to the Company’s ongoing Fuel for Growth initiatives. Specified Items also includes gains of $7.4 million related to the remeasurement of defined benefit pension and other post-employment benefit plans. The remeasurement gains were driven by a $5.5 million gain on remeasurement of the Mead Johnson & Company Retirement Plan in the United States (“U.S. Pension Plan”) net liability due to higher than expected asset returns. Within Other, the Company recognized charges associated with relocation and consolidation of administrative offices. The income tax on Specified Items includes a $14.7 million tax benefit relating to the forgiveness of Venezuela’s intercompany payables.

For the year ended December 31, 2015, Specified Items included restructuring charges of $25.1 million related to the Company’s ongoing Fuel for Growth initiatives, payments of $12.0 million made in connection with the SEC settlement disclosed by the Company in July 2015, losses of $8.2 million related to the remeasurement of defined benefit pension and other post-employment benefit plans and a $5.6 million gain due to the sale of marketable securities. The remeasurement losses of pension and other post-employment benefit plans were mainly driven by the U.S. Pension Plan as lower than expected asset returns of $16.4 million only partially offset by a $12.1 million gain from an increase in discount rates.

For additional information on these Specified Items, see “Item 8. Financial Statements and Supplementary Data—Note 6. Restructuring, —Note 8. Pension and Other Post-Employment Benefit Plans, —Note 17. Marketable Securities, and —Note 20. Venezuela Currency Matters.”

It is the Company’s policy to consistently include gains and losses, as incurred, related to the remeasurement of defined benefit pension and post-employment benefit plans within Specified Items. The remeasurement reflects changes in the pension assets and liabilities above what was estimated and included in periodic costs. Factors beyond our control such as changes in discount rates, market volatility and mortality assumptions drive the remeasurement amount. Additionally, the majority of our pension and post-

22



employment plans are frozen, and therefore the benefits provided to participants in the plans are not related to our underlying operations.

Net Sales
The Company recognizes 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 gross sales to net sales is as follows:

 
 
Years Ended December 31,
 
% of Gross Sales
(Dollars in millions)
 
2016
 
2015
 
2016
 
2015
Gross Sales
 
$
5,152.6

 
$
5,411.9

 
100%
 
100%
Gross-to-Net Sales Adjustments
 
 

 
 

 
 
 
 
WIC Rebates
 
751.5

 
763.0

 
14%
 
14%
Sales Discounts
 
400.7

 
320.6

 
8%
 
6%
Returns
 
94.2

 
89.8

 
2%
 
2%
Other (including Cash Discounts and Coupons)
 
163.5

 
167.2

 
3%
 
3%
Total Gross-to-Net Sales Adjustments
 
1,409.9

 
1,340.6

 
27%
 
25%
Total Net Sales
 
$
3,742.7

 
$
4,071.3

 
73%
 
75%

The total gross-to-net sales adjustments increased as a percentage of gross sales to 27% in 2016 from 25% in 2015, primarily driven by an increase in sales discounts. Sales discounts increased due to trade investments supporting product launches and channel investments in China.
Net sales by reportable segment and principle product category are shown in the tables below:
 
 
Years Ended December 31,
 
 
 
% Change Due to
(Dollars in millions)
 
2016
 
2015
 
% Change
 
Volume
 
Price/Mix
 
Foreign
Exchange
Asia
 
$
1,856.9

 
$
2,039.0

 
(9)%
 
(6)%
 
1%
 
(4)%
Latin America
 
643.7

 
757.1

 
(15)%
 
(10)%
 
9%
 
(14)%
North America/Europe
 
1,242.1

 
1,275.2

 
(3)%
 
(4)%
 
2%
 
(1)%
Net Sales
 
$
3,742.7

 
$
4,071.3

 
(8)%
 
(6)%
 
3%
 
(5)%
 
 
Years Ended December 31,
 
 
 
% of Net Sales
(Dollars in millions)
 
2016
 
2015
 
% Change
 
2016
 
2015
Infant formula
 
$
2,203.9

 
$
2,407.1

 
(8)%
 
59%
 
59%
Children’s nutrition
 
1,487.2

 
1,593.1

 
(7)%
 
40%
 
39%
Other
 
51.6

 
71.1

 
(27)%
 
1%
 
2%
Net Sales
 
$
3,742.7

 
$
4,071.3

 
(8)%
 
100%
 
100%
Asia
Volume declined 6% in Asia. In China, sales volume represented a 3% decline in the segment as reduced demand for locally manufactured products and a shift to e-commerce in the Hong Kong channel due to regulation changes were only partially offset by improved market share within growing channels and the successful launch of imported premium products. In addition, the Philippines had a 3% adverse impact on sales volume in the segment, two-thirds of which was driven by market share losses and another one-third of which was due to the adverse effect of retail inventory adjustments.

Price/Mix increased 1% in Asia due to price increases in a number of emerging markets, most notably the Philippines. In China, a 2% benefit from favorable sales mix due to newly launched product innovation offset a 2% adverse impact from increased trade investment.

Foreign exchange adversely impacted sales in Asia by 4%, approximately half of which was due to currency devaluation in China with the remaining decrease across the other markets in the segment.


23



Latin America

Volume declined 10% in Latin America. Venezuela contributed 6% to this volume decline following the Company’s 2015 decision to suspend shipments to distribution channels in Venezuela. This decision was made due to constraints placed by the Venezuelan government on the release of U.S. dollars to settle intercompany payables associated with product shipments. Macroeconomic challenges in Ecuador and Brazil contributed a 2% volume loss, in aggregate, to the segment.

Price/Mix increased 9% in Latin America as a result of price increases, most notably in Mexico and Argentina which each contributed a 3% increase in segment sales.

Foreign exchange adversely impacted sales in Latin America by 14% due to a strengthening U.S. dollar, most notably 6% in Mexico and 5% in Argentina.

North America/Europe
Volume declined 4% in North America/Europe. The U.S. contributed 5% to this volume decline due to market share weakness and increased promotional activities by competitors. Canada contributed a 1% gain in segment sales volume due to continued market share gains in both infant and children’s products.

Price increased 2% in North America/Europe due to favorable pricing driven three-fourths by the U.S. and one-fourth by Canada.

Foreign exchange adversely impacted sales in North America/Europe by 1% due to currency devaluations in Canada and the U.K.

The U.S. business is subject to variability from changes to our participation in the WIC program described in “Item 1. Business— The Special Supplemental Nutrition Program for Women, Infants and Children (“WIC”).” Such variability includes changes in renewal patterns, rebate levels, product presence and volume of full price sales from product purchased in excess of the rebated volume. See “Item 1A. Risk Factors—“Changes in WIC, or our participation in it, could materially adversely affect our business.

Gross Profit
 
 
Years Ended December 31,
 
 
(Dollars in millions)
 
2016
 
2015
 
% Change
Net Sales
 
$
3,742.7

 
$
4,071.3

 
(8
)%
Cost of Products Sold
 
1,341.0

 
1,455.3

 
(8
)%
Gross Profit
 
$
2,401.7

 
$
2,616.0

 
(8
)%
Gross Margin
 
64.2
%
 
64.3
%
 
 


Gross margin percentage decreased slightly in 2016 compared to 2015. Gross margin was favorably impacted by lower dairy costs (+2.9%), which was offset by sales of less profitable products (-2.0%) and adverse impact from foreign exchange (-1.2%).
Operating Expenses
 
 
Years Ended December 31,
 
 
 
% of Net Sales
(Dollars in millions)
 
2016
 
2015
 
% Change
 
2016
 
2015
Selling, General and Administrative
 
$
766.5

 
$
890.6

 
(14
)%
 
20
%
 
22
%
Advertising and Promotion
 
627.0

 
641.8

 
(2
)%
 
17
%
 
16
%
Research and Development
 
97.4

 
108.4

 
(10
)%
 
3
%
 
3
%
Other (Income)/Expenses—net
 
92.1

 
39.0

 
n/m

 
2
%
 
1
%

Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased in 2016 compared to 2015 due to approximately $80 million of incremental savings generated from the Fuel for Growth program in 2016, primarily from streamlined use of third-party services and lower headcount. Additionally, expenses were lower as a result of a $40.2 million benefit from foreign exchange.

24



Advertising and Promotion Expenses
Advertising and promotion expenses decreased slightly in 2016 compared to 2015 mainly as a result of favorable foreign exchange of $27.2 million and lower spending of $8.6 million in North America/Europe and $7.0 million in Latin America in 2016. This decrease was offset by increased spending of $28.0 million in Asia, as investments made to increase consumer awareness of Enfinitas, an enhanced digital presence and support channel investments in China of $37.2 million were offset by more lower investments across other Asian markets.
Research and Development Expenses
Research and development expenses decreased in 2016 compared to 2015 mainly due to approximately $9 million of incremental Fuel for Growth savings in 2016 from increased efficiencies in the use of third-party services and lower headcount.
Other (Income)/Expenses—net
 
 
Years Ended December 31,
(Dollars in millions)
 
2016
 
2015
Venezuela long-lived asset impairments
 
$
45.9

 
$

Foreign exchange (gains)/losses—net
 
18.8

 
6.3

Restructuring, severance and other related costs—net
 
29.1

 
18.0

(Gain)/loss on asset disposals
 

 
9.0

Marketable securities (gain)/loss
 

 
(5.6
)
Legal, settlements and other—net
 
(1.7
)
 
11.3

Other (income)/expenses—net
 
$
92.1

 
$
39.0


Foreign exchange (gains)/losses - net includes $32.9 million of currency losses within our subsidiary in Venezuela. See “Item 8. Financial Statements and Supplementary Data—Note 10. Other (Income)/Expenses - Net, —Note 20. Venezuela Currency Matters, and —Note 6. Restructuring” for additional information.
Earnings before Interest and Income Taxes
EBIT from the three reportable segments, Asia, Latin America and North America/Europe, is reduced by Corporate and Other expenses. Corporate and Other consists of unallocated global business support activities, including research and development, marketing, supply chain costs, and general and administrative expenses; net actuarial gains and losses related to defined benefit pension and other post-employment benefit plans; and income or expenses incurred within the operating segments that are not reflective of underlying operations and affect the comparability of the operating segments’ results.
 
 
Years Ended December 31,
 
 
 
% of Net Sales
(Dollars in millions)
 
2016
 
2015
 
% Change
 
2016
 
2015
Asia
 
$
559.3

 
$
682.0

 
(18)%
 
30%
 
33%
Latin America
 
156.7

 
175.2

 
(11)%
 
24%
 
23%
North America/Europe
 
380.3

 
361.8

 
5%
 
31%
 
28%
Corporate and Other
 
(277.6
)
 
(282.8
)
 
2%
 
n/m
 
n/m
EBIT
 
$
818.7

 
$
936.2

 
(13)%
 
22%
 
23%
EBIT in Asia decreased by $122.7 million in 2016 compared to 2015 partially due to $43.2 million of adverse foreign exchange rates and lower sales volumes which resulted in lower gross profit of $42.2 million. Also impacting gross profit was disadvantageous sales mix which had an adverse impact of $32.1 million and increased manufacturing costs of $18.5 million, partially offset by lower dairy and commodity costs of $42.0 million. Higher advertising and promotion spending of $28.0 million was primarily related to increasing consumer awareness of Enfinitas and channel investments in China. The decrease in EBIT was partially offset by fixed asset write-offs of $8.4 million in 2015 as the Company optimized the supply chain network in Asia which did not recur in 2016.

EBIT in Latin America decreased by $18.5 million in 2016 compared to 2015 mainly due to $36.4 million of adverse foreign exchange rates. Lower earnings related to a $48.0 million reduction in sales in Venezuela as a result of suspended shipments were offset by price increases in Mexico and Argentina of $47.2 million, lower dairy costs of $10.5 million, reduced advertising and promotion spending of $7.0 million and approximately $4 million of incremental savings from Fuel for Growth in 2016.

EBIT in North America/Europe increased by $18.5 million in 2016 compared to 2015. The increase was primarily due to gross margin improvements from lower dairy and commodity costs of $14.9 million and manufacturing related productivities of $21.5

25



million, as well as Fuel for Growth savings on operating expenses of approximately $14 million, reduced advertising and promotion expenditures of $8.6 million and lower incentive compensation of $7.0 million. These increases more than offset the reduced gross profits from lower sales volume of $31.9 million as well as adverse changes in foreign exchange rates of $15.2 million.
Corporate and Other expenses decreased by $5.2 million. Items resulting in lower Corporate and Other expenses include approximately $60 million of incremental savings from Fuel for Growth in 2016, $7.4 actuarial gains in 2016 related to the remeasurement of defined benefit pension and other post-employment benefit plans compared to $8.2 million actuarial losses in 2015, and $12.0 million of payments in connection with an SEC settlement in 2015 which did not recur in 2016. The decrease in Corporate and Other expenses was partially offset by $81.8 million of long-lived asset impairment charges, foreign exchange losses and other asset write-offs in Venezuela in 2016.
Interest Expense—net
Net interest expense increased $40.4 million in 2016 compared to 2015 primarily driven by $46.4 million of interest expense on the $750.0 million of 3.0% Senior Notes due November 15, 2020 (the “2020 Notes”) and the $750.0 million of 4.125% Senior Notes due November 15, 2025 (the “2025 Notes”), both issued in November 2015. Partially offsetting the interest expense from these notes is a benefit from an interest rate swap on the 2020 Notes which reduced interest expense by $6.8 million.
Income Taxes
The Company’s Effective Tax Rate (“ETR”) for both the 2016 and 2015 periods differs from the statutory tax rate predominantly due to the favorable impact of tax rulings and agreements in various foreign jurisdictions. See “Item 8. Financial Statements and Supplementary Data—Note 4. Income Taxes” for additional information. The ETR for the year ended December 31, 2016 and 2015 was 23.0% and 24.8%, respectively. The ETR decrease was driven 5.2% by tax credits from the repatriation of foreign earnings to the United States, offset 2.8% by the Company’s Venezuelan subsidiary which incurred a remeasurement loss on its monetary assets and an impairment charge on its long-lived assets in 2016 (both of which provided no tax benefit - see “Item 8. Financial Statements and Supplementary Data—Note 20. Venezuela Currency Matters” for additional information) and 0.6% from a series of additional items which are insignificant both individually and in the aggregate.
Net Earnings Attributable to Noncontrolling Interests
Net earnings attributable to noncontrolling interests consists of a 11%, 10% and 10% interest held by third parties in our operating entities in China, Argentina and Indonesia, respectively. See “Item 8. Financial Statements and Supplementary Data—Note 18. Equity” for additional information.
Net Earnings Attributable to Shareholders
Net earnings attributable to shareholders for the year ended December 31, 2016 decreased 17% to $544.9 million compared with the year ended December 31, 2015.


26



Results of Operations
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
Summary of Results:
 
 
 
 
 
 
 
% of Net Sales
(Dollars in millions, except per share data)
2015
 
2014
 
% Change
 
2015
 
2014
Net Sales
$
4,071.3

 
$
4,409.3

 
(8)%
 
 
 
 
Earnings before Interest and Income Taxes
936.2

 
988.3

 
(5)%
 
23%
 
22%
Interest Expense—net
65.0

 
60.3

 
8%
 
2%
 
1%
Earnings before Income Taxes
871.2

 
928.0

 
(6)%
 
21%
 
21%
Provision for Income Taxes
215.9

 
199.2

 
8%
 
5%
 
5%
    Effective Tax Rate
24.8
%
 
21.5
%
 
 
 
 
 
 
Net Earnings
655.3

 
728.8

 
(10)%
 
16%
 
17%
Less: Net Earnings Attributable to Noncontrolling Interests
1.8

 
9.0

 
(80)%
 
—%
 
(1)%
Net Earnings Attributable to Shareholders
653.5

 
719.8

 
(9)%
 
16%
 
16%
Weighted-Average Common Shares— Diluted
199.4

 
202.7

 
 
 
 
 
 
Earnings per Common Share—Diluted
$
3.27

 
$
3.54

 
(8)%
 
 
 
 

The results for the years ended December 31, 2015 and 2014 included Specified Items and are listed in the table below:
 
 
Years Ended December 31,
(Dollars in millions)
 
2015
 
2014
Restructuring, severance and other related costs
 
$
28.3

 
$
1.5

Settlement related to the China investigation
 
12.0

 

Pension and other post-employment adjustments
 
8.2

 
51.5

Legal, settlements and related costs
 
1.7

 
10.3

Marketable securities (gain)/loss
 
(5.6
)
 

Income tax impact on Specified Items
 
(11.2
)
 
(23.7
)

For the year ended December 31, 2015, Specified Items included restructuring charges related to the Company’s Fuel for Growth initiative ($25.1 million), payments made in connection with the SEC settlement disclosed by the Company in July 2015 ($12.0 million) and a marketable securities gain ($5.6 million).

Specified Items consistently include the remeasurement of defined benefit pension and post-employment benefit plans. Such re-measurement reflects changes in the pension assets and liabilities above what was estimated and included in periodic costs. Factors beyond our control such as changes in discount rates, market volatility and mortality assumptions drive the remeasurement amount. Additionally, the majority of our pension and post-employment plans are frozen, and, therefore the benefits provided to participants in such plans are not related to our underlying operations. In 2015, the re-measurement loss ($8.2 million) was driven by returns on plan assets that were lower than anticipated. In 2014, the re-measurement loss ($51.5 million) was primarily driven by a change in mortality assumptions and discount rate movements.

For the year ended December 31, 2014, the legal, settlements and related costs included legal ($12.0 million) and professional expenses ($1.5 million), partially offset by an insurance loss recovery ($3.2 million).


27



Net Sales
The Company recognizes 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 gross sales to net sales is as follows:
 
 
Years Ended December 31,
 
% of Gross Sales
(Dollars in millions)
 
2015
 
2014
 
2015
 
2014
Gross Sales
 
$
5,411.9

 
$
5,689.4

 
100%
 
100%
Gross-to-Net Sales Adjustments
 
 

 
 

 
 
 
 
WIC Rebates
 
763.0

 
790.0

 
14%
 
14%
Sales Discounts
 
320.6

 
252.4

 
6%
 
4%
Returns
 
89.8

 
86.1

 
2%
 
1%
Other (including Cash Discounts and Coupons)
 
167.2

 
151.6

 
3%
 
3%
Total Gross-to-Net Sales Adjustments
 
1,340.6

 
1,280.1

 
25%
 
22%
Total Net Sales
 
$
4,071.3

 
$
4,409.3

 
75%
 
78%

The total gross-to-net sales adjustments increased as a percentage of gross sales in 2015 compared with 2014, largely due to price-based promotional activity in 2015 in China.
Net sales by reportable segment and principle product category are shown in the tables below:
 
 
Years Ended December 31,
 
 
 
% Change Due to
(Dollars in millions)
 
2015
 
2014
 
% Change
 
Volume
 
Price/Mix
 
Foreign
Exchange
Asia
 
$
2,039.0

 
$
2,278.4

 
(11)%
 
(6)%
 
(2)%
 
(3)%
Latin America
 
757.1

 
867.5

 
(13)%
 
(4)%
 
7%
 
(16)%
North America/Europe
 
1,275.2

 
1,263.4

 
1%
 
1%
 
3%
 
(3)%
Net Sales
 
$
4,071.3

 
$
4,409.3

 
(8)%
 
(3)%
 
1%
 
(6)%
 
 
Years Ended December 31,
 
 
 
% of Net Sales
(Dollars in millions)
 
2015
 
2014
 
% Change
 
2015
 
2014
Infant formula
 
$
2,407.1

 
$
2,537.0

 
(5)%
 
59%
 
57%
Children’s nutrition
 
1,593.1

 
1,788.4

 
(11)%
 
39%
 
41%
Other
 
71.1

 
83.9

 
(15)%
 
2%
 
2%
Net Sales
 
$
4,071.3

 
$
4,409.3

 
(8)%

100%
 
100%

Asia sales decreased 11% in 2015 compared to 2014 and accounted for 50% of our net sales. Volume (3%) decreased in China as consumer demand shifted to digital purchasing channels and faster-growing imported products in which the Company has historically had lower representation. Adverse foreign translation (3%) and increased price-based promotional activity enabled by lower dairy costs also contributed to lower sales in China, Thailand and Malaysia (3%, 2% and 1%, respectively). In the second quarter of 2015, the Company launched a range of fully-imported products in China, available through all channels, which has shown positive results. Sales in the Philippines were higher in 2015 than 2014 primarily as a result of favorable product mix (1%).
Latin America sales decreased 13% in 2015 compared to 2014 and accounted for 19% of our net sales. Foreign currency adversely impacted sales by 16% primarily due to the strengthening of the U.S. dollar against the Mexican peso (6%), Venezuelan bolivar (3%) and Brazilian real (2%). Strategic price increases in Argentina (3%) and Colombia (1%) fully offset sales volume decline of 4% which was due in part to the increase in competition within the milk modifier category in Mexico. Sales volume decline was mainly from intentionally reduced shipments to Venezuela (3%) during the latter part of 2015 as a result of the constraints placed by the Venezuelan government on the release of U.S. dollars. Share gains were seen following select strategic investments.
North America/Europe sales increased 1% in 2015 compared to 2014 and accounted for 31% of our net sales. Sales growth was driven by share gains (1%), higher realized prices and favorable product mix (3%). Children’s nutrition growth in this segment reflected investments made to build the children’s brand. Foreign exchange translation (3%), most notably in Canada (1%), partially offset the sales increase.


28




Gross Profit
 
 
Years Ended December 31,
 
 
(Dollars in millions)
 
2015
 
2014
 
% Change
Net Sales
 
$
4,071.3

 
$
4,409.3

 
(8)%
Cost of Products Sold
 
1,455.3

 
1,700.6

 
(14)%
Gross Profit
 
$
2,616.0

 
$
2,708.7

 
(3)%
Gross Margin
 
64.3
%
 
61.4
%
 
 

Gross margin percentages benefited primarily from lower dairy costs (+3.3%). Productivity savings (+1.3%) were offset by increases in other commodity and production costs (-1.8%).
Operating Expenses
 
 
Years Ended December 31,
 
 
 
% of Net Sales
(Dollars in millions)
 
2015
 
2014
 
% Change
 
2015
 
2014
Selling, General and Administrative
 
$
890.6

 
$
978.9

 
(9)%
 
22%
 
22%
Advertising and Promotion
 
641.8

 
638.7

 
—%
 
16%
 
14%
Research and Development
 
108.4

 
115.1

 
(6)%
 
3%
 
3%
Other (Income)/Expenses—net
 
39.0

 
(12.3
)
 
n/m
 
1%
 
—%

Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased 9% in 2015 compared to 2014 primarily due to lower actuarial losses ($27.8 million) in 2015 related to the defined benefit pension and other post-employment benefit plans compared to prior year. Lower incentive based compensation in 2015 ($10.0 million) and initial savings from Fuel for Growth (approximately $20 million) also reduced selling, general and administrative expenses compared to 2014.
Advertising and Promotion Expenses
Advertising spending includes television, print, digital and other consumer media. Promotion activities include product evaluation and education related materials provided to health care professionals and consumers, where permitted by regulation. Advertising and promotion expenses reflected higher demand-creation investments ($20.5 million) in support of our strategic growth initiatives including the fully imported products in China and high value product offerings in the U.S.
Research and Development Expenses
Research and development expenses include continued investment in our innovation capability, product pipeline and quality programs. In addition, research and development expenses decreased due to changes in employee related costs as lower actuarial losses ($4.8 million) in 2015 related to the defined benefit pension and other post-employment benefit plans compared to 2014.
Other (Income)/Expenses—net
 
 
Years Ended December 31,
(Dollars in millions)
 
2015
 
2014
Severance and other costs
 
$
18.0

 
$
1.3

SEC Settlement
 
12.0

 

Loss on asset disposals
 
9.0

 

Foreign exchange losses—net
 
6.3

 
0.5

Gain on sale of investment
 
(5.6
)
 
(4.0
)
Pension curtailment gain
 

 
(5.4
)
Other—net
 
(0.7
)
 
(4.7
)
Other (income)/expenses—net
 
$
39.0

 
$
(12.3
)

For the year ended December 31, 2015, severance charges were primarily related to Fuel for Growth ($25.1 million). Also recognized in other (income)/expenses were payments made in connection with the SEC settlement disclosed by the Company in July 2015 ($12 million) and fixed asset disposal write-offs ($8.4 million) as the Company optimizes its Asia supply chain strategy. In 2014, the recorded gain was related to the revision of a defined benefit plan outside of the United States ($5.4 million) and the sale of an investment ($4.0 million).

29



Earnings before Interest and Income Taxes
EBIT from the three reportable segments, Asia, Latin America and North America/Europe, is reduced by Corporate and Other expenses. Corporate and Other consists of unallocated global business support activities, including research and development, marketing, supply chain costs, and general and administrative expenses; net actuarial gains and losses related to defined benefit pension and other post-employment benefit plans; and income or expenses incurred within the operating segments that are not reflective of underlying operations and affect the comparability of the operating segments’ results.
 
 
Years Ended December 31,
 
 
 
% of Net Sales
(Dollars in millions)
 
2015
 
2014
 
% Change
 
2015
 
2014
Asia
 
$
682.0

 
$
818.7

 
(17)%
 
33%
 
36%
Latin America
 
175.2

 
199.0

 
(12)%
 
23%
 
23%
North America/Europe
 
361.8

 
291.0

 
24%
 
28%
 
23%
Corporate and Other
 
(282.8
)
 
(320.4
)
 
12%
 
n/m
 
n/m
EBIT
 
$
936.2

 
$
988.3

 
(5)%
 
23%
 
22%

EBIT in Asia decreased 17% primarily due to lower sales in 2015, which were partially offset by lower dairy costs ($94.1 million). Additionally, operating costs were higher due to advertising and promotional investments to support the new product launches in China ($19.5 million), the establishment of plastic packaging formats across a number of markets and fixed asset write-offs ($8.4 million) as the Company optimized its supply chain network in Asia.
Latin America EBIT decreased 12% due to lower sales and investment spending ($13.4 million) partially offset by an improved gross margin ($59.6 million). On a local currency basis, EBIT increased primarily due to lower commodity costs, namely dairy ($20.6 million), and improved productivity ($7.0 million). This was offset by adverse foreign translation impacts ($59.9 million). In addition, 2014 comparably included foreign exchange gains generated from cash received at the official Venezuelan government rate compared to the SICAD rate adopted by the Company in February 2014. See “Item 8. Financial Statements and Supplementary Data—Note 20. Venezuela Currency Matters” for further information regarding exchange rate variability in Venezuela.
EBIT in North America/Europe increased 24% primarily due to gross margin improvement resulting from both higher realized pricing ($32.6 million) and lower dairy costs ($19.4 million). Demand-creation investments led to increased sales volume ($9.4 million). Lower operating expenses were attributable to a lower provision of incentive based compensation ($1.6 million). Adverse foreign exchange movements ($12.5 million) partially offset the increase in EBIT.
Corporate and Other expenses decreased in 2015 compared to 2014 primarily due to lower 2015 actuarial losses ($43.3 million) related to the defined benefit pension and other post-employment benefit plans, lower incentive compensation ($6.3 million) and savings from Fuel for Growth, partially offset by Fuel for Growth charges ($25.1 million).
Interest Expense—net
Net interest expense for the year ended December 31, 2015 increased compared to 2014 primarily as a result of interest expense ($8.7 million) on the 2020 Notes and the 2025 Notes, both issued in November 2015. These expenses were partially offset by gains ($5.2 million) related to fixed to floating rate fair value hedges on both the 2020 Notes and our $700.0 million of 4.90% Notes due November 1, 2019 (the “2019 Notes”).
Income Taxes
The Company’s ETR for both the 2015 and 2014 periods differs from the statutory tax rate predominantly due to the favorable impact of tax rulings and agreements in various foreign jurisdictions. The ETR for the years ended December 31, 2015 and 2014 was 24.8% and 21.5%, respectively. Unfavorable geographic earnings mix contributed 3.4% to the ETR increase, which was offset slightly by a series of additional items which are insignificant both individually and in the aggregate.  
Net Earnings Attributable to Noncontrolling Interests
Net earnings attributable to noncontrolling interests consists of approximately 11%, 10% and 10% interest held by third parties in our operating entities in China, Argentina and Indonesia, respectively.
Net Earnings Attributable to Shareholders
Net earnings attributable to shareholders for the year ended December 31, 2015 decreased 9% to $653.5 million compared with the year ended December 31, 2014.

30




Liquidity and Capital Resources
Overview
Our primary sources of liquidity are cash on hand, cash from operations and available borrowings under our $750.0 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 computer software, equipment and buildings. Cash flows used in financing activities primarily represent proceeds and repayments of long-term and short-term borrowings, dividend payments and share repurchases.

Cash and cash equivalents totaled $1,795.4 million at December 31, 2016, of which $1,594.2 million was held outside of the United States. Cash and cash equivalents totaled $1,701.4 million as of December 31, 2015, of which 1,512.5 million was held outside of the United States.

During 2016, we repatriated cash associated with earnings and profits not permanently invested abroad of approximately $276 million to the United States from multiple jurisdictions. During 2015, we repatriated cash associated with earnings and profits not permanently invested abroad of approximately $59 million to the United States from multiple jurisdictions.

As a result of the evaluation of our global cash position, management has asserted that earnings and profits in certain foreign jurisdictions are permanently invested abroad. We will continue to evaluate our global cash position and whether earnings and profits of these and other foreign jurisdictions are permanently invested abroad. The amount of cash associated with permanently invested foreign earnings was approximately $1,388 million and $1,124 million as of December 31, 2016 and 2015, respectively. 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, 2016, 2015 and 2014 were $308.8 million, $326.0 million and $296.6 million, respectively. Dividend payments were lower in 2016 due to the retirement of shares repurchased primarily under an accelerated repurchase agreement.


31



Cash Flows
We believe that cash on hand, cash from operations and the available revolving 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)
 
2016
 
2015
 
2014
Cash flow provided by/(used in):
 
 

 
 

 
 

Operating Activities
 
 

 
 

 
 

Net Earnings
 
$
549.3

 
$
655.3

 
$
728.8

Depreciation and Amortization
 
99.6

 
99.1

 
91.6

Impairment of Long-Lived Assets
 
45.9

 

 

Other
 
2.0

 
77.8

 
77.2

Changes in Assets and Liabilities
 
14.1

 
167.8

 
(54.0
)
Payments for Settlement of Interest Rate Forward Swaps
 

 

 
(45.0
)
Pension and Other Post-employment Benefits Contributions
 
(19.3
)
 
(90.1
)
 
(5.2
)
Total Operating Activities
 
691.6

 
909.9

 
793.4

Investing Activities
 
(148.7
)
 
(173.2
)
 
(182.4
)
Financing Activities
 
(399.6
)
 
(286.8
)
 
(325.5
)
Effects of Changes in Exchange Rates on Cash and Cash Equivalents
 
(49.3
)
 
(46.2
)
 
(38.6
)
Net Increase in Cash and Cash Equivalents
 
$
94.0

 
$
403.7

 
$
246.9

Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
For the year ended December 31, 2016, cash flow provided by operating activities was $691.6 million and lower than the prior year due to reduced net earnings of $106.0 million, a $56.0 million reduction in income taxes payable, lower non-cash charges of $29.4 million, lower accrued expenses, rebates and returns of $26.8 million and $23.0 million of reduced cash advances from customers. Offsetting these decreases was $44.0 million of lower contributions to pension and other post-employment benefit plans, net of tax impacts. For the year ended December 31, 2015, cash flow from operating activities was $909.9 million and primarily driven by net earnings and increased rebates related to price-based promotional discounting mainly in Asia, as well as increased provisions for restructuring and interest. Cash flow from operating activities was reduced in 2015 by an $84.0 million discretionary contribution to the U.S. Pension Plan.

Cash flow used in investing activities was $24.5 million lower in 2016 compared to 2015. The decrease was largely the result of lower spending in 2016. For the year ended December 31, 2016 and 2015, cash flow from investing activities included capacity expansion for manufacturing facilities in the U.S. and Europe to accommodate demand for new products.

Cash flow used in financing activities was $399.6 million for the year ended December 31, 2016, and included $308.8 million of dividend payments and $100.4 million of share repurchases. Cash flow used in financing activities was $286.8 million for the year ended December 31, 2015, consisting primarily of $326.0 million of dividend payments, $1,002.9 million repayments of short-term borrowings and $1,437.0 million of share repurchases. Financing activities in 2015 also included the issuance of our 2020 Notes and 2025 Notes and repurchases of Company stock under the 2013 Authorization and 2015 Authorization, discussed below, which resulted in a net cash inflow of $50.7 million.

For the year ended December 31, 2016, the effects of changes in exchange rates on cash and cash equivalents primarily includes the devaluation of the Venezuelan Bolivar.
Year Ended December 31, 2015 Compared to Year Ended 2014
For the year ended December 31, 2015, cash flow provided by operating activities was $909.9 million and primarily driven by net earnings and increased rebates related to price-based promotional discounting mainly in Asia, as well as increased provisions for restructuring and interest. Cash flow from operating activities was reduced in 2015 by an $84.0 million discretionary contribution to the U.S. Pension Plan. For the year ended December 31, 2014, cash flow from operating activities was $793.4 million and primarily driven by net earnings, partially offset by an increase in working capital, defined as accounts receivable plus inventory less accounts payable (excluding capital related items), and $45.0 million of payments related to the settlement of interest rate forward swaps.

Cash flow used in investing activities was $9.2 million lower in 2015 compared to 2014. The decrease was largely the result of spending in 2014 related to the Singapore manufacturing and technology facility. Investing activities in 2015 included capacity expansion for manufacturing facilities in the U.S. and Europe to accommodate demand for new products.


32



Cash flow used in financing activities was $286.8 million for the year ended December 31, 2015, consisting primarily of $326.0 million of dividend payments, $1,002.9 million repayments of short-term borrowings and $1,437.0 million of share repurchases. Financing activities in 2015 also included the issuance of our 2020 Notes and 2025 Notes and repurchases of Company stock under the 2013 Authorization and 2015 Authorization, discussed below, which resulted in a net cash inflow of $50.7 million. Cash flow used in financing activities was $325.5 million for the year ended December 31, 2014, consisting primarily of $296.6 million of dividend payments, $0.6 million repayments of short-term borrowings and $54.1 million of share repurchases.

Short-Term Borrowings

As of December 31, 2016 and 2015, the Company had short-term borrowings of $3.9 million and $3.0 million, respectively, which consisted primarily of borrowings made by its subsidiary in Argentina.

Capital Expenditures
Capital expenditures and the cash outflow for capital expenditures were as follows:
(Dollars in millions)
 
Capital expenditures
 
Cash outflow for capital
expenditures
 
Increase/(Decrease) in capital expenditures not paid
Year Ended December 31, 2016
 
$
142.4

 
$
149.0

 
$
(6.6
)
Year ended December 31, 2015
 
$
179.0

 
$
173.7

 
$
5.3

Year ended December 31, 2014
 
$
149.0

 
$
186.6

 
$
(37.6
)

Capital expenditures in 2016 and 2015 relate primarily to facilities involved in the manufacturing of fully-imported products for China and liquid product offerings in the United States. Capital expenditures in 2014 included investments primarily in our spray dryer in Singapore and research and development capabilities which were placed in-service during the second and third quarters of 2014. For 2017, we expect capital expenditures to approach our long-term target of 4% of sales.

Revolving Credit Facility Agreement
The Company has an unsecured, five-year revolving credit facility agreement (the “Revolving Credit Facility”) which is repayable at maturity in June 2019, 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 Revolving Credit Facility is $750.0 million, which may be increased from time to time up to $1,000.0 million at the Company’s request, subject to obtaining additional commitments and other customary conditions.
The Revolving Credit Facility contains financial covenants, whereby the ratio of consolidated adjusted total debt to consolidated EBITDA cannot exceed 3.50 to 1.0, and the ratio of consolidated EBITDA to consolidated interest expense cannot be less than 3.0 to 1.0. The Company was in compliance with these financial covenants as of December 31, 2016. Borrowings from the Revolving Credit Facility are used for working capital and other general corporate purposes. During 2015, the Company borrowed approximately $446.0 million under the Revolving Credit Facility primarily to repurchase shares of common stock. The Company repaid these amounts in November 2015. As of December 31, 2016 and 2015, we had no borrowings outstanding under the Revolving Credit Facility. We had $750.0 million available as of December 31, 2016.

Borrowings under the Revolving 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% to 1.375% over the base rate. In addition, the Company incurs an annual 0.125% facility fee on the entire facility commitment of $750.0 million.
The Company has guaranteed the obligations of all of its subsidiaries that may from time to time become borrowers under the Revolving Credit Facility. If our corporate credit rating falls below (i) Baa3 by Moody's Investors Service, Inc. (“Moody's”) or (ii) BBB- by Standard & Poor's Ratings Service (“S&P”), Mead Johnson & Company, LLC shall automatically be deemed to guarantee the obligations under the Revolving Credit Facility in addition to the guarantee provided by Mead Johnson Nutrition Company. Moody's credit rating for MJN is currently Baa1. S&P's credit rating for MJN is currently BBB.

33



Long-Term Debt and Interest Rate Swaps
The components of our long-term debt are detailed in the table below:
(Dollars in millions)
 
Principal Amount
 
Interest Rate
 
Maturity
4.900% Notes due 2019 (“2019 Notes”)
 
$
700.0

 
4.900% fixed
 
November 1, 2019
3.000% Notes due 2020 (“2020 Notes”)
 
$
750.0

 
3.000% fixed
 
November 15, 2020
4.125% Notes due 2025 (“2025 Notes”)
 
$
750.0

 
4.125% fixed
 
November 15, 2025
5.900% Notes due 2039 (“2039 Notes”)
 
$
300.0

 
5.900% fixed
 
November 1, 2039
4.600% Notes due 2044 (“2044 Notes”)
 
$
500.0

 
4.600% fixed
 
June 1, 2044

During the year ended December 31, 2015, the Company entered into a $1,000.0 million short-term loan agreement (the “Term Loan Agreement”) with various financial institutions, including Citibank, N.A., as Syndication Agent, and JPMorgan Chase Bank, N.A. (“JPMCB”), as Administrative Agent. The Company repaid all borrowings under the Term Loan Agreement and terminated the Term Loan Agreement during the year ended December 31, 2015. The payoff amount of $1,000.3 million included principal, accrued and unpaid interest and a facility fee.
    
During the year ended December 31, 2015, the Company issued and sold the 2020 Notes and 2025 Notes at a public offering price of 99.902% and 99.958%, respectively. The Company received net proceeds of $1,487.7 million from the sale of both the 2020 Notes and 2025 Notes, after deducting underwriters’ discounts and offering costs. Interest is payable on each of the 2020 Notes and 2025 Notes on May 15 and November 15 of each year. Proceeds from the 2020 Notes and 2025 Notes were used to repay the Term Loan Agreement and borrowings under the Revolving Credit Facility. The remainder of the net proceeds was for general corporate purposes.

During the year ended December 31, 2015, the Company entered into six interest rate swaps with multiple counterparties to mitigate interest rate exposure associated with the 2020 Notes. The swaps have an aggregate notional amount of $750.0 million of outstanding principal. This series of swaps effectively converts the $750.0 million of 2020 Notes from fixed to floating rate debt for the remainder of their term. As of December 31, 2016, these swaps were in a loss position with a fair value of $6.3 million.
During the year ended December 31, 2014, the Company issued and sold $500.0 million 2044 Notes at a public offering price of 99.465%. Net proceeds from the sale of the 2044 Notes, after deducting underwriters’ discounts and offering expenses, were $492.0 million. Interest on the 2044 Notes is payable semi-annually on June 1 and December 1 of each year. Proceeds from the 2044 Notes were used to redeem all $500.0 million of our 3.50% Notes due in 2014 (“2014 Notes”). The redemption price, which was calculated in accordance with the terms of the 2014 Notes and included principal plus a make-whole premium, was $503.5 million.
In the fourth quarter of 2013, prior to the issuance of our 2044 Notes, we entered into a series of interest rate forward swaps to lock in an interest rate, reflecting then-prevailing rates, in anticipation of the offering. The fair value of these interest rate forward swaps was dependent on the movements in thirty-year interest rates. As a result of a rise in interest rates leading up to December 31, 2013, these interest rate forward swaps were in a gain position with a fair value of $19.4 million as of that date. However, as a result of a subsequent decline in thirty-year interest rates, the fair value of these interest rate swaps declined $64.4 million, resulting in a loss position with a fair value of $45.0 million upon our settlement in May 2014. This $45.0 million is a deferred loss being amortized into interest expense over the life of the 2044 Notes.

During the second quarter of 2014, the Company entered into eight interest rate swaps with multiple counterparties, which have an aggregate notional amount of $700.0 million of outstanding principal. This series of swaps effectively converts the $700.0 million of 2019 Notes from fixed to floating rate debt for the remainder of their term. As of December 31, 2016, these swaps were in an asset position with a fair value of $1.1 million.
The Company’s 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, the Company may be required to repurchase the notes for 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 and interest rate swaps, see ‘‘Item 8. Financial Statements and Supplementary Data—Note 15. Debt and —Note 16. Derivatives.’’


34



Merger Agreement
The Merger Agreement, described in “Part I. Item 1. Business—Merger Agreement,” provides for certain termination rights for both the Company and Reckitt Benckiser. The Company is obligated to pay Reckitt Benckiser a $480 million termination fee in certain circumstances, including, without limitation, if we enter into a definitive agreement for a superior proposal.
In addition, under the Merger Agreement we are prohibited from creating, incurring, assuming or otherwise becoming liable with respect to any indebtedness for borrowed money or guarantee thereof, other than (i) indebtedness solely between the Company and a wholly owned subsidiary of the Company or between wholly owned subsidiaries of the Company in the ordinary course of business consistent with past practice, (ii) borrowings in the ordinary course of business consistent with past practice under our revolving credit facility and guarantees of such borrowings to the extent required under the terms of the facility and (iii) in connection with letters of credit issued in the ordinary course of business consistent with past practice in an amount not to exceed $1,000,000 individually or $5,000,000 in the aggregate.
Share Repurchases
In September 2013, the Company’s board of directors approved a share repurchase authorization of up to $500.0 million of our common stock (the “2013 Authorization”). During the year ended December 31, 2016, the Company repurchased $0.4 million of our common stock which completed all purchases remaining under the 2013 Authorization. During the year ended December 31, 2015, the Company repurchased $437.0 million of our common stock under the 2013 Authorization.

In October 2015, the Company’s board of directors approved the 2015 Authorization, a share repurchase authorization of an additional $1,500.0 million of our common stock. The 2015 Authorization does not have an expiration date. On October 22, 2015, the Company entered into an accelerated share repurchase agreement (the “ASR Agreement”) with Goldman, Sachs & Co. (“Goldman”) to repurchase $1,000.0 million (the “Repurchase Price”) of our common stock. Under the terms of the ASR Agreement, the Company paid the Repurchase Price in advance in exchange for 10,725,552 shares of our common stock which were received by the Company on October 27, 2015 (which shares are equivalent to approximately 85% of the number of shares of our common stock that could be purchased with an amount of cash equal to the Repurchase Price based on the closing price of our common stock on October 22, 2015). Upon final settlement of the ASR Agreement in June 2016, an additional 2,086,050 shares were delivered to the Company for no additional consideration based generally on the daily volume-weighted average prices of our common stock over the term of the ASR Agreement. The total shares received and retired under the terms of the ASR Agreement was 12,811,602 shares with an average price paid per share of approximately $78.05. In addition to the shares delivered upon final settlement of the ASR Agreement, during the year ended December 31, 2016, the Company repurchased $100.0 million of our common stock pursuant to the 2015 Authorization. As of December 31, 2016 and 2015, the Company had $400.0 million and $500.0 million remaining available under the 2015 Authorization, respectively.

Under the Merger Agreement described in “Part I. Item 1. Business—Merger Agreement,” we are prohibited from redeeming, repurchasing or otherwise acquiring or offering to redeem, repurchase, or otherwise acquire our common stock or other securities, other than shares surrendered to us to pay the exercise price in connection with the exercise of employee stock options and shares surrendered to us 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.
Fuel for Growth
During 2015, the Company approved a plan to implement a business productivity program referred to as “Fuel for Growth,” which is expected to be implemented over a three-year period. Fuel for Growth is designed to improve operating efficiencies and reduce costs. Fuel for Growth is expected to improve profitability and create additional investments behind brand building and growth initiatives. Fuel for Growth focuses on the optimization of resources within various operating functions and certain third-party cost reduction activities across the business. For the year ended December 31, 2016, total charges associated with Fuel for Growth were $29.2 million.
During 2016, additional savings of approximately $60 million were identified within the Fuel for Growth Program, resulting in total expected cost savings of approximately $180.0 million by the end of 2018. The Company achieved approximately $90 million cost savings in 2016 of which approximately $80 million was due to lower selling, general and administrative expenses, $9 million was due to lower research and development spending and the balance was due to lower manufacturing expenses. For additional information on the Fuel for Growth program, see “Item 8. Financial Statements and Supplementary Data—Note 6. Restructuring.”


35



Contractual Obligations
As of December 31, 2016, our contractual obligations and other commitments were as follows:
  
 
Payments due by December 31,
(Dollars in millions)
 
2017
 
2018
 
2019
 
2020
 
2021
 
Thereafter
 
Total
Operating lease obligations
 
$
37.3

 
$
30.2

 
$
23.5

 
$
18.9

 
$
13.1

 
$
55.7

 
$
178.7

Capital lease obligations
 
1.0

 
0.9

 
0.7

 
0.5

 
0.3

 
0.7

 
4.1

Purchase obligations
 
203.4

 
136.3

 
59.9

 
30.3

 
29.2

 
47.2

 
506.3

Short-term borrowings
 
3.9

 

 

 

 

 

 
3.9

Long-term debt
 

 

 
700.0

 
750.0

 

 
1,550.0

 
3,000.0

Interest payments
 
130.4

 
129.3

 
128.9

 
94.1

 
71.6

 
959.9

 
1,514.2

Total
 
$
376.0

 
$
296.7

 
$
913.0

 
$
893.8

 
$
114.2

 
$
2,613.5

 
$
5,207.2

Our operating lease obligations are generally related to real estate leases for offices, manufacturing-related leases, and vehicle leases. Purchase obligations are for unconditional commitments related to a master service agreement with IBM for information technology, accounting and indirect procurement services, and purchases of materials used in manufacturing and promotional services. The future interest payments include coupon payments on our long-term debt.
Additionally, liabilities for uncertain tax positions, pension and other post-employment benefits and derivative contracts 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 and Supplementary Data—Note 4. Income Taxes, —Note 8. Pension and Other Post-Employment Benefit Plans, and —Note 16. Derivatives” for additional 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 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.

Significant Accounting Estimates
The Company prepared the accompanying consolidated financial statements in accordance with generally accepted accounting principles in the United States (“GAAP”), which requires the Company to make estimates and assumptions that affect the reported amounts and accompanying disclosures. These estimates are based on management’s best knowledge of current events and actions the Company may undertake in the future. Significant estimates include sales rebates and return accruals, impairment testing of goodwill and indefinite-lived intangible assets, impairment of long-lived assets, deferred tax assets and liabilities and income tax expense, as well as the accounting for stock-based compensation and retirement and post-employment benefits, including the actuarial assumptions. Actual results may or may not differ from estimated results. Future results may differ from our estimates under different assumptions or conditions. Management believes the following are the most critical accounting policies that could have an affect on the Company’s reported results.
For information on the Company’s accounting policies, see “Item 8. Financial Statements and Supplementary Data—Note 2. Accounting Policies.”
Revenue Recognition
The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable, and collectibility is reasonably assured. Revenue is not recognized until title and risks of loss have transferred to the customer. The shipping terms for the majority of revenue arrangements are FOB destination. Provisions are estimated at the time of revenue recognition for returns and WIC rebates based on historical experience, updated for changes in facts and circumstances, as appropriate. Such provisions are recorded as a reduction of revenue. The Company offers sales incentives to customers and consumers through various programs consisting primarily of sales discounts, trade promotional supports and consumer coupons. Provisions are estimated for these sales incentives at the later of the date at which the Company has sold the product or the date at which the program is offered, based on historical experience, updated for changes in facts and circumstances, as appropriate. Such provisions are recorded as a reduction of revenue. Revenue is recorded

36



net of taxes collected from customers that are remitted to governmental authorities, with the collected taxes recorded as current liabilities until remitted to the relevant government authority.
WIC Rebates—The Company participates 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, the Company reimburses these entities for the difference between the list price and the contract price on eligible products. The Company accounts for WIC rebates by establishing an accrual in an amount equal to its estimate of WIC rebate claims attributable to a sale. The Company determines its estimate of the WIC rebate accrual primarily based on historical experience regarding WIC rebates and current contract prices under the WIC programs. The Company considers levels of inventory in the distribution channel, new WIC contracts, terminated WIC contracts, changes in existing WIC contracts and WIC participation, and adjusts the accrual periodically throughout the year to reflect actual expense. WIC rebate accruals were $212.5 million and $205.1 million at December 31, 2016 and 2015, respectively, and are included in accrued rebates and returns on the balance sheet. Rebates under the WIC program reduced revenues by $751.5 million, $763.0 million, and $790.0 million in the years ended December 31, 2016, 2015 and 2014, respectively.
Sales Returns—The Company accounts for sales returns by establishing an accrual in an amount equal to its estimate of sales recorded for which the related products are expected to be returned. The Company determines its estimate of the sales return accrual primarily based on historical experience regarding sales returns, but also considers other factors that could impact sales returns such as discontinuations and new product introductions. Sales return accruals were $57.1 million and $52.6 million at December 31, 2016 and 2015, respectively, and are included in accrued rebates and returns on the balance sheet. Returns reduced sales by $94.2 million, $89.8 million, and $86.1 million for the years ended December 31, 2016, 2015 and 2014, 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. United States federal income taxes are provided on foreign earnings that are not permanently invested offshore.
Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. The assessment of whether or not a valuation allowance is required often requires significant judgment including the long-range forecast of future taxable earnings and the evaluation of tax planning initiatives. Adjustments to the deferred tax valuation allowances are made to earnings in the period when such assessments are made.
Changes in uncertain tax positions and changes in valuation allowances could be material to our results of operations for any period, but are not expected to be material to our financial position.
Impairment of Long-Lived Assets
The Company periodically evaluates whether current facts or circumstances indicate that the carrying value of its depreciable assets to be held and used may not be recoverable. If such circumstances are determined to exist, an estimate of undiscounted future cash flows produced by the long-lived asset, or the appropriate grouping of assets, is compared to the carrying value to determine whether impairment exists. If an asset is determined to be impaired, the loss is measured based on the difference between the asset’s fair value and its carrying value. An estimate of the asset’s fair value is based on quoted market prices in active markets, if available. If quoted market prices are not available, the estimate of fair value is based on various valuation techniques, including a discounted value of estimated future cash flows. The Company reports an asset to be disposed of at the lower of its cost less accumulated depreciation or its estimated net realizable value.
Goodwill and Other Intangible Assets
Goodwill is not amortized but is tested for impairment annually and whenever events or changes in circumstances indicate that impairment may have occurred. The Company’s policy is to test goodwill for impairment on an annual basis or when current facts or

37



circumstances indicate that a potential impairment may exist. Goodwill is tested for impairment at the reporting unit level. A reporting unit represents an operating segment or a component of an operating segment. Goodwill is tested for impairment by either performing a qualitative evaluation or a two-step quantitative test. The qualitative evaluation is an assessment of factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. The Company may elect not to perform the qualitative assessment for some or all reporting units and perform a two-step quantitative impairment test. The first step involves a comparison of the fair value of a reporting unit with its carrying value. If the carrying value of the reporting unit exceeds its fair value, the second step of the process involves a comparison of the implied fair value and carrying value of the goodwill of that reporting unit. If the carrying value of the goodwill of a reporting unit exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess. In evaluating the recoverability of goodwill, it is necessary to estimate the fair value of reporting units, which is generally based on a discounted cash flow model. In making this assessment, the Company relies on a number of factors to discount anticipated future cash flows including operating results, business plans and present value techniques. Growth rates for sales and profits are determined using inputs from our annual planning process. The Company also makes estimates of discount rates, perpetuity growth assumptions and other factors. Many of the factors used in assessing fair value are outside the control of the Company and it is reasonably likely that assumptions and estimates can change in future periods. These changes can result in future impairments. The Company completed the annual goodwill impairment assessment during the third quarter of 2016, 2015 and 2014 and no impairment of goodwill was required as the Company determined that the fair values of the reporting units were in excess of respective carrying amounts.
Goodwill recognized as a result of the acquisition of our business in Argentina was $60.9 million as of December 31, 2016, which represents a majority of our goodwill balance. Although management currently believes operations in reporting units to which goodwill was allocated can support the value of recorded goodwill, a change in assumptions driven by macro-economic conditions or degradation in the Argentine consumer market that undermines the reporting unit's ability to achieve targeted profit levels may result in an impairment of the recorded goodwill. Additionally, if the Argentine economy becomes hyperinflationary there may be an accelerated decline in the fair value of the entity which may result in an impairment of the recorded goodwill.
    The Company evaluates the useful lives of its other intangible assets to determine if they are finite or indefinite-lived. Reaching a determination on useful life requires significant judgments and assumptions regarding the future effects of obsolescence, demand, competition, other economic factors (such as the stability of the industry, known technological advances, legislative action that results in an uncertain or changing regulatory environment, and expected changes in distribution channels), the level of required maintenance expenditures and the expected lives of other related groups of assets. Intangible assets that are deemed to have definite lives are amortized on a straight-line basis over their useful lives. Indefinite-lived intangible assets are also tested for impairment at the reporting unit level. No impairment of indefinite-lived intangible assets was required in 2016, 2015 or 2014.
Pension and Other Post-Employment Benefits
The Company’s pension plans and other post-employment benefit plans are accounted for using actuarial valuations. Management, in consultation with the actuaries, is required to make significant subjective judgments about a number of actuarial assumptions, including discount rates, long-term returns on plan assets, retirement, health care cost trend rates and mortality rates. Depending on the assumptions and estimates used, the pension and other post-employment benefit expense could vary within a range of outcomes and have a material effect on projected benefit obligations. The Company’s key assumptions used in calculating the cost of pension benefits are the discount rate and expected long-term returns on plan assets. Actual results in any given year may differ from those estimated because of economic and other factors.
The discount rate assumptions used to value the pension and other post-employment benefit obligations reflect the yield to maturity of high quality corporate bonds that coincides with the cash flows of the plans’ estimated payouts. In developing the expected rate of return on pension plan assets, the Company estimates returns for individual asset classes with input from external advisers. The Company also considers long-term historical returns on the asset classes, the investment mix of plan assets, investment manager performance and projected future returns of the asset classes.
During 2015, the SEC staff expressed its acceptance for companies applying an alternative approach for using discount rates to measure the components of net periodic benefit cost for postretirement benefit plan obligations. Specifically, the SEC staff stated that it would not object to companies’ use of an alternative approach that focuses on measuring the service cost and interest cost components of net periodic benefit cost by using individual spot rates derived from a high-quality corporate bond yield curve and matched with separate cash flows for each future year instead of a single weighted-average discount rate approach. Further, the SEC staff stated it would not object to companies treating the change in approach as a change in estimate. The Company determined it was appropriate to change our estimate in the determination of discount rate assumptions to determine periodic benefit costs for both our defined benefit pension and other postretirement plans.
The Company’s principal pension plan is the U.S. Pension Plan, which is a frozen plan and represents approximately 87% and 71% of our total pension and other post-employment assets and obligations, respectively. The assumptions used to determine net periodic benefit

38



costs for the year are established at the beginning of the plan year and the assumptions used to determine benefit obligation are established as of the balance sheet date.
The key assumptions for the U.S. Pension Plan were as follows:
Used to determine net periodic benefit cost for the years ended December 31,
 
2016
 
2015
Discount rate
 
4.25
%
 
3.89
%
Expected long-term return on plan assets
 
6.20
%
 
6.60
%
Used to determine benefit obligation as of December 31,
 
2016
 
2015
Discount rate
 
4.04
%
 
4.25
%
The obligation for the U.S. Pension Plan decreased by $27.4 million during 2016, primarily due to a $15.0 million discretionary contribution and $20.7 million of returns on assets.
The following table shows the impact on pension expense of hypothetical changes in the rates assumed for the U.S. Pension Plan:
 
 
 
 
 
 
Increase/(Decrease) in
Expense
 
Increase/(Decrease) in
Obligation
(Dollars in millions) 
 
Change in Rate
 
Increase in Rate
 
Decrease in Rate
 
Increase in Rate
 
Decrease in Rate
Impact of change in rates:
 
 
 
 
 
 
 
 
 
 
Discount rate
 
+/-100 basis points
 
$
1.9

 
$
(2.2
)
 
$
(20.2
)
 
$
23.8

Expected long-term rate of return on plan assets
 
+/-100 basis points
 
$
(2.3
)
 
$
2.3

 
 
 
 
 
See “Item 8. Financial Statements and Supplementary Data—Note 8. Pension and Other Post-Employment Benefit Plans” for additional information on our pension and other post-employment benefits.

Special Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K and other written and oral statements we make from time to time contain certain “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You can identify these forward-looking statements by the fact they use words such as “should,” “expect,” “anticipate,” “estimate,” “target,” “may,” “project,” “guidance,” “intend,” “plan,” “believe” and other words and terms of similar meaning and expression in connection with any discussion of future operating or financial performance. You can also identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. Such forward-looking statements are based on current expectations and involve inherent risks, uncertainties, and assumptions including factors that could delay, divert or change any of them, and could cause actual outcomes to differ materially from current expectations. These statements are likely to relate to, among other things, our goals, plans and projections regarding our financial position, results of operations, cash flows, market position, product development, product approvals, sales efforts, expenses, capital expenditures, performance or results of current and anticipated products and the outcome of contingencies such as legal proceedings and financial results, which are based on current expectations that involve inherent risks and uncertainties, including internal or external factors that could delay, divert or change any of them in the next several years. In addition, actual results may differ materially from those projected as a result of certain risks and uncertainties, including but not limited to: the possibility that the Merger will not be consummated or delays in consummating the Merger; adverse effects on the market price of Mead Johnson's common stock and on Mead Johnson's operating results because of a failure to complete the Merger; negative effects relating to the announcement of the Merger or any further announcements relating to the Merger or the entrance into or consummation of the Merger on the market price of Mead Johnson's stock; unanticipated difficulties or expenditures relating to the Merger; legal proceedings instituted against Mead Johnson and others in connection with the Merger; disruptions of current plans and operations caused by the announcement and pendency of the Merger; potential difficulties in employee retention as a result of the announcement and pendency of the Merger; and the response of customers, distributors, suppliers and competitors to the announcement of the Merger. We have included important factors in the cautionary statements included in “Item 1A. Risk Factors,” that we believe could cause actual results to differ materially from any forward-looking statement.
Although we believe we have been prudent in our plans and assumptions, we can give no assurance that any goal or plan set forth in forward-looking statements can be achieved and we caution readers not to place undue reliance on such statements, which speak only as of the date made. We undertake no obligation to release publicly any revisions to forward-looking statements as a result of new information, future events or otherwise.

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Item 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to certain market risks which exist as part of our ongoing business operations. In addition to our costs for materials, compensation, media, distribution and other purchased services being subject to inflationary pressures, we are exposed to changes in currency exchange rates, price volatility for certain commodities and changes in interest rates. To reduce our exposure to these risks, we use a variety of contract techniques and financial instruments as described below. As a policy, we do not engage in speculative transactions, nor do we hold or issue financial instruments for trading purposes.
Foreign Exchange Risk
We are exposed to market risk due to changes in currency exchange rates. Our primary net foreign currency exposures are the Chinese renminbi, the Mexican peso, the Philippine peso, the Thai baht, the Euro, the Malaysian ringgit and the Canadian dollar. In addition to these primary exposures, as a global business, we are exposed to foreign currency translation risk in all countries in which we do business whose local reporting currency is not the U.S. dollar. 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 exposures that we will not be able to manage through effective hedging or the use of other financial instruments.
We use foreign currency contracts to hedge anticipated transactions in certa