NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1.
ORGANIZATION
Mead Johnson Nutrition Company (“MJN” or the “Company”) manufactures, distributes and sells infant formula, children’s nutrition and other nutritional products. MJN has a broad product portfolio, which extends across routine and specialty infant formulas, children’s milks and milk modifiers, dietary supplements for pregnant and breastfeeding mothers, pediatric vitamins, and products for pediatric metabolic disorders. These products are generally sold to distributors and retailers and are promoted to healthcare professionals, and, where permitted by regulation and policy, directly to consumers.
2.
ACCOUNTING POLICIES
Basis of Presentation—
The Company prepared the accompanying unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X issued by the Securities and Exchange Commission (“SEC”). Under those rules, certain footnotes and other financial information that are normally required by GAAP for annual financial statements have been condensed or omitted. The Company is responsible for the financial statements and the related notes included in this Form 10-Q.
The condensed consolidated financial statements include all of the normal and recurring adjustments necessary for the fair presentation of the Company’s financial position as of
March 31, 2016
and
December 31, 2015
, and results of operations and cash flows for the
three months ended March 31,
2016
and
2015
. Intercompany balances and transactions have been eliminated. Revenues, expenses, assets and liabilities can vary during each quarter of the year. Accordingly, the results and trends in these unaudited condensed consolidated financial statements may not be indicative of full-year operating results or future performance.
The accounting policies used in preparing these condensed consolidated financial statements are the same as those used to prepare the Company’s annual report on Form 10-K for the year ended
December 31, 2015
(“
2015
Form 10-K”). These unaudited condensed consolidated financial statements and the related notes should be read in conjunction with the audited year-end financial statements and accompanying notes included in the Company’s
2015
Form 10-K.
Recently Issued Accounting Standards—
In March 2016, the FASB issued ASU No. 2016-09,
Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
. This update simplifies several aspects of the accounting for share-based compensation arrangements, including accounting for income taxes, forfeitures and statutory tax withholding requirements as well as classification of related amounts on the statement of cash flows. The ASU is effective for fiscal years beginning after December 15, 2016, with early adoption permitted. The Company is currently evaluating the effect that the updated standard will have on its consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842).
The updated standard requires most leases to be reflected on the balance sheet. It also aligns many of the underlying principles of the new lessor model with those of ASC No. 606,
Revenue from Contracts with Customers
. The updated standard becomes effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the effect that the updated standard will have on its consolidated financial statements and related disclosures.
In July 2015, the FASB issued ASU No. 2015-11,
Simplifying the Measurement of Inventory (Topic 330)
. This update simplifies the guidance on the subsequent measurement of inventory. GAAP currently requires an entity to measure inventory at the lower of cost or market. Previously, market could be replacement cost, net realizable value or net realizable value less an approximate normal profit margin. Under the new standard, inventory should be valued at the lower of cost or net realizable value. The ASU is effective for fiscal years beginning after December 15, 2016, with early adoption permitted. The Company is currently evaluating the effect, if any, that the updated standard will have on its consolidated financial statements and related disclosures.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
. The updated standard will replace most existing revenue recognition guidance in GAAP when it becomes effective and permits the use of either the retrospective or cumulative effect transition method. The updated standard becomes effective for MJN in the first quarter of 2018. The Company is currently evaluating the impact that the updated standard will have on its consolidated financial statements and related disclosures.
3.
EARNINGS PER SHARE
The Company uses the two-class method to calculate earnings per share. The numerator for basic and diluted earnings per share is
net earnings attributable to shareholders
reduced by dividends and undistributed earnings attributable to unvested shares. The denominator for basic earnings per share is the weighted-average shares outstanding during the period. The denominator for diluted earnings per share is the weighted-average number of shares outstanding adjusted for the effect of dilutive stock options and performance share awards.
The following table presents the calculation of basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(Dollars and shares in millions, except per share data)
|
|
2016
|
|
2015
|
Basic earnings per share:
|
|
|
|
|
|
|
Weighted-average shares outstanding
|
|
186.6
|
|
|
202.4
|
|
Net earnings attributable to shareholders
|
|
$
|
72.7
|
|
|
$
|
207.4
|
|
Dividends and undistributed earnings attributable to unvested shares
|
|
(0.3
|
)
|
|
(0.4
|
)
|
Net earnings attributable to shareholders used for basic earnings per share calculation
|
|
$
|
72.4
|
|
|
$
|
207.0
|
|
Net earnings attributable to shareholders per share
|
|
$
|
0.39
|
|
|
$
|
1.02
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
Weighted-average shares outstanding
|
|
186.6
|
|
|
202.4
|
|
Incremental shares outstanding assuming the exercise/vesting of dilutive stock options/performance shares
|
|
0.1
|
|
|
0.5
|
|
Weighted-average shares — diluted
|
|
186.7
|
|
|
202.9
|
|
Net earnings attributable to shareholders
|
|
$
|
72.7
|
|
|
$
|
207.4
|
|
Dividends and undistributed earnings attributable to unvested shares
|
|
(0.3
|
)
|
|
(0.4
|
)
|
Net earnings attributable to shareholders used for diluted earnings per share calculation
|
|
$
|
72.4
|
|
|
$
|
207.0
|
|
Net earnings attributable to shareholders per share
|
|
$
|
0.39
|
|
|
$
|
1.02
|
|
Potential shares outstanding from all stock-based awards were
3.6 million
and
2.9 million
as of
March 31, 2016
and
2015
, respectively, of which
3.5 million
and
2.4 million
were not included in the diluted earnings per share calculation for the
three
months ended
March 31, 2016
and
2015
, respectively.
4.
INCOME TAXES
For the three months ended
March 31, 2016
and
2015
, the effective tax rate (“ETR”) was
38.1%
and
23.7%
, respectively. The ETR increase was primarily due to 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 Note
17
for additional information.
The Company’s gross reserve for uncertain tax positions including penalties and interest, as of
March 31, 2016
and
December 31, 2015
, was
$182.8 million
and
$167.0 million
, respectively. The Company believes that it has adequately provided for all uncertain tax positions. The Company is currently under examination by taxing authorities in various jurisdictions in which it operates, including its two largest businesses in the United States and China. It is reasonably possible that new issues may be raised by tax authorities and that these issues may require increases in the balance of the reserve for uncertain tax positions.
Pursuant to the Amended and Restated Tax Matters Agreement dated December 18, 2009, Bristol-Myers Squibb Company (“BMS”), the Company’s former parent, maintains responsibility for all uncertain tax positions which may exist in the pre-initial public offering period or which may exist as a result of the initial public offering transaction. BMS has an obligation to the Company related to uncertain tax positions, including penalties and interest, of
$11.2 million
and
$11.1 million
as of
March 31, 2016
and
December 31, 2015
, respectively.
5.
SEGMENT INFORMATION
MJN operates in
four
geographic operating segments: Asia, Europe, Latin America and North America. Based on this operating segmentation, the chief operating decision maker regularly assesses information for decision making purposes, including allocation of resources. Due to similarities between North America and Europe, the Company aggregates these
two
operating
segments into
one
reportable segment. As a result, the Company has
three
reportable segments: Asia, Latin America and North America/Europe.
Corporate and Other
consists of unallocated global business support activities, including research and development, marketing, supply chain, and general and administrative expenses;
net actuarial gains and losses related to defined benefit pension and other post-employment 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.
The following table summarizes net sales and earnings before interest and income taxes for each of the reportable segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
Net Sales
|
|
Earnings Before Interest and Income Taxes
|
(Dollars in millions)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Asia
|
|
$
|
500.6
|
|
|
$
|
581.0
|
|
|
$
|
169.1
|
|
|
$
|
231.5
|
|
Latin America
|
|
160.3
|
|
|
204.4
|
|
|
40.8
|
|
|
57.3
|
|
North America/Europe
|
|
301.2
|
|
|
309.0
|
|
|
82.0
|
|
|
78.3
|
|
Total reportable segments
|
|
962.1
|
|
|
1,094.4
|
|
|
291.9
|
|
|
367.1
|
|
Corporate and Other
|
|
—
|
|
|
—
|
|
|
(141.8
|
)
|
|
(81.9
|
)
|
Total
|
|
$
|
962.1
|
|
|
$
|
1,094.4
|
|
|
$
|
150.1
|
|
|
$
|
285.2
|
|
6.
RESTRUCTURING
During the third quarter of 2015, the Company approved a plan to implement a business productivity program referred to as “Fuel for Growth,” which is anticipated 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 costs across the business.
A summary of restructuring charges incurred during the
three months ended March 31, 2016
and related reserves associated with Fuel for Growth as of
March 31, 2016
is as follows:
|
|
|
|
|
|
Restructuring Charges
|
|
Three Months Ended
|
(Dollars in millions)
|
|
March 31, 2016
|
Other (Income)/Expenses- net
|
|
|
Severance and Employee Benefits
|
|
$
|
8.2
|
|
Other Exist Costs
|
|
0.6
|
|
Asset Write-off
|
|
0.3
|
|
|
|
$
|
9.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring Reserves
|
|
Severance and Employee Benefits
(1)
|
|
Contract Termination
(2)
|
|
Other Exist Costs
|
(Dollars in millions)
|
|
|
|
|
|
|
Balance at December 31, 2015
|
|
$
|
9.5
|
|
|
$
|
10.3
|
|
|
$
|
—
|
|
Charges
|
|
8.2
|
|
|
—
|
|
|
0.6
|
|
Cash Payments
|
|
(6.9
|
)
|
|
—
|
|
|
(0.6
|
)
|
Balance at March 31, 2016
|
|
$
|
10.8
|
|
|
$
|
10.3
|
|
|
$
|
—
|
|
(1)
Included in
accrued expenses
on the balance sheet
.
(2)
Included in
accrued expenses
and
other liabilities
on the balance sheet.
Restructuring charges are included in
Corporate and Other
, and the remainder of severance pay and benefits will be paid out during the next
twelve months
. The contract termination costs will be paid over a period from 2017 to 2019.
7.
EMPLOYEE STOCK BENEFIT PLANS
The following table summarizes stock-based compensation expense related to stock options, performance share awards and restricted stock units.
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(Dollars in millions)
|
|
2016
|
|
2015
|
Stock options
|
|
$
|
2.1
|
|
|
$
|
1.9
|
|
Performance share awards
|
|
2.3
|
|
|
4.4
|
|
Restricted stock units
|
|
3.4
|
|
|
2.7
|
|
Total pre-tax stock-based compensation expense
|
|
$
|
7.8
|
|
|
$
|
9.0
|
|
Net tax benefit related to stock-based compensation expense
|
|
$
|
(2.7
|
)
|
|
$
|
(3.1
|
)
|
During the
three
months ended
March 31, 2016
, the Company granted the following awards:
|
|
|
|
|
|
|
|
|
(Shares in millions)
|
|
Options/Shares Granted
|
|
Weighted-
Average Grant
Date Fair Value
|
Stock options
|
|
1.1
|
|
|
$
|
13.87
|
|
Performance share awards
|
|
0.2
|
|
|
$
|
70.48
|
|
Restricted stock units
|
|
0.3
|
|
|
$
|
73.76
|
|
As of
March 31, 2016
, the Company had the following award expense yet to be recognized:
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
Unrecognized
Compensation
Expense
|
|
Expected
Weighted-Average
Period to be
Recognized
(years)
|
Stock options
|
|
$
|
20.3
|
|
|
2.1
|
Performance share awards
|
|
10.6
|
|
|
1.5
|
Restricted stock units
|
|
45.5
|
|
|
2.8
|
|
|
$
|
76.4
|
|
|
|
8.
PENSION AND OTHER POST-EMPLOYMENT BENEFIT PLANS
The net periodic benefit cost of the Company’s defined benefit pension and post-employment benefit plans includes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
Pension Benefits
|
|
Other Benefits
|
(Dollars in millions)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Service cost – benefits earned during the period
|
|
$
|
0.7
|
|
|
$
|
0.8
|
|
|
$
|
0.3
|
|
|
$
|
0.3
|
|
Interest cost on projected benefit obligations
|
|
3.0
|
|
|
3.7
|
|
|
0.4
|
|
|
0.5
|
|
Expected return on plan assets
|
|
(4.1
|
)
|
|
(3.5
|
)
|
|
—
|
|
|
—
|
|
Net periodic benefit cost
|
|
$
|
(0.4
|
)
|
|
$
|
1.0
|
|
|
$
|
0.7
|
|
|
$
|
0.8
|
|
Net Actuarial (Gains)/Losses
|
|
6.1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total net periodic expense/(benefit)
|
|
$
|
5.7
|
|
|
$
|
1.0
|
|
|
$
|
0.7
|
|
|
$
|
0.8
|
|
The Company remeasures its U.S. pension plan when year-to-date aggregate lump sum settlements exceed anticipated interest costs for the year, and in each subsequent quarter of that fiscal year. During the first quarter of 2016, aggregate lump sum settlements exceeded anticipated annual interest costs for 2016. As such, the Company remeasured its U.S. pension plan in the first quarter of 2016. During the
three months ended March 31, 2016
, the Company recognized a net actuarial loss of
$6.1 million
. During the
three months ended March 31, 2015
, there was no remeasurement, and therefore no actuarial gain or loss was recognized.
For the
three months ended March 31,
2016, the Company made
no
contributions to pension plans. For the three months ended March 31, 2015, the Company made contributions of
$1.7 million
, primarily to U.S. pension plans.
9.
OTHER (INCOME)/EXPENSES - NET
The components of
other (income)/expenses - net
were:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(Dollars in millions)
|
|
2016
|
|
2015
|
Venezuela long-lived asset impairments
|
|
$
|
45.9
|
|
|
$
|
—
|
|
Foreign exchange (gains)/losses - net
|
|
33.7
|
|
|
(2.8
|
)
|
Restructuring, severance and other related costs
|
|
9.3
|
|
|
2.6
|
|
Legal settlements and other - net
|
|
(0.6
|
)
|
|
12.4
|
|
Other (income)/expenses - net
|
|
$
|
88.3
|
|
|
$
|
12.2
|
|
During the
three months ended March 31, 2016
, the Company recognized an impairment charge of
$45.9 million
on long-lived assets of its Venezuelan subsidiary. See Note
17
for additional information.
Foreign exchange (gains)/losses - net for the
three months ended March 31, 2016
included a
$32.3 million
loss related to the change in exchange rate used for remeasuring the monetary assets and liabilities of its Venezuelan subsidiary. See Note
17
for additional information. Foreign exchange (gains)/losses - net for the
three
months ended
March 31, 2015
included a gain of
$1.8 million
as a result of the Company’s exchange of Bolivares Fuertes for U.S. dollars through a Venezuelan government exchange at a rate more favorable than the rate used to remeasure net monetary assets of its Venezuelan subsidiary.
During the
three months ended March 31, 2016
, restructuring, severance and other related costs included
$9.1 million
of restructuring costs in association with the Fuel for Growth program. See Note
6
for additional information. During the three months ended
March 31, 2015
, legal settlements and other - net primarily included an accrual made in connection with the SEC settlement disclosed by the Company in July 2015.
10.
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 operating entities in China, Argentina and Indonesia, respectively.
11.
INVENTORIES
The major categories of
inventories
were as follows:
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
March 31, 2016
|
|
December 31, 2015
|
Finished goods
|
|
$
|
234.0
|
|
|
$
|
251.7
|
|
Work in process
|
|
73.7
|
|
|
70.3
|
|
Raw and packaging materials
|
|
179.2
|
|
|
162.9
|
|
Inventories
|
|
$
|
486.9
|
|
|
$
|
484.9
|
|
12.
LONG-LIVED ASSETS
Property, Plant and Equipment - net
The major categories of
property, plant and equipment
were as follows:
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
March 31, 2016
|
|
December 31, 2015
|
Land
|
|
$
|
8.3
|
|
|
$
|
12.3
|
|
Buildings and improvements
|
|
724.2
|
|
|
729.6
|
|
Machinery, equipment and fixtures
|
|
797.8
|
|
|
786.5
|
|
Construction in progress
|
|
102.2
|
|
|
123.6
|
|
Accumulated depreciation
|
|
(705.5
|
)
|
|
(688.0
|
)
|
Property, plant and equipment — net
|
|
$
|
927.0
|
|
|
$
|
964.0
|
|
During the
three months ended March 31, 2016
, the Company recognized an impairment charge of
$45.9 million
on long-lived assets of its Venezuelan subsidiary. See Note
17
for additional information.
Other Intangible Assets - net
The Company tests intangible assets not subject to amortization for impairment in the third quarter of each year and whenever an event occurs or circumstances change that indicate that it is more likely than not that the asset is impaired. No events have occurred through
March 31, 2016
that would require the Company to review intangible assets not subject to amortization for impairment subsequent to the review performed in the third quarter of
2015
.
The gross carrying value and accumulated amortization by class of
intangible assets
as of
March 31, 2016
and
December 31, 2015
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2016
|
|
As of December 31, 2015
|
(Dollars in millions)
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Book
Value
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Book
Value
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademark
(1)
.
|
|
$
|
15.3
|
|
|
$
|
—
|
|
|
$
|
15.3
|
|
|
$
|
16.9
|
|
|
$
|
—
|
|
|
$
|
16.9
|
|
Non-compete agreement
(1)
.
|
|
3.0
|
|
|
—
|
|
|
3.0
|
|
|
3.3
|
|
|
—
|
|
|
3.3
|
|
Sub-total
|
|
18.3
|
|
|
—
|
|
|
18.3
|
|
|
20.2
|
|
|
—
|
|
|
20.2
|
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Computer software
|
|
138.1
|
|
|
(106.8
|
)
|
|
31.3
|
|
|
136.7
|
|
|
(103.0
|
)
|
|
33.7
|
|
Distributor-customer relationship
(2)
.
|
|
1.5
|
|
|
(0.6
|
)
|
|
0.9
|
|
|
1.6
|
|
|
(0.6
|
)
|
|
1.0
|
|
Sub-total
|
|
139.6
|
|
|
(107.4
|
)
|
|
32.2
|
|
|
138.3
|
|
|
(103.6
|
)
|
|
34.7
|
|
Total other intangible assets
|
|
$
|
157.9
|
|
|
$
|
(107.4
|
)
|
|
$
|
50.5
|
|
|
$
|
158.5
|
|
|
$
|
(103.6
|
)
|
|
$
|
54.9
|
|
(1)
Changes in balances result from currency translation.
(2)
Changes in balances result from currency translation and amortization (10 year life).
Non-Cash Activity
The decrease in capital expenditures not paid was
$38.4 million
and
$26.8 million
for the
three months ended March 31, 2016
and
2015
, respectively.
13.
GOODWILL
The Company tests
goodwill
for impairment in the third quarter of each year and whenever an event occurs or circumstances change that would, more likely than not, reduce the fair value of a reporting unit below its carrying amount. No events have occurred through
March 31, 2016
that would require the Company to review goodwill for impairment subsequent to the review performed in the third quarter of
2015
.
For the
three months ended March 31,
2016
and
2015
, the change in the carrying amount of
goodwill
by reportable segment was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Asia
|
|
Latin America
|
|
North America/
Europe
|
|
Total
|
Balance as of January 1, 2016
|
$
|
—
|
|
|
$
|
107.0
|
|
|
$
|
19.0
|
|
|
$
|
126.0
|
|
Translation adjustments
|
—
|
|
|
(6.0
|
)
|
|
—
|
|
|
(6.0
|
)
|
Balance as of March 31, 2016
|
$
|
—
|
|
|
$
|
101.0
|
|
|
$
|
19.0
|
|
|
$
|
120.0
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2015
|
$
|
—
|
|
|
$
|
143.7
|
|
|
$
|
19.0
|
|
|
$
|
162.7
|
|
Translation adjustments
|
—
|
|
|
(3.4
|
)
|
|
—
|
|
|
(3.4
|
)
|
Balance as of March 31, 2015
|
$
|
—
|
|
|
$
|
140.3
|
|
|
$
|
19.0
|
|
|
$
|
159.3
|
|
As of
March 31, 2016
, the Company had
no
accumulated impairment loss.
14.
DEBT
Short-Term Borrowings
As of
March 31, 2016
and
December 31, 2015
, the Company’s
short-term borrowings
were
$3.1 million
and
$3.0 million
, respectively, and consisted of borrowings made by the Company’s subsidiary in Argentina. The
short-term borrowings
in Argentina had a weighted-average interest rate of
39.0%
as of
March 31, 2016
.
Revolving Credit Facility
As of
March 31, 2016
and
December 31, 2015
, the Company had
no
borrowings from its
$750.0 million
revolving credit facility, and the Company had
$750.0 million
available at
March 31, 2016
. The revolving credit facility contains financial covenants and the Company was in compliance with these financial covenants as of March 31, 2016. Any borrowings under the facility are repayable at maturity in June 2019.
Long-Term Debt
The components of
long-term debt
were as follows:
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
March 31, 2016
|
|
December 31, 2015
|
Principal Value:
|
|
|
|
|
|
|
4.900% Notes due 2019 (“2019 Notes”)
|
|
$
|
700.0
|
|
|
$
|
700.0
|
|
3.000% Notes due 2020 (“2020 Notes”)
|
|
750.0
|
|
|
750.0
|
|
4.125% Notes due 2025 (“2025 Notes”)
|
|
750.0
|
|
|
750.0
|
|
5.900% Notes due 2039 (“2039 Notes”)
|
|
300.0
|
|
|
300.0
|
|
4.600% Notes due 2044 (“2044 Notes”)
|
|
500.0
|
|
|
500.0
|
|
Sub-total
|
|
3,000.0
|
|
|
3,000.0
|
|
Adjustments to Principal Value:
|
|
|
|
|
|
|
Unamortized basis adjustment for settled interest rate swaps
|
|
6.6
|
|
|
7.0
|
|
Unamortized bond discount
|
|
(4.7
|
)
|
|
(4.8
|
)
|
Unamortized debt issuance costs
|
|
(21.1
|
)
|
|
(21.6
|
)
|
Fair-value interest rate swaps
|
|
31.8
|
|
|
0.4
|
|
Long-term debt
|
|
$
|
3,012.6
|
|
|
$
|
2,981.0
|
|
Using quoted prices in markets that are not active, long-term debt is classified as Level 2 in the fair value hierarchy. The Company determined that the fair value of its long-term debt was
$3,201.3 million
as of
March 31, 2016
.
The components of
interest expense-net
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(Dollars in millions)
|
|
2016
|
|
2015
|
Interest expense
|
|
$
|
29.0
|
|
|
$
|
16.4
|
|
Interest income
|
|
(2.8
|
)
|
|
(2.6
|
)
|
Interest expense-net
|
|
$
|
26.2
|
|
|
$
|
13.8
|
|
The increase in
interest expense-net
was driven by interest expense on the November 2015 issuance of the 2020 Notes and the 2025 Notes.
15.
DERIVATIVES AND OTHER FINANCIAL INSTRUMENTS
The Company is exposed to market risk due to changes in foreign currency exchange rates, commodities pricing and interest rates. To manage that risk, the Company enters into certain derivative financial instruments, when available on a cost-effective basis, to hedge its underlying economic exposure. The Company does not enter into derivatives for speculative purposes.
Using quoted prices in markets that are not active
, these financial instruments are classified as
Level 2
in the fair value hierarchy at
March 31, 2016
and
December 31, 2015
, and there were
no
transfers between levels in the fair value hierarchy during the periods then ended.
The following table summarizes the fair value of the Company's outstanding derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Hedge Designation
|
Balance Sheet Location
|
|
March 31, 2016
|
|
December 31, 2015
|
Foreign exchange contracts
|
Cash Flow
|
Prepaid expenses and other assets
|
|
$
|
1.8
|
|
|
$
|
6.4
|
|
Interest rate swaps
|
Fair Value
|
Other assets
|
|
31.8
|
|
|
3.9
|
|
Foreign exchange contracts
|
Cash Flow
|
Accrued expenses
|
|
(11.2
|
)
|
|
(0.9
|
)
|
Interest rate swaps
|
Fair Value
|
Other liabilities
|
|
—
|
|
|
(3.5
|
)
|
Commodity contracts
|
Cash Flow
|
Accrued expenses
|
|
(0.1
|
)
|
|
(0.2
|
)
|
Net asset/(liability) of derivatives designated as hedging items
|
|
|
|
$
|
22.3
|
|
|
$
|
5.7
|
|
While certain derivatives are subject to netting arrangements with the Company’s counterparties, the Company does not offset derivative assets and liabilities within the condensed consolidated balance sheets presented herein.
The Company’s derivative financial instruments present certain market and counterparty risks; however, concentration of counterparty risk is mitigated as the Company deals with a variety of major banks worldwide whose long-term debt at hedge inception is rated A- or higher by Standard & Poor’s Rating Service, Fitch Ratings or Moody’s Investors Service, Inc. In addition, only conventional derivative financial instruments are used. The Company would not be materially impacted if any of the counterparties to the derivative financial instruments outstanding at
March 31, 2016
failed to perform according to the terms of its agreement.
Based upon the risk profile of the Company’s portfolio, MJN does not require collateral or any other form of securitization to be furnished by the counterparties to its derivative financial instruments
.
Cash Flow Hedges
As of
March 31, 2016
and
December 31, 2015
, all of the Company’s cash flow hedges qualify as hedges of forecasted cash flows, and the effective portion of changes in fair value are temporarily reported in
accumulated other comprehensive income (loss)
. During the period that the underlying hedged transaction impacts earnings, the effective portion of the changes in the fair value of the cash flow hedges is recognized within earnings. The Company assesses effectiveness at inception and on a quarterly basis. These assessments determine whether derivatives designated as qualifying hedges continue to be highly effective in offsetting changes in the cash flows of hedged items. Any ineffective portion of the change in fair value is included in current period earnings.
The Company will discontinue cash flow hedge accounting when the forecasted transaction is no longer probable of occurring on the originally forecasted date, or
60
days thereafter, or when the hedge is no longer effective. For the
three months ended March 31, 2016
and
2015
, the Company did not discontinue any cash flow hedges.
Foreign Exchange Contracts
The Company uses foreign exchange contracts to hedge forecasted transactions, primarily foreign currency denominated intercompany purchases anticipated in the next
15
months and designates these derivative instruments as foreign currency cash flow hedges when appropriate. When the underlying intercompany purchases impact the Company’s consolidated earnings, the effective portion of the hedge is recognized within
cost of products sold
. Ineffectiveness related to the Company’s foreign exchange hedges on earnings was
$1.3 million
and
$0.8 million
for the
three months ended March 31, 2016
and
2015
, respectively.
As of
March 31, 2016
, the notional value of the Company’s outstanding foreign exchange forward contracts designated as hedging instruments was
$208.4 million
, with a net fair value of
$9.4 million
in a net liability position. As of
December 31, 2015
, the notional value of the Company’s outstanding foreign exchange forward contracts designated as hedging instruments was
$174.8 million
, with a fair value of
$5.5 million
in net assets. The fair value of all foreign exchange forward contracts is based on quarter-end forward currency rates. The fair value of foreign exchange forward contracts should be viewed in relation to the fair value of the underlying hedged transactions and the overall reduction in exposure to fluctuations in foreign currency exchange rates.
The change in
accumulated other comprehensive income (loss)
and the impact on earnings from foreign exchange contracts that qualified as cash flow hedges were as follows:
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
2016
|
|
2015
|
Balance—January 1
|
|
$
|
10.1
|
|
|
$
|
10.4
|
|
Derivatives qualifying as cash flow hedges deferred in other comprehensive income
|
|
(11.9
|
)
|
|
8.0
|
|
Derivatives qualifying as cash flow hedges reclassified to cost of products sold (effective portion)
|
|
(6.3
|
)
|
|
(2.4
|
)
|
Change in deferred taxes
|
|
4.2
|
|
|
(1.5
|
)
|
Balance—March 31
|
|
$
|
(3.9
|
)
|
|
$
|
14.5
|
|
At
March 31, 2016
, the balance of the effective portion of changes in fair value on foreign exchange forward contracts that qualified for cash flow hedge accounting included in
accumulated other comprehensive loss
was
$3.9 million
,
$2.6 million
of which is expected to be reclassified into earnings within the next
12
months.
Commodity Hedges
The Company utilizes commodity hedges to minimize the variability in cash flows due to fluctuations in market prices of the Company’s non-fat dry milk purchases for North America. The maturities of the commodity contracts are scheduled to match the pricing terms of the Company’s existing bulk purchase agreements. When the underlying non-fat dry milk purchases impact the Company’s consolidated earnings, the effective portion of the hedge is recognized within
cost of products sold
.
As of
March 31, 2016
, the Company had commodity contracts outstanding which committed the Company to approximately
$0.2 million
of forecasted non-fat dry milk purchases. The ineffective portion recognized within
other (income)/expenses - net
was insignificant for the
three months ended March 31, 2016
and
2015
. Commodity derivatives qualifying as cash flow hedges deferred in
accumulated other comprehensive
loss
at
March 31, 2016
and
December 31, 2015
was
$0.5 million
and
$0.7 million
, respectively.
Fair Value Hedges
Interest Rate Swaps
In November 2009, the Company executed several interest rate swaps to convert
$700.0 million
of the Company’s then newly-issued fixed rate debt to be paid in 2014 and 2019 to variable rate debt. In
November 2010
, the Company terminated
$200.0 million
notional amount of fixed-to-floating interest rate swaps in exchange for cash of
$15.6 million
. In
July 2011
, the Company terminated the remaining
$500.0 million
notional amount of fixed-to-floating interest rate swaps in exchange for cash of
$23.5 million
. The related basis adjustments of the underlying hedged items are being recognized as a reduction of
interest expense
over the remaining life of the underlying debt. For the
three months ended March 31, 2016
and
2015
, the amortization of the settled swaps related to the 2019 Notes resulted in a
$0.5 million
reduction in interest expense. Because the Company redeemed the 3.50% Notes due in 2014 in the third quarter of 2014, the amortization of the related swaps was completed at that time, and there was no amortization related to these swaps in the
three months ended March 31, 2016
.
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. These interest rate swaps were outstanding as of
March 31, 2016
, and the conversion of fixed to floating rate resulted in a reduction in interest expense of
$2.0 million
for the
three months ended March 31, 2016
. During the
three months ended March 31, 2015
, the conversion of fixed to floating rate resulted in a reduction in interest expense of
$2.7 million
.
In the fourth quarter of 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. These interest rate swaps were outstanding as of
March 31, 2016
, and the conversion of fixed to floating rate resulted in a reduction in interest expense of
$2.1 million
for the
three months ended March 31, 2016
. As the Company entered into the swaps during the fourth quarter of 2015, there was
no
impact to interest expense for the
three months ended March 31, 2015
.
The following table summarizes the interest rate swaps outstanding as of
March 31, 2016
. The interest rate swaps for the 2019 Notes have a hedge inception date of May 2014, and the interest rate swaps for the 2020 Notes have an inception date of November 2015. The expiration dates of the interest rate swaps are equal to the stated maturity dates of the underlying debt.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
Notional Amount of Underlying
|
|
Fixed Rate Received
|
|
Variable Rate Paid
(U.S. 3 Month LIBOR +)
|
|
Fair Value Asset
|
Swaps associated with the 2019 Notes
|
|
$
|
700.0
|
|
|
4.9
|
%
|
|
3.14
|
%
|
|
$
|
16.5
|
|
Swaps associated with the 2020 Notes
|
|
$
|
750.0
|
|
|
3.0
|
%
|
|
1.38
|
%
|
|
$
|
15.3
|
|
See Note
14
for additional information related to the Company’s long-term debt.
Other Financial Instruments
The Company does not hedge the interest rate risk associated with money market funds, which totaled
$737.0 million
and
$510.1 million
as of
March 31, 2016
and
December 31, 2015
, respectively. Money market funds are classified as
Level 2
in the fair value hierarchy and are included in
cash and cash equivalents
on the balance sheet. The money market funds have quoted market prices that are equivalent to par.
16.
EQUITY
Changes in common shares and treasury stock were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars and shares in millions)
|
|
Common Shares
Issued
|
|
Treasury Stock
|
|
Cost of Treasury
Stock
|
Balance as of January 1, 2016
|
|
191.4
|
|
|
4.9
|
|
|
$
|
362.6
|
|
Stock-based compensation
|
|
0.2
|
|
|
—
|
|
|
—
|
|
Balance as of March 31, 2016
|
|
191.6
|
|
|
4.9
|
|
|
$
|
362.6
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2015
|
|
207.2
|
|
|
4.9
|
|
|
$
|
362.6
|
|
Stock-based compensation
|
|
0.3
|
|
|
—
|
|
|
—
|
|
Balance as of March 31, 2015
|
|
207.5
|
|
|
4.9
|
|
|
$
|
362.6
|
|
The Company may use either authorized and unissued shares or treasury shares to meet share requirements resulting from the exercise of stock options and vesting of performance share awards and restricted stock units. Treasury stock is recognized at the cost to reacquire the shares. Shares issued from treasury are recognized using the first-in first-out method.
On September 10, 2013, MJN’s board of directors approved a share repurchase authorization of up to
$500.0 million
of the Company’s common stock (the “2013 Authorization”). The authorization does not have an expiration date. During the
first
quarter of
2016
, the Company did not repurchase any shares pursuant to the 2013 Authorization.
On October 20, 2015, MJN’s board of directors approved a new share repurchase authorization of an additional
$1,500.0 million
of the Company’s common stock (the “2015 Authorization”). 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 the Company’s common stock. Under the terms of the ASR Agreement,
10,725,552
shares of common stock were received and retired by the Company on October 27, 2015 (which shares are equivalent to
85%
of the number of shares of Company common stock that could be purchased with an amount of cash equal to the Repurchase Price based on the closing price of the Company’s common stock on October 22, 2015). The payments to Goldman were recorded as a reduction to shareholders’ equity consisting of a
$1,000.0 million
reduction to retained earnings, reflecting the value of the
10,725,552
shares received upon initial settlement and a
$150.0 million
decrease reflecting the value of the stock held back by Goldman pending final settlement of the ASR Agreement. At final settlement, which will occur during the second quarter of 2016, Goldman may be required to deliver additional shares of common stock to the Company, or, under certain circumstances, the Company may be required to deliver shares of its common stock or may elect to make a cash payment to Goldman, based on the average of the daily volume-weighted average prices of the Company’s common stock during the term of the ASR Agreement, subject, in part, to certain maximum and minimum prices. The ASR Agreement was primarily funded by the 2020 Notes and 2025 Notes issuance. See Note
14
for discussion on the Company’s debt.
The Company had a redeemable noncontrolling interest related to its subsidiary in Argentina from March 2012 through June 2015. On June 30, 2015, the noncontrolling partner exercised its single trigger put option and MJN acquired an additional
10%
of the outstanding capital stock of the local entity, thereby increasing MJN’s ownership interest to
90%
. At that time, the remaining noncontrolling interest was recharacterized from
redeemable noncontrolling interest
outside of
equity
to
noncontrolling interests
within
equity
on the balance sheet.
Changes in
accumulated other comprehensive loss
by component were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
Foreign Currency Translation Adjustments
|
|
Deferred Gains/(Losses) on Derivatives Qualifying as Hedges
|
|
Pension and Other Post-employment Benefits
|
|
Total
|
|
Noncontrolling Interest
|
|
Redeemable Noncontrolling Interest
|
Balance as of January 1, 2016
|
|
$
|
(329.8
|
)
|
|
$
|
(17.2
|
)
|
|
$
|
(0.8
|
)
|
|
$
|
(347.8
|
)
|
|
$
|
(12.7
|
)
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Gains/(Losses)
|
|
6.7
|
|
|
(11.6
|
)
|
|
|
|
|
(4.9
|
)
|
|
(0.8
|
)
|
(1
|
)
|
|
|
Reclassification Adjustment for (Gains)/Losses Included in Net Earnings
|
|
|
|
(5.5
|
)
|
|
|
|
|
(5.5
|
)
|
|
|
|
|
Tax Benefit/(Expense)
|
|
0.2
|
|
|
3.8
|
|
|
|
|
|
4.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2016
|
|
$
|
(322.9
|
)
|
|
$
|
(30.5
|
)
|
|
$
|
(0.8
|
)
|
|
$
|
(354.2
|
)
|
|
$
|
(13.5
|
)
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2015
|
|
$
|
(180.4
|
)
|
|
$
|
(17.8
|
)
|
|
$
|
(0.7
|
)
|
|
$
|
(198.9
|
)
|
|
$
|
1.9
|
|
|
$
|
(21.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Gains/(Losses)
|
|
(37.1
|
)
|
|
7.4
|
|
(2)
|
|
|
|
(29.7
|
)
|
|
|
|
(1
|
)
|
(0.6
|
)
|
Reclassification Adjustment for (Gains)/Losses Included in Net Earnings
|
|
|
|
|
(1.9
|
)
|
|
|
|
|
(1.9
|
)
|
|
|
|
|
|
|
Tax Benefit/(Expense)
|
|
0.2
|
|
|
(1.5
|
)
|
|
|
|
|
(1.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2015
|
|
$
|
(217.3
|
)
|
|
$
|
(13.8
|
)
|
|
$
|
(0.7
|
)
|
|
$
|
(231.8
|
)
|
|
$
|
1.9
|
|
|
$
|
(22.2
|
)
|
(1)
Represents foreign currency translation adjustments.
(2)
See Note
15
for additional information related to interest rate forward swaps.
Reclassification adjustments out of
accumulated other comprehensive loss
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
Affected Statement of Earnings Lines
|
|
|
|
|
(Dollars in millions)
|
Cost of Products Sold
|
|
Tax Benefit/(Expense)
|
|
Net
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Deferred Gains/(Losses) on Derivatives Qualifying as Hedges:
|
|
|
|
|
|
|
|
|
|
|
|
Forward Exchange Contracts
|
$
|
6.3
|
|
|
$
|
2.4
|
|
|
$
|
(0.6
|
)
|
|
$
|
(0.6
|
)
|
|
$
|
5.7
|
|
|
$
|
1.8
|
|
Commodity Contracts
|
(0.4
|
)
|
|
(0.1
|
)
|
|
0.2
|
|
|
0.1
|
|
|
(0.2
|
)
|
|
—
|
|
Interest Rate Forward Swap
|
(0.4
|
)
|
|
(0.4
|
)
|
|
0.1
|
|
|
0.1
|
|
|
(0.3
|
)
|
|
(0.3
|
)
|
Total Reclassifications
|
$
|
5.5
|
|
|
$
|
1.9
|
|
|
$
|
(0.3
|
)
|
|
$
|
(0.4
|
)
|
|
$
|
5.2
|
|
|
$
|
1.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17.
VENEZUELA MATTERS
Discussion of Venezuela Exchange Rates
In January 2014, the Venezuelan government enacted changes affecting the country’s currency exchange and other controls, and established a new foreign currency administration, the National Center for Foreign Commerce (“CENCOEX”). CENCOEX
assumed control of the sale and purchase of foreign currency in Venezuela, and established the official exchange rate (“Official Rate”) of
6.3
Bolivares Fuertes (“VEF”) to
1.0
U.S. dollar (“USD”). Additionally, the government expanded the types of transactions that may be subject to the weekly auction mechanism under the Complimentary Currency Administration System (“SICAD I”). For a period of time, the Venezuelan government announced plans for the Alternative Foreign Exchange System, also known as SICAD II, which was intended to more closely resemble a market-driven exchange.
In February 2015, the Venezuelan government combined the SICAD I and SICAD II (“SICAD”) exchange rate mechanisms and created a new market based SIMADI rate, which was based on supply and demand. The changes created a three tiered system. As of December 31, 2015, CENCOEX traded at
6.3
VEF to
1.0
USD, the SICAD auction markets traded at
13.5
VEF to
1.0
USD and the SIMADI traded at
198.7
VEF to
1.0
USD.
In March 2016, the Venezuelan government devalued its currency and reduced its existing three tiered system to a two tiered system by eliminating the intermediary SICAD rate. The CENCOEX Official Rate, which continues to be used for purchases of certain essential goods, was changed to
10.0
VEF to
1.0
USD and is now referred to as DIPRO. Additionally, the SIMADI rate was replaced by a new market based rate known as DICOM, which governs all transactions not covered by DIPRO. As of
March 31, 2016
, DIPRO traded at
10.0
VEF to
1.0
USD and DICOM traded at
272.9
VEF to
1.0
USD.
Effect on the Company’s Results
Due to the elimination of the SICAD rate in March 2016, the Company adopted the DICOM rate for purposes of remeasuring the monetary assets and liabilities of its Venezuela subsidiary effective March 10, 2016 because the Company believes the DICOM rate would now be used to settle future intercompany dividend remittances. The remeasurement impact of this adoption was a loss of
$32.3 million
, which was recognized as a component of
other (income)/expenses - net
.
As a result of the change in the Venezuelan exchange rates, the Company concluded that an impairment indicator existed at
March 31, 2016
and evaluated the carrying value of the long-lived assets of its Venezuelan subsidiary for impairment, which includes administrative office space, land and a partially completed distribution warehouse facility. Based on this evaluation, the Company concluded that the carrying value of the long-lived assets was no longer recoverable and recorded an impairment charge of
$45.9 million
to write down the carrying value of the assets to their fair value, which was recognized during the
three months ended March 31, 2016
as a component of
other (income)/expenses - net
. The fair value measurements were based on market quotes from local real estate broker service firms as well as internal assessments of the best information available about the local business conditions and the political environment, including the risks associated with the local currency that would be indicative of what the assets could be sold for and are considered to be Level 3 measurements.
For the
three months ended March 31, 2016
, the Venezuelan subsidiary’s net sales were negligible as a percentage of total Company net sales. For the
three months ended March 31, 2015
, the Venezuelan subsidiary’s net sales were
2.5%
of total Company net sales. The Venezuelan subsidiary’s earnings were not a material component of MJN consolidated results during the
three months ended March 31,
2016
and
2015
.
Remaining Asset Exposures
The following sets forth selected information of our Venezuelan subsidiary as of
March 31, 2016
:
Net Monetary Assets:
$1.1 million
(
300.2 million
Venezuelan Bolivares; DICOM of
272.9
VEF to
1.0
USD)
Net Non-Monetary Assets:
$8.1 million
(
2,210.5 million
Venezuelan Bolivares; based on a DICOM rate of
272.9
VEF to
1.0
USD)
MJN Intercompany Payables:
$52.0 million
(U.S Dollar denominated)
The intercompany payable represents amounts owed by our Venezuelan subsidiary to our subsidiaries in Mexico and the U.S. for purchases of inventory.
18.
COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Company is subject to lawsuits, investigations, government inquiries and claims, including, but not limited to, product liability claims, advertising disputes and inquiries, consumer fraud suits, other commercial disputes, premises claims and employment and environmental, health, and safety matters.
The Company records accruals for contingencies when it is probable that a liability will be incurred and the loss can be reasonably estimated. Although the Company cannot predict with certainty the final resolution of lawsuits, investigations and claims asserted against the Company, MJN does not believe any currently pending legal proceeding to which the Company is a party will have a material impact on the Company’s business or financial condition, results of operations or cash flows.