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| MJN > SEC Filings for MJN > Form 10-Q on 28-Oct-2009 | All Recent SEC Filings |
28-Oct-2009
Quarterly Report
Overview of Our Business
We are a global leader in pediatric nutrition. We are committed to creating trusted nutritional brands and products that help improve the health and development of infants and children around the world and provide them with the best start in life. Our comprehensive product portfolio addresses a broad range of nutritional needs for infants, children and expectant and nursing mothers. We have over 100 years of innovation experience during which we have developed or improved many breakthrough or industry-defining products across each of our product categories. We operate in four geographic regions: Asia, Latin America, North America and Europe. Due to similarities in the economics, products offered, production process, customer base and regulatory environment, these operating regions have been aggregated into two reportable segments: Asia/Latin America and North America/Europe.
Financial Highlights
For the nine months ended September 30, 2009, net sales totaled $2,112.1 million, down 3% including an unfavorable foreign exchange impact of 6%, compared to $2,174.7 million from the same period in 2008. In our Asia/Latin America segment sales grew by 14%, excluding the adverse impact of foreign exchange, driven by market growth and market share gains in key markets due to our investments in product innovation and promotion. Sales decreased in our North America/Europe segment by 9%, excluding foreign exchange, due to market share losses and a market decline due to a decrease in births in the United States.
Earnings before interest and income taxes (EBIT) increased to $566.6 million, up from $560.8 million a year earlier. Factors affecting EBIT in the first nine months of 2009 include the benefit of lower commodity costs and the carryover benefit of pricing actions taken in 2008, along with price increases in 2009 in a select number of international markets. These benefits were somewhat offset by higher costs incurred as a stand-alone public company and the impact of a stronger dollar. Results for 2009 include costs associated with the initial public offering (IPO) and separation from Bristol-Myers Squibb Company (BMS) of $31.3 million.
Net earnings attributable to shareholders for the first nine months of 2009 totaled $335.6 million, compared with $347.5 million, for the same period a year ago. Net interest expense for the nine months ended September 30, 2009, totaled $75.3 million compared with $11.9 million for the same period in 2008. Results for 2009 benefited from a lower effective tax rate (ETR) compared with 2008 largely due to benefits associated with the restructuring of our foreign operations as part of the separation from BMS. The ETR for the nine months ended September 30, 2009, was 30.1% versus 35.5% for 2008. Earnings per diluted share for the nine months ended September 30, 2009, were $1.68, compared with $2.05 in 2008. There were 199.3 million diluted shares outstanding during the first nine months of 2009, versus 170.0 million shares in 2008.
Factors Affecting Comparability
The results for the three and nine months ended September 30, 2009 include several items related to the IPO and our separation from BMS that affect the comparability of the company's financial results between 2009 and 2008. These items include specified IPO-related costs, interest expense, operating model changes, the ETR and the number of shares outstanding.
We incurred $7.2 million and $31.3 million in costs in connection with our IPO and separation during the three and nine months ended September 30, 2009, respectively, compared to $13.8 million and $14.0 million during the three and nine months ended September 30, 2008, respectively. These costs relate to legal, accounting, systems separation and consulting services.
On August 26, 2008, we issued a $2.0 billion intercompany note to BMS. The note was restructured at the IPO date reducing the related party debt to approximately $1.8 billion. Net interest expense during the three and nine months ended September 30, 2009, was $23.0 million and $75.3 million, respectively, compared with $11.9 million for both the three and nine months ended September 30, 2008.
Our 2009 results include operating model changes in Brazil, Europe and Mexico. In Brazil, our ability to operate as a new stand-alone subsidiary was delayed until late in the third quarter. Prior to that time, BMS distributed and recorded sales for our products and we conducted marketing activities. In Europe, we have transitioned to a third-party distributor model with BMS serving as our distributor. This reduced net sales by the amount of the distributors' margin and lowered costs for the distribution-related expenses. In Mexico, we now operate our business through a newly formed operating subsidiary that is incurring higher profit sharing costs than were allocated to us when we operated within BMS. The combined effect of these operating model changes was to reduce net sales growth for the three months ended September 30, 2009, by $7.7 million and EBIT by $0.3 million. The combined effect of these operating model changes was to reduce net sales and EBIT growth for the nine months ended September 30, 2009, by $25.3 million and $1.7 million, respectively.
For the three and nine months ended September 30, 2009, the ETR was 27.7% and 30.1%, respectively, compared to 30.6% and 35.5% for the three and nine months ended September 30, 2008, respectively. The lower rates were attributable primarily to benefits associated with restructuring the Company's foreign operations as part of the separation from BMS in the IPO process and the earnings mix.
Prior to February 10, 2009, there were 170.0 million shares of common stock outstanding. The company issued an additional 34.5 million shares of common stock in the IPO. As of September 30, 2009, we had 204.6 million diluted common shares.
In addition to these items that affect the 2009 results of operations, there are several adjustments to the balance sheet related to our separation from BMS. These include the recognition of pension and capital lease liabilities, inclusion of cash balances and restructuring of related-party debt and divisional equity. See "Item 1. Financial Statements."
Three Months Results of Operations
Below is a summary of comparative results of operations and a more detailed
discussion of results for the three months ended September 30, 2009 and 2008:
Three Months Ended September 30,
% of Net Sales
(In millions, except per share
data) 2009 2008 % Change 2009 2008
Net Sales $ 699.8 $ 742.8 (6% ) - -
Earnings Before Interest and Income
Taxes 159.7 163.7 (2% ) 23% 22%
Interest Expense-net (23.0 ) (11.9 ) - 3% 2%
Earnings before Income Taxes 136.7 151.8 (10% ) 20% 20%
Provision for Income Taxes (37.9 ) (46.5 ) (18% ) 5% 6%
Effective Tax Rate 27.7 % 30.6 %
Net Earnings 98.8 105.3 (6% ) 14% 14%
Less: Net Earnings Attributable to
Noncontrolling Interests (1.2 ) (2.6 ) - 0% 0%
Net Earnings Attributable to
Shareholders 97.6 102.7 (5% ) 14% 14%
Weighted Average Common Shares
Outstanding - Diluted 204.6 170.0
Earnings per Common Share - Diluted $ 0.48 $ 0.61
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Net Sales
Our net sales by reportable segments are shown in the table below:
Three Months Ended September 30,
% Change Due to
Foreign
(Dollars in millions) 2009 2008 % Change Volume Price Exchange
Asia/Latin America $ 413.8 $ 400.1 3% 2% 8% (7% )
North America/Europe 286.0 342.7 (17% ) (16% ) 1% (2% )
Net Sales $ 699.8 $ 742.8 (6% ) (7% ) 5% (4% )
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Our Asia/Latin America segment represented 59% of net sales for the three months ended September 30, 2009, compared to 54% for the three months ended September 30, 2008. We continue to achieve significant sales growth in our international markets, particularly in Asia, where sales grew by double digits, excluding the impact of foreign exchange. Our success in the Asia/Latin America segment comes from market growth as well as our investment in product innovation, sales force, advertising and product promotion. China, which is our second largest market, continues to grow at rates more than double those for the Asia/Latin America segment as a whole. Multiple other Asian and Latin American countries achieved double-digit growth as well, excluding the impact of foreign exchange.
The decrease in North America/Europe segment sales was primarily due to weaker performance in the United States driven by share losses, U.S. retail inventory reductions and the contraction in the U.S. market from lower births. The reduction in inventories held by retailers in the United States during the three months ended September 30, 2009, followed a corresponding build by retailers in the three months ended June 30, 2009, due to the launch of Enfamil PREMIUM LIPIL in April 2009. Excluding the impact of foreign exchange, Europe sales declined due in large part to a reduction of distributor inventory levels.
We have three product categories: (1) infant formula, (2) children's nutrition and (3) other. The North America/Europe segment is principally an infant formula market whereas the Asia/Latin America segment sells a balance of infant formula and children's nutrition products. Our net sales by product category are shown in the table below:
Three Months Ended September 30,
(Dollars in millions) 2009 2008 % Change
Infant Formula $ 445.1 $ 496.8 (10% )
Children's Nutrition 233.5 220.7 6%
Other 21.2 25.3 (16% )
Net Sales $ 699.8 $ 742.8 (6%)
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Excluding foreign exchange, infant formula decreased 8%, primarily reflecting the sales decline in the North America/Europe segment, which are primarily infant formula markets. Excluding foreign exchange, children's nutrition increased 14%, reflecting the strength of the business in Asia and Latin America.
We recognize revenue net of various sales adjustments to arrive at net sales as reported on the statements of earnings. These adjustments are referred to as gross-to-net sales adjustments. The reconciliation of our gross sales to net sales was as follows:
Three Months Ended September 30,
(Dollars in millions) 2009 2008 % Change
Gross Sales $ 964.3 $ 1,021.7 (6%)
Gross-to-Net Sales Adjustments
WIC Rebates (187.3 ) (201.7 ) (7%)
Sales Discounts (26.8 ) (22.4 ) 20%
Returns (17.4 ) (19.4 ) (10%)
Cash Discounts (11.2 ) (12.4 ) (10%)
Prime Vendor Charge-Backs (9.3 ) (10.5 ) (11%)
Coupons and Other Adjustments (12.5 ) (12.5 ) 0%
Total Gross-to-Net Sales Adjustments (264.5 ) (278.9 ) (5%)
Total Net Sales $ 699.8 $ 742.8 (6%)
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Adjustments as a percentage of gross sales were flat year-over-year. The decline in Women, Infants and Children (WIC) rebates was due to a decline in U.S. births and the reduction of infant formula vouchers provided by government agencies in select states. The change in sales discounts was due to new product launches along with a mix shift in sales to Asia/Latin America where sales discounts are typically higher than in North America/Europe.
Gross Profit
Three Months Ended September 30,
(Dollars in millions) 2009 2008 % Change
Net Sales $ 699.8 $ 742.8 (6%)
Cost of Products Sold 244.6 287.9 (15%)
Gross Profit $ 455.2 $ 454.9 0%
Gross Margin 65.0 % 61.2 %
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Improvements in gross margin were driven by reduced commodity costs and product pricing partially offset by the negative impact of foreign exchange and higher manufacturing costs from capacity increases.
Operating Expenses
Three Months Ended September 30,
% of Net Sales
(Dollars in millions) 2009 2008 % Change 2009 2008
Operating Expenses:
Marketing, Selling and Administrative $ 164.0 $ 173.9 (6%) 23% 23%
Advertising and Product Promotion 105.2 97.0 8% 15% 13%
Research and Development 17.6 17.8 (1%) 3% 2%
Other (Income)/Expenses-net 8.7 2.5 - 1% 0%
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Marketing, Selling and Administrative Expenses
The decrease in marketing, selling and administrative expenses was primarily due to the positive impact of foreign exchange, lower distribution costs and sales force productivity initiatives. Costs related to our IPO and other separation costs decreased compared to the prior year, however, this decrease was offset by higher litigation costs.
Advertising and Product Promotion Expenses
Our advertising and product promotion expenses are influenced by the timing of key product launches and promotions. The increase reflected the continued investment in Asia and Latin America.
Research and Development Expenses
Research and development expenses remained stable year-over-year.
Other (Income)/Expenses-net
Other (income)/expenses-net for the three months ended September 30, 2009, increased by $6.2 million due primarily to foreign exchange losses on assets held in non-functional currencies.
Earnings Before Interest and Income Taxes
EBIT from our two reportable segments, Asia/Latin America and North America/Europe, is reduced by corporate and other costs. Corporate and other costs consist of unallocated general and administrative activities and associated expenses, including in part, executive, legal, finance, information technology, human resources, research and development, global marketing and global supply chain costs.
Three Months Ended September 30,
(Dollars in millions) 2009 2008 % Change
Asia/Latin America $ 143.7 $ 108.2 33%
North America/Europe 90.3 115.6 (22% )
Corporate and Other (74.3 ) (60.1 ) 24%
Total Earnings Before Interest and Income Taxes $ 159.7 $ 163.7 (2% )
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The increase in EBIT for Asia/Latin America was driven by higher net sales in addition to an improved gross margin, resulting from favorable commodity costs and increased pricing, largely from late 2008 price increases.
The decrease in EBIT for the North America/Europe segment was largely due to the sales decline, partly offset by sales force productivity initiatives.
Expenses for the Corporate and Other segment increased $14.2 million driven primarily by higher litigation costs and severance activities that occurred during the third quarter of 2009.
Interest Expense-net
Interest expense-net for the third quarter of 2009 primarily represents interest incurred on the $744.2 million 2014 Note, the $500.0 million 2016 Note and the $500.0 million 2019 Note. Interest expense-net for the third quarter of 2008 represented interest incurred on the $2.0 billion intercompany note payable issued in August 2008.
Income Taxes
The ETR for the three months ended September 30, 2009, decreased to 27.7% from 30.6% for the three months ended September 30, 2008. The lower rate was primarily attributable to benefits associated with the restructuring of our foreign operations as part of the separation from BMS in the IPO process and the earnings mix.
Net Earnings Attributable to Noncontrolling Interests
Net earnings attributable to noncontrolling interests consisted of an 11% interest in MJN China and a 10% interest in MJN Indonesia held by third parties.
Net Earnings Attributable to Shareholders
For the three months ended September 30, 2009, net earnings attributable to shareholders decreased by $5.1 million to $97.6 million compared with the three months ended September 30, 2008. The decrease was primarily due to higher interest expense and the unfavorable impact of foreign exchange, partially offset by a reduction in the ETR.
Nine Months Results of Operations
Below is a summary of comparative results of operations and a more detailed
discussion of results for the nine months ended September 30, 2009 and 2008:
Nine Months Ended September 30,
% of Net Sales
(In millions, except per share
data) 2009 2008 % Change 2009 2008
Net Sales $ 2,112.1 $ 2,174.7 (3% ) - -
Earnings Before Interest and
Income Taxes 566.6 560.8 1% 27% 26%
Interest Expense-net (75.3 ) (11.9 ) - 4% 1%
Earnings before Income Taxes 491.3 548.9 (10% ) 23% 25%
Provision for Income Taxes (147.9 ) (195.1 ) (24% ) 7% 9%
Effective Tax Rate 30.1 % 35.5 %
Net Earnings 343.4 353.8 (3% ) 16% 16%
Less: Net Earnings
Attributable to Noncontrolling
Interests (7.8 ) (6.3 ) - 0% 0%
Net Earnings Attributable to
Shareholders 335.6 347.5 (3% ) 16% 16%
Weighted Average Common Shares
Outstanding - Diluted 199.3 170.0
Earnings per Common Share -
Diluted $ 1.68 $ 2.05
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Net Sales
Our net sales by reportable segments are shown in the table below:
Nine Months Ended September 30,
% Change Due to
Foreign
(Dollars in millions) 2009 2008 % Change Volume Price Exchange
Asia/Latin America $ 1,200.1 $ 1,138.7 5% 3% 11% (9%)
North America/Europe 912.0 1,036.0 (12%) (9%) 0% (3%)
Net Sales $ 2,112.1 $ 2,174.7 (3%) (3%) 6% (6%)
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Our Asia/Latin America segment represented 57% of net sales for the nine months ended September 30, 2009, compared to 52% for the nine months ended September 30, 2008. We continue to have significant sales growth in our international markets, particularly in Asia where sales increased by double digits, excluding the impact of foreign exchange. Our success in the Asia/Latin America segment comes from market growth as well as our investments in product innovation, sales force, advertising and product promotion. Sales growth in China, our second largest market, was the highest of any market in which we operate on a year-to-date basis, although
multiple other Asian and Latin American countries increased sales by double digits, excluding the impact of foreign exchange. Volume growth of 3% in the segment was adversely impacted by approximately two percentage points due to the operating model change in Brazil.
The decrease in North America/Europe sales was primarily due to weaker performance in the United States driven by share losses and the contraction in the U.S. market from lower births.
Our net sales by product category are shown in the table below:
Nine Months Ended September 30,
(Dollars in millions) 2009 2008 % Change
Infant Formula $ 1,376.3 $ 1,462.2 (6%)
Children's Nutrition 667.5 640.7 4%
Other 68.3 71.8 (5%)
Net Sales $ 2,112.1 $ 2,174.7 (3%)
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Excluding foreign exchange, infant formula decreased 2% reflecting the decreases in the North America/Europe segment, which are predominantly infant formula markets. Excluding foreign exchange, children's nutrition increased 14%, reflecting the strength of the business in Asia and Latin America.
The reconciliation of our gross sales to net sales was as follows:
Nine Months Ended September 30,
(Dollars in millions) 2009 2008 % Change
Gross Sales $ 2,905.2 $ 2,997.8 (3%)
Gross-to-Net Sales Adjustments
WIC Rebates (569.0 ) (601.7 ) (5%)
Sales Discounts (76.0 ) (63.9 ) 19%
Returns (54.2 ) (48.7 ) 11%
Cash Discounts (33.4 ) (35.4 ) (6%)
Prime Vendor Charge-Backs (29.3 ) (32.1 ) (9%)
Coupons and Other Adjustments (31.2 ) (41.3 ) (24%)
Total Gross-to-Net Sales Adjustments (793.1 ) (823.1 ) (4%)
Total Net Sales $ 2,112.1 $ 2,174.7 (3%)
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Adjustments as a percentage of gross sales remained flat year-over-year. The decline in WIC rebates was due to a decline in U.S. births and the reduction of infant formula vouchers provided by government agencies in select states. The change in sales discounts and coupons was due to promotional mix and new product launches along with a mix shift in sales to Asia/Latin America where sales discounts are typically higher than in North America/Europe. The increase in returns was due to an abnormally low amount of returns during the nine months ended September 30, 2008.
Gross Profit
Nine Months Ended September 30,
(Dollars in millions) 2009 2008 % Change
Net Sales $ 2,112.1 $ 2,174.7 (3%)
Cost of Products Sold 728.3 812.0 (10%)
Gross Profit $ 1,383.8 $ 1,362.7 2%
Gross Margin 65.5 % 62.7 %
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Improvements in gross margin were driven by reduced commodity costs and product pricing partially offset by the negative impact of foreign exchange and higher manufacturing costs from capacity increases.
Operating Expenses
Nine Months Ended September 30,
% of Net Sales
(Dollars in millions) 2009 2008 % Change 2009 2008
Operating Expenses:
Marketing, Selling and Administrative $ 482.2 $ 465.0 4% 23% 21%
Advertising and Product Promotion 282.7 276.3 2% 13% 13%
Research and Development 51.3 51.5 0% 2% 2%
Other (Income)/Expenses-net 1.0 9.1 - 0% 0%
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Marketing, Selling and Administrative Expenses
The majority of the increase in marketing, selling and administrative expenses was due to $22.3 million in additional corporate expenses that we now carry as a public company such as legal and audit fees, along with treasury, tax and other functions that were not necessary when we operated as a wholly owned subsidiary of BMS, as well as $17.3 million of incremental costs related to our IPO and $5.3 million of litigation costs. These increases were partially offset by the positive impact of foreign exchange and reduced distribution costs.
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