Overview of Our Business
We are a global leader in pediatric nutrition. We are committed to building trusted nutritional brands and products that help improve the health and development of infants and children around the world and provide them with the best start in life. Our comprehensive product portfolio addresses a broad range of nutritional needs for infants, children and expectant and nursing mothers. We have over 100 years of innovation experience during which we have developed or improved many breakthrough or industry-defining products across each of our product categories. We operate in four geographic segments: Asia, Europe, Latin America and North America. Due to similarities in the economics, products offered, production process, customer base and regulatory environment, these operating segments have been aggregated into two reportable segments: Asia/Latin America and North America/Europe. During 2012, we implemented a change in our organizational structure involving the transfer of our Puerto Rican operations from North America to Latin America. All segment information has been revised to be consistent with the new basis of presentation.

Executive Summary
For the year ended December 31, 2012, sales grew 6% compared to 2011 (7% excluding the impact of foreign currency changes), led by broad-based growth in the Asia/Latin America segment including our 2012 acquisition in Argentina (the "Argentine Acquisition"). North America/Europe sales decreased mainly due to lower U.S. market share as well as lower category consumption and births, partially offset by higher prices.

Earnings per share grew by 19% in 2012, and was primarily attributable to sales growth, completion of our stand-alone operating infrastructure, other reductions in general and administrative spending as well as a lower effective tax rate.

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

                                                                                     % of Net Sales
(In millions, except per share data)    2012          2011         % Change         2012          2011
Net Sales                            $ 3,901.3     $ 3,677.0           6  %
Earnings before Interest and Income
Taxes                                    870.0         774.1          12  %          22  %           21 %
Interest Expense-net                      65.0          52.2          25  %           1  %            1 %
Earnings before Income Taxes             805.0         721.9          12  %          21  %           20 %
Provision for Income Taxes               192.6         202.9          (5 )%           5  %            6 %
  Effective Tax Rate                      23.9 %        28.1 %
Net Earnings                             612.4         519.0          18  %          16  %           14 %
Less: Net Earnings Attributable to
Noncontrolling Interests                   7.9          10.5         (25 )%          (1 )%            - %
Net Earnings Attributable to
Shareholders                             604.5         508.5          19  %          15  %           14 %
Weighted-Average Common Shares-
Diluted                                  204.3         205.0
Earnings per Common Share-Diluted    $    2.95     $    2.47          19  %

The results for the years ended December 31, 2012 and 2011 included several items that affect the comparability of our results. These items include significant expenses/(income) not indicative of on-going results (Specified Items) and are listed in the table below:

                                                        Years Ended December 31,
(In millions)                                             2012             2011
IT/other separation costs                            $      19.9       $      74.7
Gain on sale of certain non-core intangible assets          (6.5 )               -
Severance and other costs                                   21.1              11.6
Legal, settlements and related costs                         2.8               7.6
Specified Items before income taxes                  $      37.3       $      93.9
Income tax impact on items above                           (11.7 )           (29.3 )
Specified Items after taxes                          $      25.6       $      64.6

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

Net Sales
    Our net sales by reportable segment:
                             Years Ended December 31,                                  % Change Due to
                                                                                                         Foreign
(Dollars in millions)          2012             2011         % Change       Volume          Price        Exchange
Asia/Latin America        $     2,719.5     $  2,447.2          11  %           5  %           7 %          (1 )%
North America/Europe            1,181.8        1,229.8          (4 )%          (7 )%           4 %          (1 )%
Net Sales                 $     3,901.3     $  3,677.0           6  %           1  %           6 %          (1 )%

Asia/Latin America sales, which accounted for 70% of MJN's net sales, grew 11% including 9% growth from existing operations and 2% growth due to the Argentine Acquisition. Sales increased primarily as a result of price increases throughout the segment. The increase in volume was driven by market share increases, including broad gains across Latin America, and overall category growth partially offset by market share loss in China, which occurred at the end of the second quarter. However, during the second half of the year, we made significant progress in recovering this market share. In addition, although distributors' inventory levels increased in China in the first half of 2012 as a result of the market share decline, by year end they had returned to levels similar to those seen at the beginning of the year.

The decrease in sales in North America/Europe reflected lower U.S. market share as well as lower category consumption and births, partially offset by higher prices. Market share was lower in comparison to the prior year period when we benefited from a competitor's recall

and due to the impact on 2012 of the unfounded media reports in December 2011 alleging product contamination in the United States. Investigating governmental agencies found no contamination in sealed containers of our product, but the resulting uncertainty caused some consumers to switch away from our brand.
Our net sales by product category are shown in the table below:

                             Years Ended December 31,
(Dollars in millions)           2012               2011       % Change
Infant Formula          $     2,295.5           $ 2,188.7         5 %
Children's Nutrition          1,487.0             1,394.4         7 %
Other                           118.8                93.9        27 %
Net Sales               $     3,901.3           $ 3,677.0         6 %

Infant formula accounts for approximately 90% of our sales in North America/Europe and under half of our sales in Asia/Latin America. In 2013, we expect the growth rate of other products to decline due to the elimination of certain non-core products across both reportable segments.
We recognize revenue net of various sales adjustments to arrive at net sales as reported on the statements of earnings. These adjustments are referred to as gross-to-net sales adjustments. The reconciliation of our gross sales to net sales is as follows:

                                             Years Ended December 31,          % of Gross Sales
(Dollars in millions)                           2012            2011          2012           2011
Gross Sales                                $     5,038.5     $ 4,730.7          100 %          100 %
Gross-to-Net Sales Adjustments
WIC Rebates                                        730.0         700.7           14 %           15 %
Sales Discounts                                    191.9         149.8            4 %            3 %
Returns                                             82.5          81.8            2 %            2 %
Cash Discounts                                      45.2          47.5            1 %            1 %
Coupons and Other Adjustments                       55.6          42.4            1 %            1 %
Prime Vendor Charge-Backs                           32.0          31.5            1 %            - %
Total Gross-to-Net Sales Adjustments             1,137.2       1,053.7           23 %           22 %
Total Net Sales                            $     3,901.3     $ 3,677.0           77 %           78 %

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

Gross Profit
                           Years Ended December 31,
(Dollars in millions)        2012             2011       % Change
Net Sales               $    3,901.3       $ 3,677.0        6 %
Cost of Products Sold        1,485.3         1,362.3        9 %
Gross Profit            $    2,416.0       $ 2,314.7        4 %
Gross Margin                    61.9 %          63.0 %

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

Expenses
                                        Years Ended December 31,                            % of Net Sales
(Dollars in millions)                      2012            2011         % Change         2012           2011
Selling, General and Administrative   $       877.8     $   926.8           (5 )%           23 %           25 %
Advertising and Promotion                     552.8         501.7           10  %           14 %           14 %
Research and Development                       95.4          92.5            3  %            2 %            3 %
Other Expenses/(Income)-net                    20.0          19.6            2  %            1 %            1 %

Selling, General and Administrative Expenses Selling, general and administrative expenses ("SG&A") decreased due to the completion of our stand-alone operating infrastructure and lower performance-based compensation expense, partially offset by an increase in sales force and distribution expenses supporting sales growth. Advertising and Promotion Expenses
Our advertising spending primarily includes television and other consumer media. Promotion activities primarily include product evaluation and education provided to health care professionals and consumers, where permitted by regulation. The increase in advertising and promotion expenses reflected demand-generation investments in support of our strategic growth initiatives. Research and Development Expenses
Our R&D expenses include the continued investment in our innovation capability, product pipeline and quality programs. Other Expense/(Income)-net
For the year ended December 31, 2012 and 2011, other expense/income ("OIE") included U.S. pension settlement expense of $16.7 million and $9.7 million in 2012 and 2011, respectively. The pension settlement expense relates to lump sum payments made to retirees in the U.S. pension plan. Earnings before Interest and Income Taxes 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 expenses. Corporate and Other consists of unallocated general and administrative expenses and global business support activities, including research and development, marketing and supply chain costs.

                           Years Ended December 31,
(Dollars in millions)        2012             2011         % Change
Asia/Latin America      $     901.3       $     811.6        11  %
North America/Europe          246.1             308.4       (20 )%
Corporate and Other          (277.4 )          (345.9 )      20  %
EBIT                    $     870.0       $     774.1        12  %

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

The North America/Europe decline in EBIT was primarily attributable to a decline in sales, along with a lower gross margin due to higher commodity costs, primarily dairy inputs, and unfavorable manufacturing variances attributed largely to lower production volumes in the United States.

Corporate and Other expenses decreased due to the completion of our stand-alone operating infrastructure and lower performance-based compensation expense. Interest Expense-net
Interest expense for the year ended December 31, 2012 primarily represented interest incurred on $1.5 billion of long-term notes and the short-term note payable related to our Argentine Acquisition. The increase in interest expense reflected the prior year's termination of our fixed-to-floating interest rate swaps and the note payable related to the Argentine Acquisition (the "Argentine Acquisition Note Payable"). The weighted-average interest rate on our long-term debt, including the impact of the swaps and Argentine Acquisition Note Payable, was 4.5% and 4.0% for the years ended December 31, 2012 and 2011, respectively. Income Taxes
The effective tax rate ("ETR") for the year ended December 31, 2012 and 2011 was 23.9% and 28.1%, respectively. The lower effective tax rate was primarily attributable to favorable adjustments associated with prior years' tax filings, changes in management's assertion that certain current and prior years' foreign earnings and profits are permanently invested abroad and changes in the geographic earnings mix.

Net Earnings Attributable to Noncontrolling Interests Net earnings attributable to noncontrolling interests consists of a 20%, 11% and 10% interest held by third parties in the Company's operating entities in Argentina, China and Indonesia, respectively. Net Earnings Attributable to Shareholders For the foregoing reasons, net earnings attributable to shareholders for the year ended December 31, 2012 increased 19% to $604.5 million compared with the year ended December 31, 2011.

Results of Operations
Year Ended December 31, 2011 Compared to Year Ended December 31, 2010
Below is a summary of comparative results of operations for the years ended
December 31, 2011 and 2010:

                                                                                   % of Net Sales
(In millions, except per share data)    2011          2010        % Change        2011         2010
Net Sales                            $ 3,677.0     $ 3,141.6          17 %
Earnings before Interest and Income
Taxes                                    774.1         682.9          13 %          21 %          22 %
Interest Expense-net                      52.2          48.6           7 %           1 %           2 %
Earnings before Income Taxes             721.9         634.3          14 %          20 %          20 %
Provision for Income Taxes               202.9         176.1          15 %           6 %           6 %
  Effective Tax Rate                      28.1 %        27.8 %                                   .15
Net Earnings                             519.0         458.2          13 %          14 %          15 %
Less: Net Earnings Attributable to
Noncontrolling Interests                  10.5           5.5          91 %           - %           - %
Net Earnings Attributable to
Shareholders                         $   508.5     $   452.7          12 %          14 %          14 %
Weighted-Average Common Shares-
Diluted                                  205.0         205.1
Earnings per Common Share-Diluted    $    2.47     $    2.20          12 %

The results for the years ended December 31, 2011 and 2010 included several items that affect the comparability of our results. These items include significant expenses not indicative of on-going results (Specified Items) and are listed in the table below.

                                          Years Ended December 31,
(In millions)                               2011             2010
IT/other separation costs              $      74.7       $      57.1
Severance and other costs                     11.6               5.1
Legal, settlements and related costs           7.6               9.2
Specified Items before income taxes    $      93.9       $      71.4
Income tax impact on items above             (29.3 )           (25.9 )
Specified Items after taxes            $      64.6       $      45.5

Net Sales
    Our net sales by reportable segments are shown in the table below:
                             Years Ended December 31,                                % Change Due to
                                                                                                      Foreign
(Dollars in millions)          2011             2010        % Change       Volume        Price        Exchange
Asia/Latin America        $     2,447.2     $  1,951.0          25 %          17 %           5 %          3 %
North America/Europe            1,229.8        1,190.6           3 %           2 %           1 %          - %
Net Sales                 $     3,677.0     $  3,141.6          17 %          11 %           3 %          3 %

Our Asia/Latin America segment continued to have significant sales growth and represented 67% of sales for the year ended December 31, 2011, compared with 62% for the year ended December 31, 2010. Our success in Asia/Latin America comes from share gains and market growth driven by our investments in advertising and promotion, sales force, and product innovation. Our strongest performance

in Asia continues to be in China/Hong Kong, primarily reflecting increased market share, market growth, pricing and geographic expansion into additional cities. Latin America's percentage growth was in the mid-teens, underpinned by exceptional growth in Brazil and Peru.
The North America/Europe segment was led by our U.S. business with higher pricing and market share gains partially offset by declining birth rates and lower consumption. Market share gains reflected the effects of a competitor's 2010 recall and our current and prior year product launches.
Our net sales by product category are shown in the table below:

                             Years Ended December 31,
(Dollars in millions)           2011               2010       % Change
Infant Formula          $     2,188.7           $ 1,945.4        13 %
Children's Nutrition          1,394.4             1,119.2        25 %
Other                            93.9                77.0        22 %
Net Sales               $     3,677.0           $ 3,141.6        17 %

Our sales in North America/Europe are comprised of approximately 90% Infant Formula. Infant Formula sales growth reflected the weighting of the growth rates in Asia/Latin America and North America/Europe. Growth in Children's Nutrition reflected the performance in Asia/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 is as follows:

                                             Years Ended December 31,          % of Gross Sales
(Dollars in millions)                           2011            2010          2011           2010
Gross Sales                                $     4,730.7     $ 4,151.2          100 %          100 %
Gross-to-Net Sales Adjustments
WIC Rebates                                        700.7         680.8           15 %           16 %
Sales Discounts                                    149.8         118.4            3 %            3 %
Returns                                             81.8          84.3            2 %            2 %
Cash Discounts                                      47.5          44.0            1 %            1 %
Coupons and Other Adjustments                       42.4          47.3            1 %            1 %
Prime Vendor Charge-Backs                           31.5          34.8            - %            1 %
Total Gross-to-Net Sales Adjustments             1,053.7       1,009.6           22 %           24 %
Total Net Sales                            $     3,677.0     $ 3,141.6           78 %           76 %

Gross-to-net sales adjustments declined as a percentage of gross sales as U.S. WIC rebates declined as a percentage of global gross sales due to higher growth in the Asia/Latin America segment.

Gross Profit
                           Years Ended December 31,
(Dollars in millions)        2011             2010        % Change
Net Sales               $    3,677.0       $ 3,141.6         17 %
Cost of Products Sold        1,362.3         1,149.6         19 %
Gross Profit            $    2,314.7       $ 1,992.0         16 %
Gross Margin                    63.0 %          63.4 %

The decline in gross margin compared with a year ago is primarily due to higher commodity costs, particularly dairy inputs, partially offset by productivity and higher product pricing.

Expenses
                                         Years Ended December 31,                         % of Net Sales
(Dollars in millions)                       2011            2010        % Change        2011          2010
Selling, General and Administrative    $       926.8     $  762.7          22  %          25 %          24 %
Advertising and Promotion                      501.7        438.7          14  %          14 %          14 %
Research and Development                        92.5         78.5          18  %           3 %           2 %
Other Expenses/(Income)-net                     19.6         29.2         (33 )%           1 %           1 %

Selling, General and Administrative Expenses The increase in SG&A reflected increases in sales force expense, performance-based compensation, distribution expenses, IT separation costs, and the duplication of costs as we transitioned to a new outsourced service provider for IT, accounting and indirect procurement. The performance-based compensation increase reflected the phase-in of equity awards following our 2009 initial public offering ("IPO") and our outstanding financial performance as measured against incentive plan targets and stock performance. Because equity awards are generally expensed over a period of three years, 2011 is the first year in which we had three overlapping grants of these awards. Advertising and Promotion Expenses
Our advertising spending primarily includes television and other consumer media. Promotion activities primarily include product trial and education provided to both health care professionals and consumers, where permissible by regulation. The increase in advertising and promotion expenses reflected investments in demand-generation activities in support of our strategic growth initiatives.
Research and Development Expenses
The increase in research and development expenses reflected our continued investment in our innovation capability and product pipeline. Other Expense/(Income)-net
For the year ended December 31, 2011, OIE included severance and other specified items, pension settlement costs for frozen defined benefit plans, and foreign currency and other gains and losses. In 2011 and 2010, pension settlements were $9.7 million and $10.6 million, respectively. In 2010, $8.5 million of foreign currency losses were recognized in Venezuela due to both the devaluation of the bolivar and the application of highly inflationary accounting.
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 expenses. Corporate and Other consists of unallocated general and administrative expenses and global business support activities, including research and development, marketing and supply chain costs.

                           Years Ended December 31,
(Dollars in millions)        2011             2010         % Change
Asia/Latin America      $     811.6       $     656.3        24  %
North America/Europe          308.4             347.5       (11 )%
Corporate and Other          (345.9 )          (320.9 )       8  %
EBIT                    $     774.1       $     682.9        13  %

The increase in EBIT for Asia/Latin America was primarily related to sales growth, partially offset by higher expenses, such as advertising and promotion, sales force growth, the allocation of new outsourced service and system expenses, and performance-based compensation.
EBIT for North America/Europe decreased due to higher expenses, primarily the allocation of new outsourced service and system expenses, performance-based compensation and distribution expense, partially offset by an increase in sales.
The new outsourced service and system expenses recorded in the operating segments include new information technology, accounting and procurement services. These new operations replaced similar services provided by the Company's former parent under transitional services agreements; the replaced services have been consistently reflected in Corporate and Other.
Corporate and Other expenses increased due to higher IT separation costs. Interest Expense-net
Interest expense for the year ended December 31, 2011 primarily represented interest incurred on $1.5 billion of notes. The increase in interest expense reflected the termination of our fixed-to-floating interest rate swaps. The weighted-average interest rate on our long-term debt, including the impact of the swaps, was 4.0% and 3.6% for the years ended December 31, 2011 and 2010, . . .