UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2016March 31, 2017
 
Commission File Number: 001-34251
 
MEAD JOHNSON NUTRITION COMPANY
(Exact Name of Registrant as Specified in Its Charter)
 
Delaware 80-0318351
(State or Other Jurisdiction of
 Incorporation or Organization)
 
(I.R.S. Employer
 Identification No.)
 225 North Canal Street
2701 Patriot Blvd.25th Floor
Glenview,Chicago, Illinois 6002660606
(Address of Principal Executive Offices and Zip Code)
 
Registrant’s Telephone Number, Including Area Code: (847) 832-2420(312) 466-5800
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one): 
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of July 25, 2016,April 21, 2017, there were 184,658,800183,640,008 shares of the registrant’s common stock outstanding.




MEAD JOHNSON NUTRITION COMPANYMead Johnson Nutrition Company
QUARTERLY REPORT ON FORMQuarterly Report on Form 10-Q
FOR THE PERIOD ENDED JUNE 30, 2016For the Period Ended March 31, 2017
 
TABLE OF CONTENTS
 
  
PART I — FINANCIAL INFORMATION
ITEM 1.
Financial Statements
 
Condensed Consolidated Statements of Earnings for the three and six months ended June 30,March 31, 2017 and 2016 and 2015 (unaudited)
 
Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30,March 31, 2017 and 2016 and 2015 (unaudited)
 
Condensed Consolidated Balance Sheets as of June 30, 2016March 31, 2017 and December 31, 20152016 (unaudited)
 
Condensed Consolidated Statements of Equity/(Deficit) for the sixthree months ended June 30,March 31, 2017 and 2016 and 2015 (unaudited)
 
Condensed Consolidated Statements of Cash Flows for the sixthree months ended June 30,March 31, 2017 and 2016 and 2015 (unaudited)
 
Notes to Condensed Consolidated Financial Statements
ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk
ITEM 4.
Controls and Procedures
  
PART II — OTHER INFORMATION
ITEM 1.
Legal Proceedings
ITEM 1A.
Risk Factors
ITEM 2.
Unregistered Sales of Equity Securities and Use of Proceeds
ITEM 6.
Exhibits

PART I — FINANCIAL INFORMATION
 
ITEM 1.      FINANCIAL STATEMENTS.

MEAD JOHNSON NUTRITION COMPANY 
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars and shares in millions, except per share data)
(UNAUDITED)
 
Three Months Ended June 30, Six Months Ended June 30,Three Months Ended March 31,
2016 2015 2016 20152017 2016
NET SALES$941.5
 $1,032.4
 $1,903.6
 $2,126.8
$883.5
 $962.1
Cost of Products Sold333.2
 356.4
 680.8
 749.9
330.2
 347.6
GROSS PROFIT608.3
 676.0
 1,222.8
 1,376.9
553.3
 614.5
Operating Expenses: 
  
  
  
 
  
Selling, General and Administrative206.7
 230.2
 405.6
 463.4
193.7
 198.9
Advertising and Promotion166.0
 190.2
 317.8
 334.6
160.3
 151.8
Research and Development26.4
 27.7
 51.8
 53.6
21.4
 25.4
Other (Income)/Expenses—net(5.2) (1.3) 83.1
 10.9
22.8
 88.3
EARNINGS BEFORE INTEREST AND INCOME TAXES214.4
 229.2
 364.5
 514.4
155.1
 150.1
          
Interest Expense—net26.4
 13.9
 52.6
 27.7
27.1
 26.2
EARNINGS BEFORE INCOME TAXES188.0
 215.3
 311.9
 486.7
128.0
 123.9
          
Provision for Income Taxes32.2
 52.7
 79.4
 117.0
10.4
 47.2
NET EARNINGS155.8
 162.6
 232.5
 369.7
117.6
 76.7
Less Net Earnings/(Loss) Attributable to Noncontrolling Interests0.7
 (0.3) 4.7
 (0.6)(2.3) 4.0
NET EARNINGS ATTRIBUTABLE TO SHAREHOLDERS$155.1
 $162.9
 $227.8
 $370.3
$119.9
 $72.7
Earnings per Share—Basic 
  
     
  
Net Earnings Attributable to Shareholders$0.83
 $0.80
 $1.22
 $1.83
$0.65
 $0.39
Earnings per Share—Diluted 
  
     
  
Net Earnings Attributable to Shareholders$0.83
 $0.80
 $1.21
 $1.82
$0.65
 $0.39
          
Weighted Average Shares—Basic186.7
 202.7
 186.6
 202.5
183.5
 186.6
Weighted Average Shares—Diluted187.0
 203.1
 186.9
 203.1
183.9
 186.7
Dividends Declared per Share$0.4125
 $0.4125
 $0.8250
 $0.8250
$0.4125
 $0.4125
 
The accompanying notes are an integral part of these condensed consolidated financial statements.



MEAD JOHNSON NUTRITION COMPANY
 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in millions)
(UNAUDITED)



Three Months Ended June 30, Six Months Ended June 30,Three Months Ended March 31,
2016 2015 2016 20152017 2016
NET EARNINGS$155.8
 $162.6
 $232.5
 $369.7
$117.6
 $76.7
          
OTHER COMPREHENSIVE INCOME/(LOSS) 
  
     
  
Foreign Currency Translation Adjustments 
  
     
  
Translation Adjustments(23.3) (11.9) (17.4) (49.6)33.3
 5.9
Tax Effect on Foreign Currency Translation Adjustments0.6
 (0.1) 0.8
 0.1
(0.5) 0.2
Deferred Gains/(Losses) on Derivatives Qualifying as Hedges 
  
  
  
 
  
Deferred Gains/(Losses) on Derivatives Qualifying as Hedges for the Period5.5
 1.9
 (6.1) 9.3
(4.4) (11.6)
Reclassification Adjustment for (Gains)/Losses Included in Net Earnings(1.1) (5.9) (6.6) (7.8)(2.4) (5.5)
Tax Effect on Deferred Gains/(Losses) on Derivatives Qualifying as Hedges(1.7) 2.6
 2.1
 1.1
2.1
 3.8
OTHER COMPREHENSIVE LOSS(20.0) (13.4) (27.2) (46.9)
OTHER COMPREHENSIVE INCOME/(LOSS)28.1
 (7.2)
          
COMPREHENSIVE INCOME135.8
 149.2
 205.3
 322.8
145.7
 69.5
          
Less Comprehensive Income/(Loss) Attributable to Noncontrolling Interests0.6
 10.5
 3.8
 9.6
(2.3) 3.2
          
COMPREHENSIVE INCOME ATTRIBUTABLE TO SHAREHOLDERS$135.2
 $138.7
 $201.5
 $313.2
$148.0
 $66.3
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

MEAD JOHNSON NUTRITION COMPANY
  
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars and shares in millions, except per share data)
(UNAUDITED) 
June 30, 2016 December 31, 2015March 31, 2017 December 31, 2016
ASSETS 
  
 
  
CURRENT ASSETS: 
  
 
  
Cash and Cash Equivalents$1,716.0
 $1,701.4
$1,724.4
 $1,795.4
Receivables—net of allowances of $5.3 and $5.4, respectively359.5
 342.5
Inventories465.8
 484.9
Restricted Cash152.5
 —
Receivables—net of allowances of $4.4 and $4.4, respectively355.0
 369.0
Inventories - net498.5
 473.5
Income Taxes Receivable13.0
 13.2
26.1
 8.3
Prepaid Expenses and Other Assets65.6
 60.4
60.8
 60.4
Total Current Assets2,619.9
 2,602.4
2,817.3
 2,706.6
Property, Plant and Equipment – net925.4
 964.0
963.6
 948.6
Goodwill115.8
 126.0
113.1
 108.9
Other Intangible Assets – net48.9
 54.9
43.9
 46.0
Deferred Income Taxes – net of valuation allowance142.3
 118.5
148.4
 143.1
Other Assets176.3
 132.3
140.8
 134.5
TOTAL$4,028.6
 $3,998.1
$4,227.1
 $4,087.7
LIABILITIES AND EQUITY 
  
 
  
CURRENT LIABILITIES: 
  
 
  
Short-term Borrowings$3.8
 $3.0
Short-Term Borrowings$4.5
 $3.9
Accounts Payable456.3
 481.5
536.0
 515.8
Dividends Payable77.6
 77.8
76.3
 76.0
Accrued Expenses193.6
 213.0
216.2
 194.7
Accrued Rebates and Returns396.7
 376.8
415.0
 417.4
Deferred Income10.3
 35.5
10.9
 12.4
Income Taxes Payable22.2
 65.7
49.9
 24.0
Total Current Liabilities1,160.5
 1,253.3
1,308.8
 1,244.2
Long-Term Debt3,021.9
 2,981.0
2,973.3
 2,976.2
Deferred Income Taxes6.1
 8.7
6.0
 6.2
Pension and Other Post-employment Liabilities149.4
 132.4
99.2
 104.2
Other Liabilities210.1
 215.2
232.6
 229.0
Total Liabilities4,548.0
 4,590.6
4,619.9
 4,559.8
COMMITMENTS AND CONTINGENCIES

 



 

      
EQUITY 
  
 
  
Shareholders’ Equity 
  
 
  
Common Stock, $0.01 par value: 3,000 authorized, 189.6 and 191.4 issued, respectively1.9
 1.9
Common Stock, $0.01 par value: 3,000 authorized, 188.6 and 188.3 issued, respectively1.9
 1.9
Additional Paid-in/(Distributed) Capital(537.1) (564.2)(499.5) (514.0)
Retained Earnings709.8
 640.4
812.4
 773.4
Treasury Stock – at cost(362.6) (362.6)(362.6) (362.6)
Accumulated Other Comprehensive Loss(374.1) (347.8)(383.3) (411.4)
Total Shareholders’ Equity/(Deficit)(562.1) (632.3)(431.1) (512.7)
Noncontrolling Interests42.7
 39.8
38.3
 40.6
Total Equity/(Deficit)(519.4) (592.5)(392.8) (472.1)
TOTAL$4,028.6
 $3,998.1
$4,227.1
 $4,087.7
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

MEAD JOHNSON NUTRITION COMPANY
 
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY/(DEFICIT)
(Dollars in millions, except per share data)
(UNAUDITED)
 
 
Common
Stock
 
Additional
Paid-in
(Distributed)
Capital
 
Retained
Earnings
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Loss
 
Non-
controlling
Interests
 
Total 
Equity/(Deficit)
 
Redeemable
Non-
controlling
Interest
Balance as of January 1, 2016$1.9
 $(564.2) $640.4
 $(362.6) $(347.8) $39.8
 $(592.5) $—
Stock-based Compensation Awards (includes tax shortfalls of $0.0)—
 27.1
 (3.8) —
 —
 —
 23.3
 —
Distributions to Noncontrolling Interests—
 —
 —
 —
 —
 (0.9) (0.9) —
Cash Dividends Declared ($0.8250 per share)—
 —
 (154.6) —
 —
 —
 (154.6) —
Net Earnings—
 —
 227.8
 —
 —
 4.7
 232.5
 —
Other Comprehensive Income/(Loss)—
 —
 —
 —
 (26.3) (0.9) (27.2) —
Balance as of June 30, 2016$1.9
 $(537.1) $709.8
 $(362.6) $(374.1) $42.7
 $(519.4) $—
                
Balance as of January 1, 2015$2.1
 $(641.3) $1,775.0
 $(362.6) $(198.9) $9.5
 $583.8
 $66.0
Stock-based Compensation Awards (includes excess tax benefits of $4.6)—
 34.9
 (10.3) —
 —
 —
 24.6
 —
Distributions to Noncontrolling Interests—
 —
 —
 —
 —
 (6.1) (6.1) (0.8)
Cash Dividends Declared ($0.8250 per share)—
 —
 (167.6) —
 —
 —
 (167.6)  
Net Earnings—
 —
 370.3
 —
 —
 (1.1) 369.2
 0.5
Redeemable Noncontrolling Interest Accretion—
 —
 (12.8) —
 —
 —
 (12.8) 12.8
Other Comprehensive Income/(Loss)—
 —
 —
 —
 (46.4) 0.1
 (46.3) (1.3)
Acquisition of Redeemable Noncontrolling Interest—
 25.5
 —
 —
 (10.8) 38.6
 53.3
 (77.2)
Balance as of June 30, 2015$2.1

$(580.9)
$1,954.6

$(362.6)
$(256.1)
$41.0

$798.1

$—
 
Common
Stock
 
Additional
Paid-in
(Distributed)
Capital
 
Retained
Earnings
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Loss
 
Non-
controlling
Interests
 
Total 
Equity/(Deficit)
Balance as of January 1, 2017$1.9
 $(514.0) $773.4
 $(362.6) $(411.4) $40.6
 $(472.1)
Stock-based Compensation Awards (1)
—
 14.5
 (4.7) —
 —
 —
 9.8
Cash Dividends Declared ($0.4125 per share)—
 —
 (76.2) —
 —
 —
 (76.2)
Net Earnings—
 —
 119.9
 —
 —
 (2.3) 117.6
Other Comprehensive Income/(Loss)—
 —
 —
 —
 28.1
 —
 28.1
Balance as of March 31, 2017$1.9
 $(499.5) $812.4
 $(362.6) $(383.3) $38.3
 $(392.8)
              
Balance as of January 1, 2016$1.9
 $(564.2) $640.4
 $(362.6) $(347.8) $39.8
 $(592.5)
Stock-based Compensation Awards (includes excess tax shortfalls of $0.3)—
 11.4
 (3.5) —
 —
 —
 7.9
Cash Dividends Declared ($0.4125 per share)—
 —
 (77.3) —
 —
 —
 (77.3)
Net Earnings—
 —
 72.7
 —
 —
 4.0
 76.7
Other Comprehensive Income/(Loss)—
 —
 —
 —
 (6.4) (0.8) (7.2)
Balance as of March 31, 2016$1.9

$(552.8)
$632.3

$(362.6)
$(354.2)
$43.0

$(592.4)
(1) Excess Tax Benefits/Shortfalls excluded for 2017. See “—Note 2. Accounting Policies” for additional information on recently adopted accounting standards.

 
The accompanying notes are an integral part of these condensed consolidated financial statements.

MEAD JOHNSON NUTRITION COMPANY
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
(UNAUDITED)

Six Months Ended June 30,Three Months Ended March 31,
2016 20152017 2016
CASH FLOWS FROM OPERATING ACTIVITIES: 
  
 
  
Net Earnings$232.5
 $369.7
$117.6
 $76.7
Adjustments to Reconcile Net Earnings to Net Cash Provided by Operating Activities: 
  
 
  
Depreciation and Amortization49.3
 48.8
25.8
 24.9
Impairment of Long-Lived Assets45.9
 —
—
 45.9
Other38.4
 26.3
Other Non-Cash Items(12.6) 36.0
Changes in Assets and Liabilities(88.1) 14.2
65.7
 (23.4)
Pension and Other Post-employment Benefit Contributions(1.9) (2.5)(0.1) —
Net Cash Provided by Operating Activities276.1
 456.5
196.4
 160.1
CASH FLOWS FROM INVESTING ACTIVITIES: 
  
 
  
Payments for Capital Expenditures(80.8) (80.0)(48.5) (55.6)
Proceeds from Sale of Property, Plant and Equipment0.2
 0.4
0.1
 0.1
Net Cash Used in Investing Activities(80.6) (79.6)(48.4) (55.5)
CASH FLOWS FROM FINANCING ACTIVITIES: 
  
 
  
Proceeds from Short-term Borrowings1.3
 1.0
0.6
 0.4
Repayments of Short-term Borrowings(0.2) (4.0)—
 (0.1)
Debt Issuance Costs(0.1) —
—
 (0.1)
Payments of Dividends(154.8) (159.8)(75.9) (77.4)
Stock-based Compensation-related Proceeds and Excess Tax Benefits9.6
 19.7
Stock-based Compensation related Proceeds and Excess Tax Benefits (1)
5.4
 3.7
Stock-based Compensation Tax Withholdings(3.8) (10.3)(4.7) (3.5)
Purchase of Redeemable Shares—
 (5.1)
Purchase of Trading Securities—
 (16.2)
Distributions to Noncontrolling Interests(0.9) (6.9)
Net Cash Used in Financing Activities(148.9) (181.6)(74.6) (77.0)
Effects of Changes in Exchange Rates on Cash and Cash Equivalents(32.0) (17.9)
NET INCREASE IN CASH AND CASH EQUIVALENTS14.6
 177.4
CASH AND CASH EQUIVALENTS: 
  
Effects of Changes in Exchange Rates on Cash, Cash Equivalents and Restricted Cash8.1
 (26.7)
NET INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH (2)
81.5
 0.9
CASH, CASH EQUIVALENTS AND RESTRICTED CASH(3):
 
  
Beginning of Period1,701.4
 1,297.7
1,795.4
 1,701.4
End of Period$1,716.0
 $1,475.1
$1,876.9
 $1,702.3
(1) Excess Tax Benefits excluded for 2017. See “—Note 2. Accounting Policies” for additional information on recently adopted accounting standards.
(2)See “—Note 19. Mergers and Acquisitions” for additional information on restricted cash.
(3) Cash, Cash Equivalents and Restricted Cash is the sum of Cash and Cash Equivalents of $1,724.4 million and $1,795.4 million at March 31, 2017 and
December 31, 2016, respectively, and Restricted Cash of $152.5 million at March 31, 2017.
 
The accompanying notes are an integral part of these condensed consolidated financial statements.





MEAD JOHNSON NUTRITION COMPANY
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 June 30, 2016March 31, 2017 and December 31, 20152016, the results of operations for the three and six months ended June 30,March 31, 2017 and 2016 and 2015 and the cash flows for the sixthree months ended June 30,March 31, 20162017 and 2015.2016. 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, 20152016 (“20152016 Form 10-K”). other than described within. 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 20152016 Form 10-K.

Recently IssuedAdopted Accounting Standards—In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The update requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The Company did not have any restricted cash and restricted cash equivalents prior to January 1, 2017, and elected to early adopt the updated standard for new restricted cash and restricted cash equivalents that have arisen in the annual period beginning January 1, 2017.

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 standard was adopted prospectively by the Company on January 1, 2017 with no adjustments to prior periods required. The Company recognized $1.1 million of excess tax benefits within the condensed consolidated statements of earnings during the three months ended March 31, 2017. Prior to the adoption of this standard, such benefits would have been recorded within additional paid-in capital. Additionally, the Company recorded the excess tax benefit within cash flows from operating activities on the condensed consolidated statement of cash flows. Other elements of the standard had no material impact to the Company as the Company previously presented cash paid for tax withholdings under financing activities within the statements of cash flows and the Company has elected to continue to estimate for forfeitures and to not withhold more than the minimum statutory tax rate.

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 previously required an entity to measure inventory at the lower of cost or market. 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 updated standard was effective for the Company in the annual period beginning January 1, 2017 and was adopted prospectively.


Given the Company has not experienced markdowns of inventory due to lower of cost or market considerations, adoption of this updated standard had no material impact on the consolidated financial statements.

Recently Issued Accounting Standards—In March 2017, the FASB issued ASU No. 2017-07, Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This update requires disaggregating the service cost component from the other components of net benefit cost and provides explicit guidance on the presentation of these costs in the income statement. The updated standard is effective for fiscal years beginning after December 15, 2017. The Company is currently evaluating the effect that the updated standard will have on its consolidated financial statements and related disclosures.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350). This update simplifies goodwill impairment testing by eliminating step two from the goodwill impairment test. Under the updated standard, the Company still has the option to perform its annual, or interim, goodwill impairment test using the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The quantitative impairment test is to compare the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The updated standard is effective for fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed after January 1, 2017. The Company is currently evaluating the effect that the updated standard will have on its consolidated financial statements and related disclosures.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This update is intended to reduce diversity in practice in the classification of certain cash receipts and payments in the statement of cash flows. The updated standard is effective for fiscal years beginning after December 15, 2017, 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 becomesis effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The adoption of this standard is expected to result in a significant increase to the Company’s consolidated balance sheets for lease assets and liabilities, and the Company is currently evaluating the effect thatother effects 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). .Subsequent to that, the FASB issued ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20 to clarify, among other things, the implementation guidance related to principal versus agent considerations, identifying performance obligations, and accounting for licenses of intellectual property. The updated standard and related clarifications 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 MJNthe Company in the first quarter of 2018. The Company is currently evaluating the impacteffect that the updated standard will have on its consolidated financial statements and related disclosures. From the results of the preliminary review, the Company believes the impact of adopting the updated standard primarily relates to the timing of the recognition of variable consideration. Under current guidance, the Company accounts for sales incentives offered to its customers at the later of the date at which the Company has sold the product or the date at which the program is offered. The new guidance requires earlier recognition if the sales incentive is implied by the Company’s customary business practice, even if the Company has not yet explicitly communicated its intent to make the payment to the customer. Analysis of the Company’s historical and future trends and use of judgment are required. The Company is in the process of quantifying such impact and, based upon the current portfolio of contracts, such financial impact is not expected to be material, however it is expected that disclosure will be enhanced. The Company anticipates using the modified retrospective adoption method.


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 June 30, Six Months Ended June 30, Three Months Ended March 31,
(Dollars and shares in millions, except per share data) 2016 2015 2016 2015 2017 2016
Basic earnings per share:  
  
  
  
  
  
Weighted-average shares outstanding 186.7
 202.7
 186.6
 202.5
 183.5
 186.6
Net earnings attributable to shareholders $155.1
 $162.9
 $227.8
 $370.3
 $119.9
 $72.7
Dividends and undistributed earnings attributable to unvested shares (0.6) (0.3) (0.8) (0.7) (0.7) (0.3)
Net earnings attributable to shareholders used for basic earnings per share calculation $154.5
 $162.6
 $227.0
 $369.6
 $119.2
 $72.4
Net earnings attributable to shareholders per share $0.83
 $0.80
 $1.22
 $1.83
 $0.65
 $0.39
Diluted earnings per share:  
  
  
  
  
  
Weighted-average shares outstanding 186.7
 202.7
 186.6
 202.5
 183.5
 186.6
Incremental shares outstanding assuming the exercise/vesting of dilutive stock options/performance shares 0.3
 0.4
 0.3
 0.6
 0.4
 0.1
Weighted-average shares — diluted 187.0
 203.1
 186.9
 203.1
 183.9
 186.7
Net earnings attributable to shareholders $155.1
 $162.9
 $227.8
 $370.3
 $119.9
 $72.7
Dividends and undistributed earnings attributable to unvested shares (0.6) (0.3) (0.8) (0.7) (0.7) (0.3)
Net earnings attributable to shareholders used for diluted earnings per share calculation $154.5
 $162.6
 $227.0
 $369.6
 $119.2
 $72.4
Net earnings attributable to shareholders per share $0.83
 $0.80
 $1.21
 $1.82
 $0.65
 $0.39

Potential shares outstanding from all stock-based awards were 3.53.6 million and 2.6 million as of June 30, 2016March 31, 2017 and 20152016, respectively, of which 3.2 million and 2.23.5 million were not included in the diluted earnings per share calculation for the three months ended June 30,March 31, 2017 and 2016, and 2015, respectively, and 3.2 million and 2.0 million were not included in the diluted earnings per share calculation for the six months ended June 30, 2016 and 2015, respectively.

4.                          INCOME TAXES
 
The Company’s effective tax rate (“ETR”) differs from the statutory tax rate predominantly due to the favorable impact of tax rulings and agreements in various foreign jurisdictions. The Company and the Dutch tax authorities previously agreed to the appropriate remuneration attributable to Dutch manufacturing activities through the year ending December 31, 2019. In addition, the Company negotiated a tax ruling effective from January 1, 2013, under which certain profits in Singapore are eligible for favorable taxation through the year ending December 31, 2027.

For the three and six months ended June 30,March 31, 2017 and 2016, the ETR was 17.2%8.1% and 25.5%38.1%, respectively, compared with 24.5% and 24.0% forrespectively.The 30.0% change in the same periods in 2015. The ETR decrease for the three months ended June 30, 2016 was driven approximately 4% by tax credits from the repatriation of foreign earningsfollowing benefits: (i) 23.3% related to the United States and a series of additional items which are insignificant both individually and in the aggregate. The ETR increase for the six months ended June 30, 2016 was driven approximately 6% by the Company’s Venezuelan subsidiary which incurred a remeasurement loss on its monetary assets and an impairment charge on its long-lived assets in 2016 (both of which provided no tax benefit)benefit in 2016), offset almost entirely by(ii) 10.8% due to higher tax credits fromcredit recognition associated with the repatriation of foreign earnings, to(iii) 7.6% from changes in reserves for uncertain tax positions, and (iv) 1.7% from a series of additional items which are insignificant both individually and in the United States. See Note 18 for additional information.aggregate. These benefits were offset by a 13.4% impact from unfavorable changes in the Company’s geographic earnings mix.

The Company’s gross reserve for uncertain tax positions including penalties and interest, as of June 30, 2016March 31, 2017 and December 31, 2015,2016, was $185.2$208.3 million and $167.0$199.3 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. 


A reversal of uncertain tax positions up to $50 million, of which approximately $27 million would impact the effective tax rate, is reasonably possible in the next 12 months due to the running of statutes of limitations and settlements with various taxing authorities.

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 June 30, Six Months Ended June 30, Three Months Ended March 31,
 Net Sales Earnings Before Interest and Income Taxes Net Sales Earnings Before Interest and Income Taxes Net Sales Earnings Before Interest and Income Taxes
(Dollars in millions) 2016 2015 2016 2015 2016 2015 2016 2015 2017 2016 2017 2016
Asia $456.2
 $513.2
 $137.0
 $156.4
 $956.8
 $1,094.2
 $306.1
 $387.9
 $434.1
 $500.6
 $116.8
 $169.1
Latin America 166.5
 198.4
 36.2
 44.8
 326.8
 402.8
 77.0
 102.1
 156.2
 160.3
 39.8
 40.8
North America/Europe 318.8
 320.8
 99.2
 85.3
 620.0
 629.8
 181.2
 163.6
 293.2
 301.2
 69.0
 82.0
Total reportable segments 941.5
 1,032.4
 272.4
 286.5
 1,903.6
 2,126.8
 564.3
 653.6
 883.5
 962.1
 225.6
 291.9
Corporate and Other —
 —
 (58.0) (57.3) —
 —
 (199.8) (139.2) —
 —
 (70.5) (141.8)
Total $941.5
 $1,032.4
 $214.4
 $229.2
 $1,903.6
 $2,126.8
 $364.5
 $514.4
 $883.5
 $962.1
 $155.1
 $150.1

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 anticipatedexpected 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 recognized within other (income)/expenses - net during the three and six months ended June 30,March 31, 2017 and 2016 and related reserves associated with Fuel for Growth as of June 30, 2016March 31, 2017 is as follows:
Restructuring Charges Three Months EndedSix Months Ended Three Months Ended
(Dollars in millions)
 June 30, 2016 March 31, 2017 March 31, 2016
Severance and Employee Benefits $1.3
$9.5
 $7.9
 $8.2
Asset Write-off —
 0.3
Other Costs 0.7
1.3
 2.0
 0.6
Asset Write-off —
0.3
 $2.0
$11.1
 $9.9
 $9.1

Restructuring Reserves 
Severance and Employee Benefits (1)
 
Contract Termination (2)
 
Other Costs (3)
 
Severance and Employee Benefits (1)
 
Contract Termination (2)
 
Other Costs (3)
 Total
(Dollars in millions)
              
Balance as of December 31, 2015 $9.5
 $10.3
 $—
Balance as of January 1, 2017 $14.2
 $10.3
 $3.0
 $27.5
Charges 9.5
 —
 1.3
 7.9
 —
 2.0
 9.9
Cash Payments (11.4) —
 (0.6) (6.3) (3.5) (0.3) (10.1)
Balance as of June 30, 2016 $7.6
 $10.3
 $0.7
Balance as of March 31, 2017 $15.8
 $6.8
 $4.7
 $27.3
        
Balance as of January 1, 2016 $9.5
 $10.3
 $—
 $19.8
Charges 8.2
 —
 0.6
 8.8
Cash Payments (6.9) —
 (0.6) (7.5)
Balance as of March 31, 2016 $10.8
 $10.3
 $—
 $21.1
(1) Included in accrued expenses on the balance sheet.

(2) Included in accrued expenses and other liabilities on the balance sheet.
(3) Included in accounts payable on the balance sheet.


Restructuring charges are included in Corporate and Other. Reserves related to severance and employee benefits and other costs 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 June 30, Six Months Ended June 30, Three Months Ended March 31,
(Dollars in millions) 2016 2015 2016 2015 2017 2016
Stock options $3.3
 $2.0
 $5.4
 $3.9
 $2.5
 $2.1
Performance share awards 2.3
 1.1
 4.6
 5.5
 1.4
 2.3
Restricted stock units 4.4
 3.4
 7.8
 6.1
 5.5
 3.4
Total pre-tax stock-based compensation expense $10.0
 $6.5
 $17.8
 $15.5
 $9.4
 $7.8
Net tax benefit related to stock-based compensation expense $(3.3) $(2.1) $(6.0) $(5.2) $(3.1) $(2.7)
 
During the sixthree months ended June 30, 2016March 31, 2017, the Company granted the following awards: 
(Shares in millions) Options/Shares Granted 
Weighted-
Average Grant
Date Fair Value
 Options/Shares Granted 
Weighted-
Average Grant
Date Fair Value
Stock options 1.1
 $13.88
Performance share awards 0.2
 $70.49
 0.1
 $84.87
Restricted stock units 0.4
 $74.48
 0.5
 $87.79
 
As of June 30, 2016March 31, 2017, 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)
 
Unrecognized
Compensation
Expense
 
Expected
Weighted-Average
Period to be
Recognized
(years)
Stock options $16.9
 1.9 $6.7
 2.0
Performance share awards 8.2
 1.4 10.0
 1.2
Restricted stock units 42.6
 2.7 71.9
 2.6
 $67.7
 
Total $88.6
 
 
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 June 30, Six Months Ended June 30, Three Months Ended March 31,
 Pension Benefits Other Benefits Pension Benefits Other Benefits Pension Benefits Other Benefits
(Dollars in millions) 2016 2015 2016 2015 2016 2015 2016 2015 2017 2016 2017 2016
Service cost – benefits earned during the period $0.7
 $0.7
 $0.2
 $0.3
 $1.4
 $1.5
 $0.5
 $0.6
 $0.9
 $0.7
 $0.3
 $0.3
Interest cost on projected benefit obligations 2.8
 3.7
 0.5
 0.5
 5.8
 7.4
 0.9
 1.0
 2.7
 3.0
 0.4
 0.4
Expected return on plan assets (4.1) (3.4) —
 —
 (8.2) (6.9) —
 —
 (4.0) (4.1) —
 —
Net periodic benefit cost $(0.6) $1.0
 $0.7
 $0.8
 $(1.0) $2.0
 $1.4
 $1.6
 $(0.4) $(0.4) $0.7
 $0.7
Net actuarial (gains)/losses 13.1
 (1.5) —
 —
 19.2
 (1.5) —
 —
 —
 6.1
 —
 —
Total net periodic expense/(benefit) $12.5
 $(0.5) $0.7
 $0.8
 $18.2
 $0.5
 $1.4
 $1.6
 $(0.4) $5.7
 $0.7
 $0.7
 

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. Because aggregate lump sum settlements exceededdid not exceed anticipated 2017 annual interest costs for the respective year during the first quarter of 2017, there was no remeasurement, and therefore no actuarial gain or loss was recognized during the three months ended March 31, 2017. Because aggregate lump sum settlements exceeded anticipated 2016 andannual interest costs during the secondfirst quarter of 2015,2016, the Company remeasured its U.S. pension plan during the secondfirst quarter of both 2016 and 2015. During the three and six months ended June 30, 2016, the Company recognized a net actuarial loss of $13.1$6.1 million and $19.2 million, respectively. The pension remeasurement loss was driven by decreases in the discount rate associated with the U.S. pension plan liability. Duringduring the three and six months ended June 30, 2015 the Company recognized a net actuarial gain of $1.5 million.March 31, 2016.


During the sixthree months ended June 30, 2016 and 2015,March 31, 2017, the Company contributed $1.9$0.1 million and $2.5 million, respectively, primarily to U.S.foreign pension plans. During the three months ended March 31, 2016, the Company made no contributions to pension plans.


9.                             OTHER (INCOME)/EXPENSES - NET
 
The components of other (income)/expenses - net were:
  Three Months Ended June 30, Six Months Ended June 30,
(Dollars in millions) 2016 2015 2016 2015
Venezuela long-lived asset impairments $—
 $—
 $45.9
 $—
Foreign exchange (gains)/losses - net (6.6) 4.7
 27.1
 1.9
Restructuring, severance and other related costs 1.9
 1.1
 11.2
 3.7
Marketable securities (gain)/loss —
 (6.4) —
 (6.4)
Legal, settlements and other - net (0.5) (0.7) (1.1) 11.7
Other (income)/expenses - net $(5.2) $(1.3) $83.1
 $10.9
  Three Months Ended March 31,
(Dollars in millions) 2017 2016
Restructuring, severance and other related costs—net $9.9
 $9.3
Merger related costs 6.8
 —
Administrative office relocation 4.8
 —
Foreign exchange (gains)/losses—net 1.9
 33.7
Venezuela long-lived asset impairments —
 45.9
Legal, settlements and other—net (0.6) (0.6)
Other (income)/expenses—net $22.8
 $88.3

During the first quarterthree months ended March 31, 2017 and 2016, restructuring, severance and other related costs—net included $9.9 million and $9.1 million, respectively, of restructuring costs associated with the Fuel for Growth program. See “—Note 6. Restructuring” for additional information.

Merger related costs for the three months ended March 31, 2017 included costs incurred by the Company associated with the proposed merger with Reckitt Benckiser. See “—Note 19. Mergers and Acquisitions” for additional information.

During the three months ended March 31, 2017, administrative office relocation included costs associated with moving the Company’s administrative offices in the U.S., including contract termination fees.

Foreign exchange (gains)/losses—net includes the re-measurement of U.S. dollar denominated intercompany loans, payables, and royalties for the three months ended March 31, 2017 and 2016, as well as foreign currency devaluation recognized in the Company’s Venezuelan subsidiary of $32.3 million for the three months ended March 31, 2016. See “—Note 17. Venezuela Matters” for additional information.

During the three months ended March 31, 2016, the Company recognized impairment charges of $45.9 million on long-lived assets of its Venezuelan subsidiary. See “—Note 1817. Venezuela Matters” for additional information.

Foreign exchange (gains)/losses - net for the three and six months ended June 30, 2016 included losses of $0.2 million and $32.5 million related to the devaluation of the exchange rate used for remeasuring the monetary assets and liabilities of its Venezuelan subsidiary. See Note 18 for additional information. During the three and six months ended June 30, 2016, restructuring, severance and other related costs included $2.0 million and $11.1 million, respectively, of restructuring costs in association with the Fuel for Growth program. See Note 6 for additional information.

Marketable securities (gain)/loss for the three and six months ended June 30, 2015 included a $6.4 million gain related to fluctuation in fair value and foreign exchange. See Note 16 for additional information. During the six months ended June 30, 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 - NET
 
The major categories of inventories - net were as follows:
(Dollars in millions) June 30, 2016 December 31, 2015 March 31, 2017 December 31, 2016
Finished goods $239.1
 $251.7
 $289.2
 $262.9
Work in process 71.1
 70.3
 61.8
 64.1
Raw and packaging materials 155.6
 162.9
 147.5
 146.5
Inventories $465.8
 $484.9
Inventories - net $498.5
 $473.5


12.                              LONG-LIVED ASSETS
 
Property, Plant and Equipment - net

The major categories of property, plant and equipment were as follows: 
(Dollars in millions) June 30, 2016 December 31, 2015 March 31, 2017 December 31, 2016
Land $8.3
 $12.3
 $8.2
 $8.1
Buildings and improvements 730.0
 729.6
 775.4
 739.8
Machinery, equipment and fixtures 792.0
 786.5
 868.3
 823.9
Construction in progress 110.2
 123.6
 73.0
 110.4
Accumulated depreciation (715.1) (688.0) (761.3) (733.6)
Property, plant and equipment — net $925.4
 $964.0
 $963.6
 $948.6
                   

During the first quarter of 2016, the Company recognized an impairment charge of $45.9 million on long-lived assets of its Venezuelan subsidiary. See Note 18 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 June 30, 2016March 31, 2017 that would require the Company to review intangible assets not subject to amortization for impairment subsequent to the review performed induring the third quarter of 2015.2016.
The gross carrying value and accumulated amortization by class of intangible assets as of June 30, 2016March 31, 2017 and December 31, 20152016 were as follows: 
 As of June 30, 2016 As of December 31, 2015 March 31, 2017 December 31, 2016
(Dollars in millions) 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Book
Value
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Book
Value
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Book
Value
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Book
Value
Indefinite-lived intangible assets:  
  
  
  
  
  
  
  
  
  
  
  
Trademark(1) .
 $14.9
 $—
 $14.9
 $16.9
 $—
 $16.9
 $14.2
 $—
 $14.2
 $14.4
 $—
 $14.4
Non-compete agreement(1) .
 2.9
 —
 2.9
 3.3
 —
 3.3
 2.8
 —
 2.8
 2.8
 —
 2.8
Sub-total 17.8
 —
 17.8
 20.2
 —
 20.2
 17.0
 —
 17.0
 17.2
 —
 17.2
Amortizable intangible assets:  
  
  
  
  
  
  
  
  
  
  
  
Computer software 140.7
 (110.4) 30.3
 136.7
 (103.0) 33.7
 146.8
 (120.6) 26.2
 145.4
 (117.3) 28.1
Distributor-customer relationship(2).
 1.4
 (0.6) 0.8
 1.6
 (0.6) 1.0
 1.4
 (0.7) 0.7
 1.4
 (0.7) 0.7
Sub-total 142.1
 (111.0) 31.1
 138.3
 (103.6) 34.7
 148.2
 (121.3) 26.9
 146.8
 (118.0) 28.8
Total other intangible assets $159.9
 $(111.0) $48.9
 $158.5
 $(103.6) $54.9
 $165.2
 $(121.3) $43.9
 $164.0
 $(118.0) $46.0
(1) Changes in balances result from currency translation.
(2) Changes in balances result from currency translation and amortization (10 year life).

Non-Cash Activity
Capital expenditures and the cash outflow for capital expenditures were as follows:

(Dollars in millions) Capital expenditures Cash outflow for capital
expenditures		 Increase/(Decrease) in capital expenditures not paid
Six months ended June 30, 2016 $49.0
 $80.8
 $(31.8)
Six months ended June 30, 2015 $52.1
 $80.0
 $(27.9)
(Dollars in millions) Capital expenditures Cash outflow for capital
expenditures		 Increase/(Decrease) in capital expenditures not paid
Three Months Ended March 31, 2017 $29.8
 $48.5
 $(18.7)
Three Months Ended March 31, 2016 $17.2
 $55.6
 $(38.4)

13.                             GOODWILL
 
The Company tests goodwillgoodwill 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 June 30, 2016March 31, 2017 that would require the Company to review goodwill for impairment subsequent to the review performed in the third quarter of 2015.2016.
For the sixthree months ended June 30,March 31, 2017 and 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
 TotalAsia 

Latin America
 
North America/
Europe
 Total
Balance as of January 1, 2017$—
 $89.9
 $19.0
 $108.9
Translation adjustments—
 4.2
 —
 4.2
Balance as of March 31, 2017$—
 $94.1
 $19.0
 $113.1
       
Balance as of January 1, 2016$—
 $107.0
 $19.0
 $126.0
$—
 $107.0
 $19.0
 $126.0
Translation adjustments—
 (10.2) —
 (10.2)—
 (6.0) —
 (6.0)
Balance as of June 30, 2016$—
 $96.8
 $19.0
 $115.8
       
Balance as of January 1, 2015$—
 $143.7
 $19.0
 $162.7
Translation adjustments—
 (7.8) —
 (7.8)
Balance as of June 30, 2015$—
 $135.9
 $19.0
 $154.9
Balance as of March 31, 2016$—
 $101.0
 $19.0
 $120.0
 
As of June 30, 2016,March 31, 2017, the Company had no accumulated impairment loss.

14.                              DEBT
 
Short-Term Borrowings
 
As of June 30, 2016March 31, 2017 and December 31, 2015,2016, the Company’s short-term borrowings were $3.8$4.5 million and $3.03.9 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%27.5% as of June 30, 2016.March 31, 2017.

Revolving Credit Facility

As of June 30, 2016March 31, 2017 and December 31, 2015,2016, the Company had no borrowings fromagainst its $750.0 million revolving credit facility, and the Company had $750.0 million available at June 30, 2016.March 31, 2017. The revolving credit facility contains financial covenants and the Company was in compliance with these financial covenants as of June 30, 2016.March 31, 2017. 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) June 30, 2016 December 31, 2015 March 31, 2017 December 31, 2016
Principal Value:  
  
  
  
4.900% Notes due 2019 (“2019 Notes”) $700.0
 $700.0
 $700.0
 $700.0
3.000% Notes due 2020 (“2020 Notes”) 750.0
 750.0
 750.0
 750.0
4.125% Notes due 2025 (“2025 Notes”) 750.0
 750.0
 750.0
 750.0
5.900% Notes due 2039 (“2039 Notes”) 300.0
 300.0
 300.0
 300.0
4.600% Notes due 2044 (“2044 Notes”) 500.0
 500.0
 500.0
 500.0
Sub-total 3,000.0
 3,000.0
 3,000.0
 3,000.0
Adjustments to Principal Value:  
  
  
  
Unamortized basis adjustment for settled interest rate swaps 6.1
 7.0
 4.7
 5.1
Unamortized bond discount (4.6) (4.8) (4.2) (4.3)
Unamortized debt issuance costs (20.5) (21.6) (18.8) (19.4)
Fair-value interest rate swaps 40.9
 0.4
 (8.4) (5.2)
Long-term debt $3,021.9
 $2,981.0
 $2,973.3
 $2,976.2

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 $3,259.0$3,165.2 million as of June 30, 2016.March 31, 2017.
 

The components of interest expense-net were as follows: 
  Three Months Ended June 30, Six Months Ended June 30,
(Dollars in millions) 2016 2015 2016 2015
Interest expense $29.5
 $16.5
 $58.5
 $32.9
Interest income (3.1) (2.6) (5.9) (5.2)
Interest expense-net $26.4
 $13.9
 $52.6
 $27.7

The increase in interest expense-net was driven by interest expense on the November 2015 issuance of the 2020 Notes and the 2025 Notes.
  Three Months Ended March 31,
(Dollars in millions) 2017 2016
Interest expense $30.8
 $29.0
Interest income (3.7) (2.8)
Interest expense-net $27.1
 $26.2

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 These financial instruments are classified as Level 2 in the fair value hierarchy at June 30, 2016 March 31, 2017 and December 31, 2015,2016, 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 DesignationBalance Sheet Location June 30, 2016 December 31, 2015Hedge DesignationBalance Sheet Location March 31, 2017 December 31, 2016
Foreign exchange contractsCash FlowPrepaid expenses and other assets $3.5
 $6.4
Cash FlowPrepaid expenses and other assets $3.6
 $10.9
Interest rate swapsFair ValueOther assets 40.9
 3.9
Fair ValueOther assets —
 1.1
Foreign exchange contractsCash FlowAccrued expenses (5.6) (0.9)Cash FlowAccrued expenses (1.8) (0.2)
Interest rate swapsFair ValueOther liabilities —
 (3.5)Fair ValueOther liabilities (8.4) (6.3)
Commodity contractsCash FlowAccrued expenses —
 (0.2)Cash FlowAccrued expenses (0.2) —
Net asset/(liability) of derivatives designated as hedging items   $38.8
 $5.7
 Net asset/(liability) of derivatives designated as hedging items $(6.8) $5.5

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 byby Standard & Poor’s Rating Service, Fitch Ratings or Moody’s Investors Service, Inc. In addition, only conventional derivativederivative financial instruments are used. The Company would not be materially impacted if any of the counterparties to the derivative financial instruments outstanding atMarch 31, 2017 June 30, 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 June 30, 2016March 31, 2017 and December 31, 2015,2016, the Company has cash flow hedges which qualify as hedges of forecasted cash flows, with the effective portion of changes in fair value 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.Cash flow hedges are valued using quoted prices in markets that are not active.

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 and six months ended June 30,March 31, 2017, the Company discontinued cash flow hedge accounting for an insignificant number of hedges with a negligible net impact to the income statement as the underlying transaction was no longer probable.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, and ineffectiveness related to the Company’s foreign exchange hedges on earnings is recognized within other (income)/expenses - net. The ineffective portion of the hedges was $0.2 million and $0.6$1.3 million for the sixthree months ended June 30, 2016March 31, 2017 and 2015, respectively.2016.

As of June 30, 2016, the notional value ofThe table below summarizes the Company’s outstanding foreign exchange forward contracts designated as hedging instruments wasat $252.3 millionMarch 31, 2017, with a net fair value of .$2.1 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.
(Dollars in millions) Weighted-average
Forward Rate		 Notional
Amount		 Fair Value
Asset
Foreign exchange contracts:      
Cash flow hedges:      
Canadian dollar 1.32 $72.5
 $0.6
Mexican peso 19.84 43.4
 (1.4)
Malaysian ringgit 4.30 37.6
 1.4
Philippine peso 49.34 43.0
 1.2
Total foreign exchange contracts   $196.5
 $1.8

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 2017 2016
Balance—January 1 $10.1
 $10.4
 $10.1
 $10.1
Derivatives qualifying as cash flow hedges deferred in other comprehensive income (6.4) 10.2
 (4.2) (11.9)
Derivatives qualifying as cash flow hedges reclassified to cost of products sold (effective portion) (7.9) (9.2) (3.0) (6.3)
Change in deferred taxes 2.7
 1.3
 2.2
 4.2
Balance—June 30 $(1.5) $12.7
Balance—March 31 $5.1
 $(3.9)
 
At June 30, 2016,March 31, 2017, 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 lossincome was $1.5$5.1 million, $1.0$4.6 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.sold.

As of June 30, 2016,March 31, 2017, the Company had commodity contracts outstanding which committed the Company to approximately $2.8$6.3 million of forecasted non-fat dry milk purchases. The effective portion of commodity derivatives qualifying as cash flow hedges is deferred in accumulated other comprehensive income (loss), and the ineffective portion is recognized within other (income)/expenses - net. Both the effectiveCommodity derivatives qualifying as cash flow hedges deferred in accumulated other comprehensive loss at March 31, 2017 was $0.2 million and ineffective portions of the hedges were insignificant forat December 31, 2016. During the three and six months ended June 30,March 31, 2017, the Company had no ineffectiveness on commodities. For the three months ended March 31, 2016, and 2015.the ineffective portion recognized within other (income)/expenses - net was $0.5 million. 
 

Fair Value Hedges
 
Interest Rate Swaps
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 June 30, 2016March 31, 2017, and the conversion of fixed to floating rate resulted in a reduction in interest expense of $1.9$1.3 million and $4.0$2.0 million for the three and six months ended June 30,March 31, 2017 and 2016, respectively, compared to a $2.5 million and $5.2 million reduction for the same periods in 2015.respectively.

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 June 30, 2016,March 31, 2017, and the conversion of fixed to floating rate resulted in a reduction in interest expense of $1.8$1.2 million and $3.8$2.1 million for the three and six months ended June 30,March 31, 2017 and 2016, respectively. As the Company entered into the swaps during the fourth quarter of 2015, there was no impact to interest expense for the three and six months ended June 30, 2015.

The following table summarizes the interest rate swaps outstanding as of June 30, 2016.March 31, 2017. 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. Interest rate swaps are valued using third party valuation models.
       Fair Value Asset/(Liability)
(Dollars in millions) Notional Amount of Underlying Fixed Rate Received 
Variable Rate Paid
(U.S. 3 Month LIBOR +)
 Fair Value Asset Notional Amount of Underlying Fixed Rate Received 
Variable Rate Paid
(U.S. 3 Month LIBOR +)
 March 31, 2017 December 31, 2016
Swaps associated with the 2019 Notes $700.0
 4.9% 3.14% $19.7
 $700.0
 4.9% 3.14% $(0.5) $1.1
Swaps associated with the 2020 Notes $750.0
 3.0% 1.38% $21.2
 $750.0
 3.0% 1.38% $(7.9) $(6.3)
See “—Note 1414. Debt” for additional information related toregarding 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 $592.9$251.6 million and $510.1$1,022.0 million as of June 30, 2016March 31, 2017 and December 31, 2015,2016, 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.                              MARKETABLE SECURITIES
As of June 30, 2015, the Company held investments in debt securities of $22.5 million classified as trading securities, which were included in prepaid expensesand other assets. These investments were carried at fair value based on quoted market prices and classified as Level 1 in the fair value hierarchy. Cost basis for the Company’s debt securities is determined by the specific identification method. Realized and unrealized gains and losses on trading securities were included in other (income)/expenses - net.

The Company sold its investments in debt securities during the third quarter of 2015. As of June 30, 2016 and December 31, 2015, the Company held no investments in debt securities. During the three months and six months ended June 30, 2015, the Company recognized gains on trading securities of $6.4 million resulting from fluctuation in fair value and foreign exchange.

17.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 0.3
 —
 —
Accelerated Share Repurchase (2.1) —
 —
Balance as of June 30, 2016 189.6
 4.9
 $362.6
       
Balance as of January 1, 2015 207.2
 4.9
 $362.6
Stock-based compensation 0.5
 —
 —
Balance as of June 30, 2015 207.7
 4.9
 $362.6
(Dollars and shares in millions) 
Common Shares
Issued
 Treasury Stock 
Cost of Treasury
Stock
Balance as of January 1, 2017 188.3
 4.9
 $362.6
Stock-based Compensation 0.3
 —
 —
Balance as of March 31, 2017 188.6
 4.9
 $362.6
       
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
 
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.


Share Repurchase Authorizations and Accelerated Share Repurchase Agreement

In September 2013, the Company’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 2013 Authorization doesdid not have an expiration date. During the secondfirst quarter of 2016, the Company did not repurchase any shares pursuant to the 2013 Authorization. As of March 31, 2016,

the Company had $0.4 million remaining available under the 2013 Authorization. In the third quarter of 2016, the Company repurchased $0.4 million of its common stock which completed all purchases remaining under the 2013 Authorization.

In October 2015, the Company’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”). The 2015 Authorization does not have an expiration date. Other thanDuring the shares delivered upon final settlementfirst quarters of the ASR Agreement described below, during the second quarter of2017 and 2016, the Company did not repurchase any shares pursuant to the 2015 Authorization. As of March 31, 2017, the Company had $400.0 million remaining available under the 2015 Authorization.

On October 22, 2015,Under the Merger Agreement (as defined in “—Note 19. Mergers and Acquisitions”), the Company entered into an accelerated shareis prohibited from redeeming, repurchasing or otherwise acquiring or offering to redeem, repurchase, agreement (the “ASR Agreement”) with Goldman, Sachs & Co. (“Goldman”) to repurchase $1,000.0 million (the “Repurchase Price”) of our common stock. Under the terms of the ASR Agreement, the Company paid the Repurchase Price in advance in exchange for 10,725,552 shares of ouror otherwise acquire its common stock received by the Company on October 27, 2015 (whichor other securities, other than shares are equivalent to approximately 85% of the number of shares of our common stock that could have been purchased with an amount of cash equal to the Repurchase Price based on the closing price of our common stock on October 22, 2015).Upon final settlement of the ASR Agreement in June 2016, an additional 2,086,050 shares were deliveredsurrendered to the Company for no additional consideration based generally onto pay the daily volume-weighted average pricesexercise price in connection with the exercise of our commonemployee stock over the term of the ASR Agreement. The totaloptions and shares received and retired under the terms of the ASR Agreement was 12,811,602 shares with an average price paid per share of approximately $78.05. The par value of the retired shares were reflected as a reduction to common stock and the payment made to Goldman was recorded as a reduction to retained earnings within shareholders’ equity.

The ASR Agreement was primarily funded by the issuance of the 2020 Notes and 2025 Notes. See Note 14 for discussion on the Company’s debt.

Redeemable Noncontrolling Interest

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%. The agreed upon purchase price paidsurrendered to the noncontrolling interest owner was $24.4 million asCompany to satisfy tax withholding obligations in connection with the exercise of June 30, 2015 (based uponemployee stock options or the agreed local currency price)vesting of restricted stock units and consisted of $5.1 million in cash and $19.3 million recorded in accrued expenses and other liabilities (paid July 17, 2015).

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.

performance share awards.

Accumulated Other Comprehensive Loss

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 Foreign Currency Translation Adjustments Deferred Gains/(Losses) on Derivatives Qualifying as Hedges Pension and Other Post-employment Benefits Total Noncontrolling Interest 
Balance as of January 1, 2017 $(395.0) $(15.6) $(0.8) $(411.4) $(13.2) 
Deferred Gains/(Losses) 33.3
 (4.4) —
 28.9
 —
(1)
Reclassification Adjustment for (Gains)/Losses Included in Net Earnings —
 (2.4) —
 (2.4) —
 
Tax Benefit/(Expense) (0.5) 2.1
 —
 1.6
 —
 
Balance as of March 31, 2017 $(362.2) $(20.3) $(0.8) $(383.3) $(13.2) 
           
Balance as of January 1, 2016 $(329.8) $(17.2) $(0.8) $(347.8) $(12.7) $—
 $(329.8) $(17.2) $(0.8) $(347.8) $(12.7) 
Deferred Gains/(Losses) (16.5) (6.1) —
 (22.6) (0.9)(1)—
 6.7
 (11.6) —
 (4.9) (0.8)(1)
Reclassification Adjustment for (Gains)/Losses Included in Net Earnings —
 (6.6) —
 (6.6) —
 —
 —
 (5.5) —
 (5.5) —
 
Tax Benefit/(Expense) 0.8
 2.1
 —
 2.9
 —
 —
 0.2
 3.8
 —
 4.0
 —
 
Balance as of June 30, 2016 $(345.5) $(27.8) $(0.8) $(374.1) $(13.6) $—
            
Balance as of January 1, 2015 $(180.4) $(17.8) $(0.7) $(198.9) $1.9
 $(21.6)
Deferred Gains/(Losses) (48.4) 9.3
(2)—
 (39.1) 0.1
(1)(1.3)
Reclassification Adjustment for (Gains)/Losses Included in Net Earnings —
 (7.8) —
 (7.8) —
 —
Tax Benefit/(Expense) 0.1
 1.1
 —
 1.2
 —
 —
Acquisition of Noncontrolling Interest (11.5) —
 —
 (11.5) (11.4) 22.9
Balance as of June 30, 2015 $(240.2) $(15.2) $(0.7) $(256.1) $(9.4) $—
Balance as of March 31, 2016 $(322.9) $(30.5) $(0.8) $(354.2) $(13.5) 
(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 June 30,
 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$1.6
 $6.8
 $—
 $(3.4) $1.6
 $3.4
  Commodity Contracts(0.2) (0.6) —
 0.2
 (0.2) (0.4)
  Interest Rate Forward Swap(0.3) (0.3) 0.2
 0.2
 (0.1) (0.1)
Total Reclassifications$1.1
 $5.9
 $0.2
 $(3.0) $1.3
 $2.9


Six Months Ended June 30,Three Months Ended March 31,
Affected Statement of Earnings Lines    Affected Statement of Earnings Lines    
(Dollars in millions)Cost of Products Sold Tax Benefit/(Expense) NetCost of Products Sold Tax Benefit/(Expense) Net
2016 2015 2016 2015 2016 20152017 2016 2017 2016 2017 2016
Deferred Gains/(Losses) on Derivatives Qualifying as Hedges:                      
Forward Exchange Contracts$7.9
 $9.2
 $(0.6) $(4.0) $7.3
 $5.2
$3.0
 $6.3
 $(0.1) $(0.6) $2.9
 $5.7
Commodity Contracts(0.6) (0.7) 0.2
 0.3
 (0.4) (0.4)(0.2) (0.4) 0.1
 0.2
 (0.1) (0.2)
Interest Rate Forward Swap(0.7) (0.7) 0.3
 0.3
 (0.4) (0.4)(0.4) (0.4) 0.1
 0.1
 (0.3) (0.3)
Total Reclassifications$6.6
 $7.8
 $(0.1) $(3.4) $6.5
 $4.4
$2.4
 $5.5
 $0.1
 $(0.3) $2.5
 $5.2
           


18.17.                              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. The VEF as measured at the DICOM rate has continued to devalue against the USD throughout the second quarter of 2016. 2016 and 2017.

The rates were as follows:

(VEF to 1.0 USD) June 30, 2016 March 31, 2016 March 31, 2017 December 31, 2016 March 31, 2016
DIPRO 10.0
 10.0
 10.0
 10.0
 10.0
DICOM 628.3
 272.9
 709.7
 673.8
 272.9

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, recognized during the first quarter of 2016 as a component of other (income)/expenses - net. Additional losses in the amount of $0.2 million were recognized duringFor the three months ended June 30, 2016 related to remeasurementMarch 31, 2017, the impact of the monetary assets and liabilities due to the continued devaluation of the DICOM rate against the USD.foreign currency was negligible.

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 first quarter ofthree 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.

Net sales in the Venezuelan subsidiary were negligible as a percent of total Company net sales for the three and six months ended June 30, 2016 and 2015.March 31, 2017. In addition, the Venezuelan subsidiary’s earnings were not a material component of MJN’s consolidated results during the three and six months ended June 30, 2016 and 2015.March 31, 2017.

Remaining Asset Exposures

The Venezuelan subsidiary had net monetary assets and net non-monetary assets that were negligible individually and in aggregate to the Company’s total net assets as of June 30, 2016. At June 30, 2016, the Venezuelan subsidiary had an intercompany payable in the amount of $52.7 million which represented amounts owed to the Company’s subsidiaries in Mexico and the U.S. for purchases of inventory.March 31, 2017.

19.18.                              COMMITMENTS AND CONTINGENCIES
 
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.

Litigation Related to the Merger

See “—Note 19. Mergers and Acquisitions” for information and definitions regarding the Company’s pending transaction with Reckitt Benckiser Group plc (“Reckitt Benckiser”).

On February 14, 2017, a stockholder of the Company filed a purported stockholder class action lawsuit in Cook County, Illinois, captioned Kirkham v. Altschuler, et al., 2017-CH-02109. The defendants are the Company, the individual members of the board of directors, Reckitt Benckiser and Marigold Merger Sub, Inc., a wholly owned indirect subsidiary of Reckitt Benckiser (“Merger Sub”). The lawsuit alleges that the Company’s board of directors violated their fiduciary duties and that the Company, Reckitt Benckiser and Merger Sub aided and abetted such breaches, in each case in connection with the transactions contemplated by the Merger Agreement (as defined below). The lawsuit seeks, among other things, to enjoin consummation of the Merger (as defined below). On March 28, 2017, the plaintiff stockholder filed an amended complaint. In addition to the allegations of the original complaint, the amended complaint further alleges that the defendants failed to disclose certain information in the preliminary proxy statement, filed with the SEC on March 13, 2017.  The plaintiff alleges that this omitted information is material for stockholders to vote on the Merger.  The amended complaint alleges the same causes of actions against the same defendants and seeks the same relief as did the original complaint. The Company and its directors intend to vigorously defend against the allegations in the complaint.

On March 21, 2017, a stockholder of the Company filed a purported stockholder class action lawsuit in the United States District Court for the District of Delaware, captioned Steinberg v. Mead Johnson Nutrition Company, et al., 1:17-cv-00304. The defendants are the Company, the individual members of the board of directors, Reckitt Benckiser and Merger Sub. The lawsuit alleges that the Company’s preliminary proxy statement, filed with the SEC on March 13, 2017, is false and misleading with respect to the Merger and thus the Company and the individual defendants violated Section 14(a) of the Securities Exchange Act of 1934 as well as SEC Rule 14a-9 and Reckitt Benckiser and the individual defendants violated Section 20(a) of the Securities Exchange Act of 1934. The lawsuit seeks, among other things, to enjoin consummation of the Merger. The Company and its directors intend to vigorously defend against the allegations in the complaint.
On March 27, 2017, a stockholder of the Company filed a purported stockholder class action lawsuit in the United States District Court for the District of Delaware, captioned Rubin v. Mead Johnson Nutrition Company, et al., 1:17-cv-00325. The defendants are the Company, the individual members of the board of directors, Reckitt Benckiser and Merger Sub. The lawsuit alleges that the Company’s preliminary proxy statement, filed with the SEC on March 13, 2017, is false and misleading with respect to the Merger and thus all defendants violated Section 14(a) of the Securities Exchange Act of 1934 as well as SEC Rule 14a-9 and the individual defendants violated Section 20(a) of the Securities Exchange Act of 1934. The lawsuit seeks, among other things, to enjoin consummation of the Merger. The Company and its directors intend to vigorously defend against the allegations in the complaint.
On March 27, 2017, a stockholder of the Company filed a purported stockholder class action lawsuit in the United States District Court for the District of Delaware, captioned Solak v. Mead Johnson Nutrition Company, et al., 1:17-cv-00325. The defendants are the Company, the individual members of the board of directors, Reckitt Benckiser and Merger Sub. The lawsuit alleges that the Company’s preliminary proxy statement, filed with the SEC on March 13, 2017, is false and misleading with respect to the Merger and thus the Company and the individual defendants violated Section 14(a) of the Securities Exchange Act of 1934 as well as SEC Rule 14a-9 and all defendants violated Section 20(a) of the Securities Exchange Act of 1934. The lawsuit seeks, among other things, to enjoin consummation of the Merger. The Company and its directors intend to vigorously defend against the allegations in the complaint.
On March 30, 2017, a stockholder of the Company filed a purported stockholder class action lawsuit in the United States District Court for the District of Delaware, captioned Walters v. Mead Johnson Nutrition Company, et al., 1:17-cv-00344. The defendants are the Company and the individual members of the board of directors. The lawsuit alleges that the Company’s preliminary proxy statement, filed with the SEC on March 13, 2017, is false and misleading with respect to the Merger and thus all defendants violated Section 14(a) of the Securities Exchange Act of 1934 and the individual defendants violated Section 20(a) of the Securities Exchange Act of 1934. The lawsuit seeks, among other things, to enjoin consummation of the Merger. The Company and its directors intend to vigorously defend against the allegations in the complaint.


19.MERGERS AND ACQUISITIONS
Merger Agreement

On February 10, 2017, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Reckitt Benckiser and Merger Sub, pursuant to which Reckitt Benckiser will indirectly acquire the Company by means of a merger of Merger Sub with and into the Company on the terms and subject to the conditions set forth in the Merger Agreement (the “Merger”). The Merger Agreement and the consummation of the transactions contemplated by the Merger Agreement have been unanimously approved by the Company’s board of directors.

At the effective time of the Merger (the “Effective Time”), on the terms and subject to the conditions set forth in the Merger Agreement, each share of the Company’s common stock outstanding immediately prior to the Effective Time (other than (i) each share held by the Company as treasury stock (other than shares held for the account of clients, customers or other persons), (ii) each share held by Reckitt Benckiser or by any subsidiary of either the Company or Reckitt Benckiser and (iii) each share held by a holder who has not voted in favor of the Merger or consented thereto in writing and who has demanded appraisal for such shares in accordance with Delaware law) will be converted into the right to receive $90.00 in cash, without interest.

Consummation of the Merger is subject to the satisfaction or waiver of certain customary closing conditions, including, among others: (i) the affirmative vote of the holders of a majority of the Company's outstanding shares of common stock; (ii) the affirmative vote of a simple majority of Reckitt Benckiser’s shareholders at a shareholder meeting; (iii) the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (“HSR”), and the receipt of certain other non-United States regulatory approvals required to consummate the Merger; and (iv) in the case of Reckitt Benckiser's obligations to consummate the Merger, the absence of a Company Material Adverse Effect (as defined in the Merger Agreement). Reckitt Benckiser and Merger Sub's respective obligations to consummate the Merger are not subject to any financing condition or other contingency. With regard to subsection (iii) of the foregoing sentence, the Company received early termination of the HSR waiting period effective as of March 24, 2017.

Australian Asset Acquisition
On February 27, 2017, the Company announced that it has reached an agreement to acquire assets from Bega Cheese Limited (“Bega”).  In connection with this transaction, the Company is acquiring from Bega a spray dryer and a finishing plant in Australia and will enter into service agreements to support the operation of those assets. The aggregate consideration for the asset purchase was approximately AUD $200 million for which the Company deposited $153.8 million into an escrow account held by a third-party in anticipation of funding this transaction. At March 31, 2017 that escrow account translated to $152.5 million and was included in restricted cash as the funds were to be disbursed to Bega when certain conditions have been satisfied by both parties. The asset purchase was completed on April 24, 2017. In accordance with the relevant transaction documents, Bega received AUD $180 million (USD $136.1 million) on completion and will receive the remaining AUD $20 million balance of the purchase price on or before December 31, 2017.

ITEM 2.                             MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 

Business Overview
 
We are a global leader in pediatric nutrition. We are committed to being the world’s leading nutrition company for infants and children and to helping nourish the world’s children for the best start in life. Our comprehensive product portfolio addresses a broad range of nutritional needs for infants, children and expectant and breastfeeding mothers. We have over 100 years of innovation experience during which we have developed or improved many breakthrough or category-defining products across our product portfolio. We operate in four geographies which represent our operating segments: Asia, North America, Latin America and Europe. Due to similarities between North America and Europe, we aggregated these two operating segments into one reportable segment. As a result, the Company has three reportable segments: Asia, Latin America and North America/Europe.

We continue to note exposures related to adverse foreign currency exchange rates similar to those highlighted in the Annual Report on Form 10-K for the year ended December 31, 2015 and the Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2016. We remain cautious of the impact of such exchange rates on our net salesreported results because a substantial portion of our sales arebusiness is outside of the U.S. and the U.S. dollar remains stronghas recently been strengthening in relation to many relevant currencies. We have implemented certain measures to offset some of the impact that lower sales has on our margins.of adverse foreign exchange. However, if the U.S. dollar continues to strengthen or does so at an accelerated pace, we may experience a greater impact to our business.

Merger Agreement

On February 10, 2017, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Reckitt Benckiser Group plc, a company incorporated in England and Wales (“Reckitt Benckiser”), and Marigold Merger Sub, Inc., a Delaware corporation and a wholly owned indirect subsidiary of Reckitt Benckiser (“Merger Sub”), pursuant to which Reckitt Benckiser will indirectly acquire the Company by means of a merger of Merger Sub with and into the Company on the terms and subject to the conditions set forth in the Merger Agreement (the “Merger”). The Merger Agreement and the consummation of the transactions contemplated by the Merger Agreement have been unanimously approved by the Company’s board of directors.

At the effective time of the Merger (the “Effective Time”), on the terms and subject to the conditions set forth in the Merger Agreement, each share of the Company’s common stock outstanding immediately prior to the Effective Time (other than (i) each share held by the Company as treasury stock (other than shares held for the account of clients, customers or other persons), (ii) each share held by Reckitt Benckiser or by any subsidiary of either the Company or Reckitt Benckiser and (iii) each share held by a holder who has not voted in favor of the Merger or consented thereto in writing and who has demanded appraisal for such shares in accordance with Delaware law) will be converted into the right to receive $90.00 in cash, without interest.

Consummation of the Merger is subject to the satisfaction or waiver of certain customary closing conditions, including, among others: (i) the affirmative vote of the holders of a majority of the Company's outstanding shares of common stock; (ii) the affirmative vote of a simple majority of Reckitt Benckiser’s shareholders at a shareholder meeting; (iii) the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (“HSR”), and the receipt of certain other non-United States regulatory approvals required to consummate the Merger; and (iv) in the case of Reckitt Benckiser's obligations to consummate the Merger, the absence of a Company Material Adverse Effect (as defined in the Merger Agreement). Reckitt Benckiser and Merger Sub's respective obligations to consummate the Merger are not subject to any financing condition or other contingency. With regard to subsection (iii) of the foregoing sentence, the Company received early termination of the HSR waiting period effective as of March 24, 2017.

Additional information about the Merger Agreement is set forth in our Current Report on Form 8-K filed with the United States Securities and Exchange Commission (the “SEC”) on February 13, 2017.

Three Months Results of Operations

Below is a summary of comparative results of operations for the three months ended June 30, 2016March 31, 2017 and 2015: 2016: 

    
 Three Months Ended June 30,   % of Net Sales Three Months Ended March 31,   % of Net Sales
(Dollars in millions, except per share data) 2016 2015 % Change 2016 2015 2017 2016 % Change 2017 2016
Net Sales $941.5
 $1,032.4
 (9)%  $883.5
 $962.1
 (8)%    
Gross Profit 608.3
 676.0
 (10)% 65% 65% 553.3
 614.5
 (10)% 63% 64%
Operating Expenses 393.9
 446.8
 (12)% 42% 43% 398.2
 464.4
 (14)% 45% 48%
Earnings before Interest and Income Taxes 214.4
 229.2
 (6)% 23% 22% 155.1
 150.1
 3% 18% 16%
Interest Expense—net 26.4
 13.9
 90% 3% 1% 27.1
 26.2
 3% 3% 3%
Earnings before Income Taxes 188.0
 215.3
 (13)% 20% 21% 128.0
 123.9
 3% 14% 13%
Provision for Income Taxes 32.2
 52.7
 (39)% 3% 5% 10.4
 47.2
 (78)% 1% 5%
Effective Tax Rate 17.2% 24.5%  8.1% 38.1% 
Net Earnings 155.8
 162.6
 (4)% 17% 16% 117.6
 76.7
 53% 13% 8%
Less: Net Earnings/(Loss) Attributable to Noncontrolling Interests 0.7
 (0.3) n/m —% —% (2.3) 4.0
 n/m —% —%
Net Earnings Attributable to Shareholders $155.1
 $162.9
 (5)% 16% 16% $119.9
 $72.7
 65% 14% 8%
Weighted-Average Common Shares— Diluted 187.0
 203.1
  183.9
 186.7
 
Earnings per Common Share—Diluted $0.83
 $0.80
 4%  $0.65
 $0.39
 67% 

The results for the three months ended June 30,March 31, 2017 and 2016 and 2015 include several items that affect the comparability of our results. These items include significant expenses/(income) not indicative of ongoing results (“Specified Items”) and are listed in the table below.
 Three Months Ended June 30, Three Months Ended March 31,
(Dollars in millions) 2016 2015 2017 2016
Restructuring, severance and other related costs $9.9
 $9.9
Merger related costs 6.8
 —
Administrative office relocation 6.0
 —
Venezuela long-lived asset impairments and foreign exchange losses —
 78.2
Pension and other post-employment adjustments $13.1
 $(1.5) —
 6.1
Restructuring, severance and other related costs 2.5
 0.2
Venezuela foreign exchange losses 0.2
 —
Legal, settlements and related costs —
 0.4
Marketable securities gain - net —
 (6.3)
Tax matters and the income tax impact on Specified Items (5.1) (0.6) (5.9) (3.5)

For the three months ended June 30,March 31, 2017, Specified Items consisted of $9.9 million of charges related to the Company’s ongoing Fuel for Growth initiatives, $6.8 million of charges incurred by the Company associated with the Merger, and $6.0 million of costs related to moving the Company’s administrative offices in the U.S., including contract termination fees.

During the three months ended March 31, 2016, Specified Items includedconsisted of $78.2 million of long-lived asset impairment charges and foreign exchange losses in Venezuela, $9.1 million of charges related to the Company’s ongoing Fuel for Growth initiatives, and a loss of $6.1 million related to the remeasurement of a defined benefit pension plan, a restructuring charge related to the Company’s ongoing Fuel for Growth initiative and foreign exchange losses in

Venezuela. The pension remeasurement loss wasprimarily driven by decreasesa decrease in the discount rate associated with the U.S. pension plan liability.

During the three months ended June 30, 2015, Specified Items mainly included a marketable securities gain as well as a gain related to the remeasurement of a defined benefit pension plan.interest rate.

For additional information on these Specified Items, see “Item 1. Financial Statements - Statements—Note 6. Restructuring, Note—Note 8. Pension and Other Post-Employment Benefit Plans, Note 16. Marketable Securities—Note 17. Venezuela Matters, and Note 18. Venezuela Matters.—Note 19. Mergers and Acquisitions.”

Specified ItemsIt is the Company’s policy to consistently include gains and losses, as incurred, related to the remeasurement of defined benefit pension and post-employment benefit plans.plans within Specified Items. The remeasurement reflects changes in the pension assets and liabilities above what was estimated and included in periodic costs. Factors beyond our control such as changes in discount rates, market volatility and mortality assumptions drive the remeasurement amount. Additionally, the majority of our pension and post-employment plans are frozen, and therefore the benefit provided to such employees is not related to our underlying operations.

Net Sales 

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 gross sales to net sales is as follows: 

 Three Months Ended June 30, % of Gross Sales Three Months Ended March 31, % of Gross Sales
(Dollars in millions) 2016 2015 2016 2015 2017 2016 2017 2016
Gross Sales $1,304.3
 $1,366.2
 100% 100% $1,229.4
 $1,293.5
 100% 100%
Gross-to-Net Sales Adjustments  
  
      
  
    
Women, Infant and Children (“WIC”) Rebates 191.0
 192.9
 15% 14% 179.8
 183.2
 14% 14%
Sales Discounts 108.6
 77.5
 8% 6% 108.7
 85.7
 9% 7%
Returns 22.5
 21.2
 2% 1% 24.3
 20.9
 2% 2%
Other (including Cash Discounts, Coupons) 40.7
 42.2
 3% 3% 33.1
 41.6
 3% 3%
Total Gross-to-Net Sales Adjustments 362.8
 333.8
 28% 24% 345.9
 331.4
 28% 26%
Total Net Sales $941.5
 $1,032.4
 72% 76% $883.5
 $962.1
 72% 74%

The total gross-to-net sales adjustments increased as a percentage of gross sales to 28% in 20162017 from 24%26% in 2015,2016, primarily driven by an increase in sales discounts. Sales discounts increased due to trade investments in support of product launches and channel transition in China, a portion of which was the result of a change in the nature of demand generation spending as investments previously recognized within advertising and promotion are now impacting gross-to-net sales adjustments.China.

Net sales by reportable segments are shown in the table below:
 Three Months Ended June 30,   % Change Due to Three Months Ended March 31,   % Change Due to
(Dollars in millions) 2016 2015 % Change Volume Price/Mix 
Foreign
Exchange
 2017 2016 % Change Volume Price/Mix 
Foreign
Exchange
Asia $456.2
 $513.2
 (11)% (5)% (2)% (4)% $434.1
 $500.6
 (13)% (10)% —% (3)%
Latin America 166.5
 198.4
 (16)% (12)% 9% (13)% 156.2
 160.3
 (3)% (5)% 11% (9)%
North America/Europe 318.8
 320.8
 (1)% (1)% 1% (1)% 293.2
 301.2
 (3)% (6)% 4% (1)%
Net Sales $941.5
 $1,032.4
 (9)% (5)% 1% (5)% $883.5
 $962.1
 (8)% (8)% 3% (3)%
 
Net sales by product category are shown in the table below: 
 Three Months Ended June 30, % of Net Sales Three Months Ended March 31, % of Net Sales
(Dollars in millions) 2016 2015 % Change 2016 2015 2017 2016 % Change 2017 2016
Infant formula $558.0
 $606.9
 (8)% 59% 59% $541.5
 $562.9
 (4)% 61% 58%
Children’s nutrition 372.0
 408.4
 (9)% 40% 40% 331.2
 384.0
 (14)% 38% 40%
Other 11.5
 17.1
 (33)% 1% 1% 10.8
 15.2
 (29)% 1% 2%
Net Sales $941.5
 $1,032.4
 (9)% 100% 100% $883.5
 $962.1
 (8)% 100% 100%

Asia
Volume declined 5%10% in Asia. China represented a 4% volume decline in the segment approximately halfas reduced demand for locally manufactured products, lower levels of which was duecross-border trade, and lower promotional activities related to shiftsthe Chinese new year were only partially offset by the successful launch of imported premium products and improved market share within growing channels, including a shift to e-commerce in consumer preference towards imported products where the Company currently has lower representation. The balance

of the decline was due to adverse impacts from new product testing standards for imported goods in China.Hong Kong channel. The Philippines represented a 2%had an additional 4% adverse impact on sales volume decline in the segment, due to challengingequally impacted by market dynamics which impactedshare weakness and the mid-tier priced children’s business.effect of retail inventory adjustments. Category declines in Thailand and Vietnam contributed a 1% decrease in segment volume.

Price/Mix declined 2%was flat in Asia. In China, increased trade investments hadinvestment led to a 4% adverse impact on3% decline in segment sales, partiallyprice. This was offset by a 2% benefit to segmentfavorable sales from newly launched product innovation which offset some of the decline in volumemix due to changesimported products in consumer preference. Sales in Asia also benefited fromChina and 1% price increases in most markets, most notably in the Philippines which had a 1% positive impact on segment sales.other markets.

Foreign exchange adversely impacted sales in Asia by 4%3%, of which 2% was due to currency devaluation which affected all markets within the segment.in China.

Latin America
Volume declined 12%5% in Latin America. Venezuela represented a 7% volume2% of this decline infollowing the segment resulting from aCompany’s prior decision made by the Company in 2015 to slow shipments to distribution channels ininto Venezuela due to constraints placed by the Venezuelan government on the release of U.S. dollars to settle intercompany payables associated with product shipments. Brazil sales volume was negatively impacted by macro-economic weakness which lowered demand for mid-priced products, resultingMarket share losses following competitive pricing in a 3% adverse impact to sales volume in Latin America. ArgentinaColombia represented a 2% volume decline in the segment, primarily due to competitor activity, while Mexico had a positive impact of 1% on volume in the segment, primarily due to growth driven by milk modifiers.segment.

Price/Mix increased 9%11% in Latin America due to price increases, takenparticularly 3% for Enfa products and milk modifiers in Mexico and 2% in Argentina. Venezuela contributed 5% to the price increase in the segment due to inflation, which was fully offset local currency devaluation, most notably in Argentina (4%), Mexico (3%) and Brazil (2%).by adverse foreign exchange discussed below.


Foreign exchange adversely impacted sales in Latin America by 13%9% due to a strengthening U.S. dollar,currency devaluation, most notably 5% in Mexico (7%)Venezuela and Argentina (6%).5% in Mexico.

North America/Europe
SalesVolume declined slightly6% in North America/Europe. The specialty and solution product offerings inIn the U.S. were negatively, sales volume was adversely impacted by strong competitive activities and reduced market share in this category, which were offset3% by market share gains in Canada. Price increasesweakness, 3% from beneficial timing of 2016 retail shipments and 1% by category decline. Canada represented a 1% positive impact to sales volume in the segment were driven by increasesfrom increased sales in Canadainfant products.

Price increased 4% in North America/Europe. In the U.S., favorable pricing actions taken in the second quarter of 2016 accounted for two-thirds of the increase and the remainder was due to positive changes in customer discount terms.

Foreign exchange adversely impacted sales in North America/Europe by 1% due to currency devaluation in Europe.
Our U.S. following innovative product launches. Sales movementsbusiness is subject to variability from changes to our participation in the U.S.Special Supplemental Nutrition Program for Women, Infants and Canada were insignificant individuallyChildren (“WIC”), including changes to rebate levels and inrenewal patterns for WIC contracts. In addition to sales directly attributable to a WIC contract, the aggregate. Adverse foreign exchangecontract holder enjoys the benefit of sales for products not directly covered by WIC.

Under recently awarded WIC contracts, trends have been towards higher rebate levels. If these trends continue, the segment was almost entirely duecost to the translationCompany of the Canadian dollar.losing and/or retaining WIC contracts could adversely affect our U.S. sales and/or operating results.

Gross Profit
 Three Months Ended June 30,   Three Months Ended March 31,  
(Dollars in millions) 2016 2015 % Change 2017 2016 % Change
Net Sales $941.5
 $1,032.4
 (9)% $883.5
 $962.1
 (8)%
Cost of Products Sold 333.2
 356.4
 (7)% 330.2
 347.6
 (5)%
Gross Profit $608.3
 $676.0
 (10)% $553.3
 $614.5
 (10)%
Gross Margin Percentage 64.6% 65.5%   62.6% 63.9%  

Gross margin percentage decreasedwas 1.3% lower in 20162017 compared to 2015.2016. Gross margin was favorably impacted by lower dairy costs (+3.8%1.2%), and the net impact of increased prices and increased trade investments (+0.3%) which waswere offset by unfavorable product mix (-2.7%higher cost of new premium products (-1.2%), and adverse impact from foreign exchange (-1.7%), and a pension mark-to-market remeasurement loss (-0.5%(-1.0%).

Operating Expenses
 Three Months Ended June 30,   % of Net Sales Three Months Ended March 31,   % of Net Sales
(Dollars in millions) 2016 2015 % Change 2016 2015 2017 2016 % Change 2017 2016
Selling, General and Administrative $206.7
 $230.2
 (10)% 22% 22% $193.7
 $198.9
 (3)% 22% 21%
Advertising and Promotion 166.0
 190.2
 (13)% 18% 18% 160.3
 151.8
 6% 18% 16%
Research and Development 26.4
 27.7
 (5)% 3% 3% 21.4
 25.4
 (16)% 2% 3%
Other (Income)/Expenses—net (5.2) (1.3) n/m (1)% —% 22.8
 88.3
 n/m 3% 9%
 

Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased in 20162017 compared to 20152016 primarily due to approximately $25$3.4 million of savings generated fromactuarial losses in 2016 related to the Fuel for Growth program. Savings were driven by streamlined useremeasurement of third party servicesa defined benefit pension plan that did not recur in the current year, $10.2 million of beneficial foreign exchange, and lowerhigher selling, general and administrative headcount.expenses of $3.0 million in Venezuela due to inflation.
 
Advertising and Promotion Expenses
 
Advertising and promotion expenses decreasedincreased in 20162017 compared to 2015 partially2016 primarily due to $8.7 million of favorable foreign exchange translation. Of the remaining decrease, $9.4 million was driven by lower expenses in Asia and $5.2 million was driven by lower expenses in North America/Europe. A portion of the decrease in expenses in Asia was the result of a reallocation of demand generation spending as investments previously recognized withinincreased advertising and promotion are now impacting gross-to-net sales adjustments. Spending was slightly lower as a percentagespending of sales globally.$7.2 million in Asia mainly related to increasing consumer awareness of imported premium products and channel transition in China.

Research and Development
Research and development expenses decreased in 2017 compared to 2016 mainly due to approximately $3 million of incremental Fuel for Growth savings in 2017, primarily from increased efficiencies in the use of third-party services.

Other (Income)/Expenses—net  
  Three Months Ended June 30,
(Dollars in millions) 2016 2015
Foreign exchange (gains)/losses - net $(6.6) $4.7
Restructuring, severance and other related costs 1.9
 1.1
Marketable securities gain - net —
 (6.4)
Legal, settlements and other - net (0.5) (0.7)
Other (income)/expenses - net $(5.2) $(1.3)
  Three Months Ended March 31,
(Dollars in millions) 2017 2016
Restructuring, severance and other related costs—net—
$9.9
 $9.3
Merger related costs 6.8
 —
Administrative office relocation 4.8
 —
Foreign exchange (gains)/losses—net 1.9
 33.7
Venezuela long-lived asset impairments —
 45.9
Legal settlements and other—net (0.6) (0.6)
Other (income)/expenses—net $22.8
 $88.3

See “Item 1. Financial Statements - Statements—Note 9. Other (Income)/Expenses - Net,” —Note 6. Restructuring, —Note 17. Venezuela Matters, and “Item 1. Financial Statements - Note 6. Restructuring”—Note 19. Mergers and Acquisitions” for additional information.

Earnings before Interest and Income Taxes 
Earnings before interest and income taxes (“EBIT”) from the Company’s three reportable segments is reduced by Corporate and Other expenses. Corporate and Other consists of unallocated global business support activities, including research and development, marketing, supply chain costs, and general and administrative expenses; net actuarial gains and losses related to defined benefit pension and other post-employment plans; and income or expenses incurred within the Company’s operating segments that are not reflective of ongoing operations and affect the comparability of the operating segments’ results.

 Three Months Ended June 30,   % of Net Sales Three Months Ended March 31,   % of Net Sales
(Dollars in millions) 2016 2015 % Change 2016 2015 2017 2016 % Change 2017 2016
Asia $137.0
 $156.4
 (12)% 30% 30% $116.8
 $169.1
 (31)% 27% 34%
Latin America 36.2
 44.8
 (19)% 22% 23% 39.8
 40.8
 (2)% 26% 26%
North America/Europe 99.2
 85.3
 16% 31% 27% 69.0
 82.0
 (16)% 24% 27%
Corporate and Other (58.0) (57.3) (1)% n/a n/a (70.5) (141.8) 50% n/a n/a
EBIT $214.4
 $229.2
 (6)% 23% 22% $155.1
 $150.1
 3% 18% 16%

EBIT in Asia decreased by $19.4$52.3 million in 20162017 compared to 20152016 primarily due to areduced gross profit of $39.4 million from lower sales, decrease of $57.0 million which was only partially offset by lower operating expenses of $16.2 million. Adverse foreign exchange negatively impacted the segment by $12.7 million. Lower operating expenses were primarily driven by lowerhigher advertising and promotion expenditures, which also benefited from a strengthening U.S. dollar.spending of $7.2 million mainly related to increasing consumer awareness of imported premium products and channel transition in China as well as $7.2 million of adverse foreign exchange.

EBIT in Latin America decreased by $8.6$1.0 million in 20162017 compared to 20152016 as increased sales were more than offset by higher advertising and promotion expenses of $2.7 million across a number of markets in the segment, higher selling, general and administrative expenses of $3.0 million in Venezuela due to lower sales, most notably a $13.9inflation, and $6.3 million reduction in Venezuela as a result of suspended shipments, partially offset by a $10.8 million beneficial impact ofadverse foreign exchange on operating expenses as well as savings from Fuel for Growth.exchange.

EBIT in North America/Europe increaseddecreased by $13.9$13.0 million in 20162017 compared to 2015, despite lower sales,2016. The decrease was primarily due to a $12.3reduced gross profit of $7.8 million reduction in operating expenses. This decline in operating expenses was driven in equal measure byfrom lower sales, higher advertising and promotion expenditurespromotional expenses of $2.0 million in support of the Enfa product line in the U.S. and lower incentive-based compensation.
$1.1 million of adverse foreign exchange.

Corporate and Other expenses increased slightly duedecreased by $71.3 million in 2017 compared to $13.12016, primarily attributable to $78.2 million of long-lived asset impairment charges and foreign exchange losses in Venezuela in 2016, $6.1 million of actuarial losses related to the remeasurement of a defined benefit pension plan that did not recur in 2016 compared to $1.5current year, and approximately $2 million of actuarial gains in 2015 and $2.0 million of charges related toincremental Fuel for Growth which weresavings in 2017. This was slightly offset by approximately $19charges of $6.8 million related to the Merger and $6.0 million associated with the relocation of administrative offices in savings from Fuel for Growth.the U.S. in 2017.

Interest Expense —net
Net interest expense increased $12.5$0.9 million in 20162017 compared to 2015.2016. The increase was driven by $13.4an increase in the floating interest rate used for the interest rate swaps on the $700.0 million of interest expense on4.9% Senior Notes due November 1, 2019 (the “2019 Notes”) and the $750.0 million of 3.0% Senior Notes due November 15, 2020 (the “2020 Notes”) and, which effectively convert the $750.0 million of 4.125% SeniorCompany’s 2019 Notes due November 15, 2025 (the “2025 Notes”), both issued in November 2015. Partially offsetting the interest expense from these notes is a benefit from an interest rate swap on theand 2020 Notes which reduced interest expense by $1.8 million during the three months ended June 30, 2016.from a fixed rate structure to a floating rate structure.


Income Taxes
The Company’s effective tax rate (“ETR”) for both the 20162017 and 20152016 periods differs from the statutory tax rate predominantly due to the favorable impact of tax rulings and agreements in various foreign jurisdictions.  See “Item 1. Financial Statements - Statements—Note 4. Income Taxes” for additional information. The ETR forFor the three months ended June 30,March 31, 2017 and 2016, the ETR was 8.1% and 2015 was 17.2% and 24.5%38.1%, respectively. The ETR decrease for30.0% change in the three months ended June 30, 2016ETR was driven approximately 4% by the following benefits: (i) 23.3% related 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 credits frombenefit in 2016), (ii) 10.8% due to higher tax credit recognition associated with the repatriation of foreign earnings, to the United States(iii) 7.6% from changes in reserves for uncertain tax positions, and (iv) 1.7% from a series of additional items which are insignificant both individually and in the aggregate. These benefits were offset by a 13.4% impact from unfavorable changes in the Company’s geographic earnings mix.

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 the Company’s operating entities in China, Argentina and Indonesia, respectively (see “Item 1. Financial Statements - Note 17. Equity” for additional information).respectively.

Net Earnings Attributable to Shareholders
For the foregoing reasons, net earnings attributable to shareholders for the three months ended June 30, 2016 decreased 5%March 31, 2017 increased 65% to $155.1$119.9 million compared to the three months ended June 30, 2015.March 31, 2016.
 
Six Months Results of Operations
Below is a summary of comparative results of operations for the six months ended June 30, 2016 and 2015: 
  Six Months Ended June 30,   % of Net Sales
(Dollars in millions, except per share data) 2016 2015 % Change 2016 2015
Net Sales $1,903.6
 $2,126.8
 (10)%    
Gross Profit 1,222.8
 1,376.9
 (11)% 64% 65%
Operating Expenses 858.3
 862.5
 —% 45% 41%
Earnings before Interest and Income Taxes 364.5
 514.4
 (29)% 19% 24%
Interest Expense—net 52.6
 27.7
 90% 3% 1%
Earnings before Income Taxes 311.9
 486.7
 (36)% 16% 23%
Provision for Income Taxes 79.4
 117.0
 (32)% 4% 6%
    Effective Tax Rate 25.5% 24.0%      
Net Earnings 232.5
 369.7
 (37)% 12% 17%
Less: Net Earnings/(Loss) Attributable to Noncontrolling Interests 4.7
 (0.6) n/m —% —%
Net Earnings Attributable to Shareholders $227.8
 $370.3
 (38)% 12% 17%
Weighted-Average Common Shares— Diluted 186.9
 203.1
      
Earnings per Common Share—Diluted $1.21
 $1.82
 (34)%    
The results for the six months ended June 30, 2016 and 2015 include several items that affect the comparability of our results. These items include significant expenses/(income) not indicative of ongoing results (“Specified Items”) and are listed in the table below.

  Six Months Ended June 30,
(In millions) 2016 2015
Venezuela foreign exchange losses and long-lived asset impairments $78.4
 $—
Pension and other post-employment adjustments 19.2
 (1.5)
Restructuring, severance and other related costs 12.4
 2.5
Accrual related to China investigation —
 12.0
Legal, settlements and related costs —
 1.1
Marketable securities gain - net —
 (6.3)
Tax matters and the income tax impact on Specified Items (8.6) (0.8)

For the six months ended June 30, 2016, Specified Items included foreign exchange losses and long-lived asset impairment charges in Venezuela, a loss related to the remeasurement of a defined benefit pension plan and restructuring charges related to the Company’s ongoing Fuel for Growth initiative. The pension remeasurement loss was driven by decreases in the discount rate associated with the U.S. pension plan liability.

During the six months ended June 30, 2015, Specified Items mainly included an accrual made in connection with the SEC settlement disclosed by the Company in July 2015 and a marketable securities gain.

For additional information on these Specified Items, see “Item 1. Financial Statements - Note 6. Restructuring, Note 8. Pension and Other Post-Employment Benefit Plans, Note 16. Marketable Securities and Note 18. Venezuela Matters.”

Specified Items include gains and losses, as incurred, related to the remeasurement of defined benefit pension and post-employment benefit plans. The remeasurement reflects changes in the pension assets and liabilities above what was estimated and included in periodic costs. Factors beyond our control such as changes in discount rates, market volatility and mortality assumptions drive the remeasurement amount. Additionally, the majority of our pension and post-employment plans are frozen, and therefore the benefit provided to such employees is not related to our underlying operations.

Net Sales
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 gross sales to net sales is as follows: 
  Six Months Ended June 30, % of Gross Sales
(Dollars in millions) 2016 2015 2016 2015
Gross Sales $2,597.8
 $2,781.0
 100% 100%
Gross-to-Net Sales Adjustments        
Women, Infant and Children (“WIC”) Rebates 374.1
 386.5
 14% 14%
Sales Discounts 194.3
 141.3
 7% 5%
Returns 43.4
 42.9
 2% 2%
Other (including Cash Discounts, Coupons) 82.4
 83.5
 3% 3%
Total Gross-to-Net Sales Adjustments 694.2
 654.2
 26% 24%
Total Net Sales $1,903.6
 $2,126.8
 74% 76%

Total gross-to-net sales adjustments increased as a percentage of gross sales to 26% in 2016 from 24% in 2015, primarily driven by an increase in sales discounts. Sales discounts increased due to trade investments in China.

Net sales by reportable segments are shown in the table below:
  Six Months Ended June 30,   % Change Due to
(Dollars in millions) 2016 2015 % Change Volume Price/Mix 
Foreign
Exchange
Asia $956.8
 $1,094.2
 (13)% (8)% (1)% (4)%
Latin America 326.8
 402.8
 (19)% (12)% 8% (15)%
North America/Europe 620.0
 629.8
 (2)% (1)% —% (1)%
Net Sales $1,903.6
 $2,126.8
 (10)% (6)% 1% (5)%

Net sales by product category are shown in the table below: 
  Six Months Ended June 30,   % of Net Sales
(Dollars in millions) 2016 2015 % Change 2016 2015
Infant formula $1,121.1
 $1,246.1
 (10)% 59% 59%
Children’s nutrition 756.1
 843.4
 (10)% 40% 40%
Other 26.4
 37.3
 (29)% 1% 1%
Net Sales $1,903.6
 $2,126.8
 (10)% 100% 100%

Asia
Volume declined 8% in Asia. China represented a 6% volume decline in the segment, primarily due to shifts in consumer preference towards imported products where the Company currently has lower representation. The Philippines had a 1% adverse impact on sales volume in the segment due to challenging market dynamics which impacted the mid-tier priced children’s business.

Price/Mix declined 1% in Asia. In China, increased trade investment had a 5% adverse impact on segment sales, partially offset by a 3% benefit to segment sales from newly launched product innovation. Sales in Asia also benefited 1% from price increases in the Philippines.

Foreign exchange adversely impacted sales in Asia by 4% due to currency devaluation which affected all markets within the segment.

Latin America
Volume declined 12% in Latin America. Venezuela represented an 11% volume decline in the segment resulting from a decision made by the Company in 2015 to slow shipments to distribution channels in Venezuela due to constraints placed by the Venezuelan government on the release of U.S. dollars to settle intercompany payables associated with product shipments. Brazil sales volume was negatively impacted by macro-economic weakness which lowered demand for mid-priced products, resulting in a 2% adverse impact to sales volume in Latin America. Argentina represented a 2% volume decline in the segment, primarily due to competitor activity, while Mexico had a positive impact of 1% on volume in the segment, primarily due to growth driven by milk modifiers.

Price/Mix increased 8% in Latin America due to price increases taken to offset local currency devaluation, most notably in Argentina (4%), Mexico (3%) and Brazil (1%).

Foreign exchange adversely impacted sales in Latin America by 15% due to a strengthening U.S. dollar, most notably in Mexico (8%) and Argentina (6%).

North America/Europe
Sales declined slightly in North America/Europe. The specialty and solution product offerings in the U.S. were negatively impacted by strong competitive activities and reduced market share in this category, which were offset by market share gains in Canada. Price increases in the segment were driven by increases in Canada and the U.S. following innovative product launches. Sales movements in the U.S. and Canada were insignificant individually and in the aggregate. Adverse foreign exchange for the segment was almost entirely due to the translation of the Canadian dollar.

Gross Profit
  Six Months Ended June 30,  
(Dollars in millions) 2016 2015 % Change
Net Sales $1,903.6
 $2,126.8
 (10)%
Cost of Products Sold 680.8
 749.9
 (9)%
Gross Profit $1,222.8
 $1,376.9
 (11)%
Gross Margin Percentage 64.2% 64.7%  

Gross margin percentage decreased slightly in 2016 compared to 2015. Gross margin was favorably impacted by lower dairy costs (+3.7%), which was offset by unfavorable product mix (-1.7%), increased manufacturing and other commodity costs (-1.7%) and adverse impact from foreign exchange (-1.1%).


Operating Expenses
  Six Months Ended June 30,   % of Net Sales
(Dollars in millions) 2016 2015 % Change 2016 2015
Selling, General and Administrative $405.6
 $463.4
 (12)% 21% 22%
Advertising and Promotion 317.8
 334.6
 (5)% 17% 16%
Research and Development 51.8
 53.6
 (3)% 3% 3%
Other (Income)/Expenses—net 83.1
 10.9
 n/m 4% 1%

Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased in 2016 compared to 2015 primarily due to a $22.3 million benefit from foreign exchange and approximately $43 million of savings generated from the Fuel for Growth program. Savings were driven by streamlined use of third party services and lower administrative headcount.

Advertising and Promotion Expenses
The decrease in advertising and promotion expenses was mainly a result of $17.4 million of favorable foreign exchange translation, slightly offset by increased advertising and promotion spending related to channel expansion and the recent launch of imported products in China.

Other (Income)/Expenses—net
  Six Months Ended June 30,
(Dollars in millions) 2016 2015
Venezuela long-lived asset impairments $45.9
 $—
Foreign exchange (gains)/losses - net 27.1
 1.9
Restructuring, severance and other related costs 11.2
 3.7
Marketable securities gain - net —
 (6.4)
Legal, settlements and other - net (1.1) 11.7
Other (income)/expenses - net $83.1
 $10.9

See “Item 1. Financial Statements - Note 9. Other (Income)/Expenses - Net,” “Item 1. Financial Statements - Note 18. Venezuela Matters,” and “Item 1. Financial Statements - Note 6. Restructuring” for additional information.

Earnings before Interest and Income Taxes
EBIT from the Company’s three reportable segments is reduced by Corporate and Other expenses. Corporate and Other consists of unallocated global business support activities, including research and development, marketing, supply chain costs, and general and administrative expenses; net actuarial gains and losses related to defined benefit pension and other post-employment plans; and income or expenses incurred within the Company’s operating segments that are not reflective of ongoing operations and affect the comparability of the operating segments’ results.

  Six Months Ended June 30,   % of Net Sales
(Dollars in millions) 2016 2015 % Change 2016 2015
Asia $306.1
 $387.9
 (21)% 32% 35%
Latin America 77.0
 102.1
 (25)% 24% 25%
North America/Europe 181.2
 163.6
 11% 29% 26%
Corporate and Other (199.8) (139.2) (44)% n/a n/a
EBIT $364.5
 $514.4
 (29)% 19% 24%

EBIT in Asia decreased by $81.8 million in 2016 compared to 2015 partially due to $23.9 million of adverse foreign exchange. EBIT was further impacted by lower sales of $93.0 million and increased advertising and promotion spending of $8.0 million to support newly launched products in China.

EBIT in Latin America decreased by $25.1 million in 2016 compared to 2015 due to lower sales, most notably a $38.3 million reduction in Venezuela as a result of suspended shipments, partially offset by a $23.0 million beneficial impact of foreign exchange on operating expenses as well as savings from Fuel for Growth.


EBIT in North America/Europe increased by $17.6 million in 2016 compared to 2015, despite lower sales, primarily due to a $19.5 million reduction in operating expenses. The decline in operating expenses was driven by approximately $8 million of Fuel for Growth savings, approximately $5 million of lower advertising and promotion expenditures and approximately $4 million of lower incentive-based compensation.

Corporate and Other expenses increased primarily due to $78.4 million of currency devaluation and impairment of long-lived assets in Venezuela in 2016. In addition, there were $11.1 million of charges related to Fuel for Growth in 2016 and $19.2 million of actuarial losses in 2016 related to a defined benefit pension plan compared to $1.5 million of actuarial gains in 2015. The increase in expenses was offset by a $12.0 million accrual in connection with an SEC settlement in 2015 which did not recur in 2016 and approximately $35 million of savings from Fuel for Growth.

Interest Expense —net
Net interest expense increased $24.9 million in 2016 compared to 2015. The increase was driven by $26.7 million of interest expense on the 2020 Notes and the 2025 Notes, both issued in November 2015. Partially offsetting the interest expense from these notes is a benefit from an interest rate swap on the 2020 Notes which reduced interest expense by $3.8 million during the six months ended June 30, 2016.

Income Taxes
The Company’s ETR for both the 2016 and 2015 periods differs from the statutory tax rate predominantly due to the favorable impact of tax rulings and agreements in various foreign jurisdictions. See “Item 1. Financial Statements - Note 4. Income Taxes” for additional information. The ETR for the six months ended June 30, 2016 and 2015 was 25.5% and 24.0%, respectively. The ETR increase for the six months ended June 30, 2016 was driven approximately 6% by the Company’s Venezuelan subsidiary which incurred a remeasurement loss on its monetary assets and an impairment charge on its long-lived assets in 2016 (both of which provided no tax benefit), offset almost entirely by tax credits from the repatriation of foreign earnings to the United States.

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 the Company’s operating entities in China, Argentina and Indonesia, respectively (see “Item 1. Financial Statements - Note 17. Equity” for additional information).

Net Earnings Attributable to Shareholders
For the foregoing reasons, net earnings attributable to shareholders for the six months ended June 30, 2016 decreased 38% to $227.8 million compared with the six months ended June 30, 2015.

Liquidity and Capital Resources
 
Overview
 
Our primary sources of liquidity are cash on hand, cash from operations and available borrowings under our $750.0 million revolving credit facility. Cash flows from operating activities represent the inflow of cash from customers net of the outflow of cash for raw material purchases, manufacturing, operating expenses, interest and taxes. Cash flows used in investing activities primarily represent capital expenditures for equipment, buildings and computer software. Cash flows used in financing activities primarily represent proceeds and repayments of long-term and short-term borrowings, dividend payments and share repurchases.
 
Cash and cash equivalents totaled $1,716.0$1,724.4 million at June 30, 2016,March 31, 2017, of which $1,410.0$1,673.7 million was held outside of the United States. Cash and cash equivalents totaled $1,701.4$1,795.4 million as of December 31, 2015,2016, of which $1,512.5$1,594.2 million was held outside of the United States.

During the sixthree months ended June 30,March 31, 2017 and 2016, and 2015, we repatriated approximately $213$7 million and $54$93 million, respectively, of cash not associated with permanently invested earnings to the United States from multiple jurisdictions. We expect to repatriate additional cash throughout 2016.


As a result of the Company’s evaluation of its global cash position, management has asserted that earnings and profits in certain foreign jurisdictions are permanently invested abroad. We will continue to evaluate our global cash position and whether earnings and profits of certain other foreign jurisdictions are permanently invested abroad. As of June 30,March 31, 2017 and December 31, 2016, approximately $1,006$1,193 million and $1,388 million of cash and cash equivalents associated with permanently invested undistributed earnings were held by foreign subsidiaries.subsidiaries, respectively. Our intent is to invest these earnings in our foreign operations and our current plans do not demonstrate a need to repatriate them to fund the Company’s U.S. operations. If we decide at a later date to repatriate these earnings to the United States, we would be required to provide U.S. taxes on these amounts.

Cash Flows
 
The Company believes that cash on hand and cash from operations will be sufficient to support its working capital needs, pay its operating expenses, satisfy debt obligations, fund capital expenditures and make dividend payments. 

 Six Months Ended June 30, Three Months Ended March 31,
(Dollars in millions) 2016 2015 2017 2016
Cash flow provided by/(used in):  
  
  
  
Operating Activities  
  
  
  
Net Earnings $232.5
 $369.7
 $117.6
 $76.7
Depreciation and Amortization 49.3
 48.8
 25.8
 24.9
Impairment of Long-Lived Assets 45.9
 —
 —
 45.9
Other 38.4
 26.3
Other Non-Cash Items (12.6) 36.0
Changes in Assets and Liabilities (88.1) 14.2
 65.7
 (23.4)
Pension and Other Post-employment Benefit Contributions (1.9) (2.5) (0.1) —
Total Operating Activities 276.1
 456.5
 196.4
 160.1
Investing Activities (80.6) (79.6) (48.4) (55.5)
Financing Activities (148.9) (181.6) (74.6) (77.0)
Effects of Changes in Exchange Rates on Cash and Cash Equivalents (32.0) (17.9)
Net Increase in Cash and Cash Equivalents $14.6
 $177.4
Effects of Changes in Exchange Rates on Cash, Cash Equivalents and Restricted Cash 8.1
 (26.7)
Net Increase in Cash, Cash Equivalents and Restricted Cash $81.5
 $0.9

Cash, Cash Equivalents and cash equivalentsRestricted Cash, increased $14.6$81.5 million in the sixthree months ended June 30, 2016March 31, 2017 as operating cash flows were utilized forgenerated in excess of capital expenditures and dividends. Cash and cash equivalents were further impacted by the currency devaluation in Venezuela.
 
Cash flows from operating activities were $276.1$196.4 million and $456.5$160.1 million for the sixthree months ended June 30,March 31, 2017 and 2016, and 2015, respectively. Cash flows reflected reduced incomefor the quarter ended March 31, 2017 benefited from lower sales, a reduction in taxes payablereceivables of approximately $44$23 million, and a reductionprimarily in China which were higher than normal at December 31, 2016 due to timing of deferred revenue of approximately $25 million.collections.
 
Cash flow used in investing activities was $1.0$7.1 million greaterlower than the prior year period. The increasedecrease was the result of higherlower capital expenditures in 20162017 as compared to 20152016. Capital expenditures in 2017 were primarily related to production facilities in North America, Latin America and Europe. Capital expenditures in 2016 were related to capacity expansion for manufacturing facilities in the U.S. and Europe.
 
Cash flow used in financing activities was $148.9$74.6 million and $181.6$77.0 million for the sixthree months ended June 30,March 31, 2017 and 2016, respectively. Dividend payments were $0.4125 per share in both the first quarter of 2016 and 2015, respectively. This difference2017; however, the Company’s share count was primarily driven by dividend payments which were lower in 2017 following the current year due to the retirementrepurchase of shares repurchased under the accelerated share repurchase agreement. The prior year period included cash paid to acquire an incremental 10% of the Company’s business in Argentina.2016. For additional information, see “Item 1. Financial Statements - Statements—Note 17.16. Equity.”

Short-Term Borrowings

As of June 30, 2016March 31, 2017 and December 31, 2015,2016, the Company had short-term borrowings of $3.8$4.5 million and $3.0$3.9 million, respectively, made by its subsidiary in Argentina.

Revolving Credit Facility

As of June 30, 2016,March 31, 2017, the Company had no borrowings against its $750.0 million five-year revolving credit facility, and the Company had $750.0 million available under this facility. The revolving credit facility contains financial covenants and the Company was in compliance with these financial covenants as of June 30, 2016.

March 31, 2017.

Long-Term Debt and Interest Rate Swaps

The components of our long-term debt are detailed in the table below:

(Dollars in millions) Principal Amount Interest Rate Maturity
2019 Notes $700.0
 4.900% fixed November 1, 2019
2020 Notes $750.0
 3.000% fixed November 15, 2020
2025 Notes $750.0
 4.125% fixed November 15, 2025
2039 Notes $300.0
 5.900% fixed November 1, 2039
2044 Notes $500.0
 4.600% fixed June 1, 2044


During the fourth quarter of 2015, we entered into a series of interest rate swaps to convert our 2020 Notes from fixed to floating for the remainder of their term in order to diversify our interest rate exposure. The interest rate swaps have an aggregate notional amount of $750.0 million of outstanding principal. As of June 30, 2016,March 31, 2017, these swaps were in an asseta loss position with a fair value of $21.2$7.9 million.
During the second quarter of 2014, we entered into a series of interest rate swaps to convert our $700.0 million of 4.9%2019 Notes due November 1, 2019 (the “2019 Notes”) from fixed to floating for the remainder of their term in order to diversify our interest rate exposure.  These interest rate swaps have an aggregate notional amount of $700.0 million of outstanding principal. As of June 30, 2016,March 31, 2017, these swaps were in an asseta loss position with a fair value of $19.7$0.5 million.

For additional information regarding Short-Term Borrowings, Revolving Credit Facility, Long-Term Debt and Interest Rate Swaps, see “Item 1. Financial Statements - Statements—Note 14. Debt and Note—Note 15. DerivativesDerivatives.”

Merger Agreement

The Merger Agreement, described above, provides for certain termination rights for both the Company and Other Financial Instruments.”Reckitt Benckiser. The Company is obligated to pay Reckitt Benckiser a $480 million termination fee in certain circumstances, including, without limitation, if we enter into a definitive agreement for a superior proposal.

In addition, under the Merger Agreement we are prohibited from creating, incurring, assuming or otherwise becoming liable with respect to any indebtedness for borrowed money or guarantee thereof, other than (i) indebtedness solely between the Company and a wholly owned subsidiary of the Company or between wholly owned subsidiaries of the Company in the ordinary course of business consistent with past practice, (ii) borrowings in the ordinary course of business consistent with past practice under our revolving credit facility and guarantees of such borrowings to the extent required under the terms of the facility and (iii) in connection with letters of credit issued in the ordinary course of business consistent with past practice in an amount not to exceed $1,000,000 individually or $5,000,000 in the aggregate.

Share Repurchases

In September 2013, ourthe Company’s board of directors approved a share repurchase authorization of up to $500.0 million of ourthe Company’s common stock (the “2013 Authorization”). The authorization does2013 Authorization did not have an expiration date. During the second quarter ofIn 2016, the Company did not repurchase any shares pursuant torepurchased $0.4 million of its common stock which completed all purchases remaining under the 2013 Authorization.

In October 2015, the Company’s board of directors approved a new share repurchase authorization of an additional $1,500.0 million of ourthe Company’s common stock (the “2015 Authorization”).The 2015 Authorization does not have an expiration date. Shares may be repurchased from time to time inDuring the open market transactions or in privately negotiated transactions. 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”)first quarters of our common stock. Under the terms of the ASR Agreement, 10,725,552 shares of our common stock were received by the Company on October 27, 2015 (which shares are equivalent to approximately 85% of the number of shares of our common stock that could have been purchased with an amount of cash equal to the Repurchase Price based on the closing price of our common stock on October 22, 2015). Upon final settlement of the ASR Agreement in June 2016, an additional 2,086,050 shares were delivered to the Company for no additional consideration based generally on the daily volume-weighted average prices of our common stock over the term of the ASR Agreement. The total shares received2017 and retired under the terms of the ASR Agreement was 12,811,602 shares with an average price paid per share of approximately $78.05. Other than the shares delivered upon final settlement of the ASR Agreement, during the second quarter of 2016, the Company did not repurchase any shares pursuant to the 2015 Authorization. As of March 31, 2017, the Company had $400.0 million remaining available under the 2015 Authorization.

Under the Merger Agreement, described above, we are prohibited from redeeming, repurchasing or otherwise acquiring or offering to redeem, repurchase, or otherwise acquire our common stock or other securities, other than shares surrendered to us to pay the exercise price in connection with the exercise of employee stock options and shares surrendered to us to satisfy tax withholding obligations in connection with the exercise of employee stock options or the vesting of restricted stock units and performance share awards.

Fuel for Growth Program
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 expected to be implemented over a three-year period. Fuel for Growth is designed to improve operating efficiencies and reduce costs. Fuel for Growth is expected to improve profitability and create additional investments behind brand building and growth initiatives. Fuel for Growth focuses on the optimization of resources within various operating functions and certain third party cost reduction activities across the business. During the sixthree months ended June 30, 2016,March 31, 2017, total charges associated with Fuel for Growth were $11.1$9.9 million.
During the second quarter of 2016, additionalTotal savings of approximately $60 million were identified within the Fuel for Growth Program resulting in totalare expected cost savings ofto be approximately $180 million by 2018 with a targeted reductionthe end of approximately $75 million to $80 million during 2016.2018. The Company is contemplating additional program activitiesachieved approximately $114 million cost savings to date, of which approximately $102 million was due to lower selling, general and

anticipates incremental charges in 2016 of approximately $15 administrative expenses and $12 million was due to $20 million.lower research and development spending. For additional information on the Fuel for Growth program, see “Item 1. Financial Statements – Statements—Note 6. Restructuring.”

Special Note Regarding Forward-Looking Statements
 
This Quarterly Report on Form 10-Q and other written and oral statements that the Company makes from time to time contain certain “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You can identify these forward-looking statements by the fact they use words such as “should,” “expect,” “anticipate,” “estimate,” “target,” “may,” “project,” “guidance,” “intend,” “plan,” “believe” and other words and terms of similar meaning and expression. Such statements are likely to relate to, among other things, a discussion of goals, plans and projections regarding financial position, results of operations, cash flows, market position, product development, product approvals, sales efforts, expenses, capital expenditures, performance or results of current and anticipated products and the outcome of contingencies such as legal proceedings and financial results. Forward-looking statements can also be identified by the fact that they do not relate strictly to historical or current facts. Such forward-looking statements are based on current expectations that involve inherent risks, uncertainties and assumptions that may cause actual results to differ materially from expectations as of the date of this filing. These risks include, but are not limited to: (1) the ability to sustain brand strength, particularly the Enfa family of brands; (2) the effect on the Company’s reputation of real or perceived quality issues; (3) the effect of regulatory restrictions related to the Company’s products; (4) the adverse effect of commodity costs; (5) increased competition from branded, private label, store and economy-branded products; (6) the effect of an economic downturn on consumers’ purchasing behavior and customers’ ability to pay for product; (7) inventory reductions by customers; (8) the adverse effect of changes in foreign currency exchange rates; (9) the effect of changes in economic, political and social conditions in the markets where the Company operates; (10) changing consumer preferences; (11) the possibility of changes in the WIC program, or participation in WIC; (12) legislative, regulatory or judicial action that may adversely affect the Company’s ability to advertise its products, maintain product margins, or negatively impact the Company’s reputation or result in fines or penalties that decrease earnings; and (13) the ability to develop and market new, innovative products. In addition, actual results may differ materially from those projected as a result of certain risks and uncertainties, including but not limited to: the possibility that the Merger will not be consummated or delays in consummating the Merger; adverse effects on the market price of the Company's common stock and on the Company's operating results because of a failure to complete the Merger; negative effects relating to the announcement of the Merger or any further announcements relating to the Merger or the entrance into or consummation of the Merger on the market price of the Company's stock; unanticipated difficulties or expenditures relating to the Merger; legal proceedings instituted against the Company and others in connection with the Merger; disruptions of current plans and operations caused by the announcement and pendency of the Merger; potential difficulties in employee retention as a result of the announcement and pendency of the Merger; and the response of customers, distributors, suppliers and competitors to the announcement of the Merger. 

For additional information regarding these and other factors, see the Company’s filings with the SEC, including the 20152016 Form 10-K, which filings are available upon request from the SEC or at www.meadjohnson.com.www.meadjohnson.com. The Company cautions readers not to place undue reliance on any forward-looking statements, which speak only as of the date made. The Company undertakes no obligation to publicly update any forward looking statement, whether as a result of new information, future events or otherwise.



ITEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
There have been no material changes to the disclosures made under Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” contained in the 20152016 Form 10-K and under Item 3 to Part I of the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2016.


10-K.

ITEM 4.     CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures. Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer (our principal executive officer and principal financial officer, respectively), we have evaluated our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of June 30, 2016.March 31, 2017. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that, as of June 30, 2016,March 31, 2017, the Company’s disclosure controls and procedures were effective in ensuring information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting. There has been no change in the Company’s internal control over financial reporting during the quarter ended June 30, 2016March 31, 2017 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.


PART II - OTHER INFORMATION

ITEM 1.            LEGAL PROCEEDINGS.
 
Information pertaining to legal proceedings can be found in Part I of this report under “Item 1. Financial Statements - Statements—Note 19.18. Commitments and Contingencies” and is incorporated by reference herein.
 
ITEM 1A.         RISK FACTORS.
 
There is no material change in the information reported under “Item 1A. Risk Factors” contained in the Company’s 20152016 Form 10-K.

ITEM 2.     UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
 
(c) Issuer Purchases of Equity Securities

The following table includes information about the Company’s stock repurchases during the three-month period ending June 30, 2016:
(Dollars in millions, except per share amounts)


Period
Total Number of
Shares Purchased 
(2)		 Average Price Paid per Share
(3)		 Total Number of Shares Purchased as Part of Publicly Announced Program Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program
(4)
April 1, 2016 through April 30, 2016—
 $—
 —
 $500.4
May 1, 2016 through May 31, 2016—
 —
 —
 500.4
June 1, 2016 through June 30, 2016 (1)2,086,050
 78.05
 2,086,050
 500.4
Total2,086,050
 $78.05
 2,086,050
 $500.4

(1)On October 22, 2015, the Company entered into an accelerated share repurchase agreement (the “ASR Agreement”) with Goldman, Sachs & Co. (“Goldman”) to repurchase $1,000.0 million (the “Repurchase Price”) of our common stock. Under the terms of the ASR Agreement, the Company paid the Repurchase Price in advance in exchange for 10,725,552 shares of our common stock received by the Company on October 27, 2015 (which shares are equivalent to approximately 85% of the number of shares of our common stock that could have been purchased with an amount of cash equal to the Repurchase Price based on the closing price of our common stock on October 22, 2015). Upon final settlement of the ASR Agreement in June 2016, an additional 2,086,050 shares were delivered to the Company for no additional consideration based generally on the daily volume-weighted average prices of our common stock over the term of the ASR Agreement.

(2)The total number of shares purchased does not include shares surrendered to the Company to pay the exercise price in connection with the exercise of employee stock options or shares surrendered to the Company to satisfy tax withholding obligations in connection with the exercise of employee stock options or the vesting of restricted stock units and performance share awards.

(3)Average Price Paid per Share includes commissions and discounts.

(4)On September 11, 2013, the Company announced that its board of directors approved a share repurchase authorization of up to $500.0 million of the Company’s common stock (the “2013 Authorization”). The 2013 Authorization does not have an expiration date. During the second quarter of 2016, the Company did not repurchase any shares pursuant to the 2013 Authorization. As of June 30, 2016, the Company had $0.4 million remaining available under the 2013 Authorization.

On October 22, 2015, the Company announced that, on October 20, 2015, its 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”). The 2015 Authorizationstock. This authorization does not have an expiration date. Other thanDuring the shares delivered upon final settlement of the ASR Agreement, during the secondfirst quarter of 2016,2017, the Company did not repurchase any shares pursuant to the 2015 Authorization.this authorization. As of June 30, 2016,March 31, 2017, the Company had $500.0$400.0 million remaining available under this authorization.

Under the 2015 Authorization.Merger Agreement described in “Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Merger Agreement” we are prohibited from redeeming, repurchasing or otherwise acquiring or offering to redeem, repurchase, or otherwise acquire our common stock or other securities, other than shares surrendered to us to pay the exercise price in connection with the exercise of employee stock options and shares surrendered to us to satisfy tax withholding obligations in connection with the exercise of employee stock options or the vesting of restricted stock units and performance share awards.

ITEM 6.     EXHIBITS.
 

 
Exhibit
Number
 Exhibit Description
2.1Agreement and Plan of Merger, dated as of February 10, 2017, among Mead Johnson Nutrition Company, Reckitt Benckiser Group plc and Marigold Merger Sub, Inc. (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on February 13, 2017)
3.1Amendment No. 1 to the Amended and Restated Bylaws of the Company, adopted on February 9, 2017 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on February 13, 2017)
10.1Form of Employee Restricted Stock Unit Agreement
10.2Form of Employee Restricted Stock Unit Agreement
   
31.1 Rule 13a-14(a) and 15d-14(a) Certification of the Chief Executive Officer
   
31.2 Rule 13a-14(a) and 15d-14(a) Certification of the Chief Financial Officer
   
32.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
32.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
101.INS XBRL Instance Document
   
101.SCH XBRL Taxonomy Extension Schema Document
   
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
   
101.LAB XBRL Taxonomy Extension Label Linkbase Document
   
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
   
101.DEF XBRL Taxonomy Extension Definition Linkbase Document



SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
  MEAD JOHNSON NUTRITION COMPANY
    
Date:July 28, 2016April 27, 2017By:/s/ Michel Cup
   Michel Cup
   Executive Vice President and Chief Financial Officer
   (Authorized Officer and Principal Financial Officer)


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