Mead Johnson Nutrition 10-Q 2009 Q2 Quarterly report

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, 2009

Commission File Number: 001-34251

MEAD JOHNSON NUTRITION COMPANY

(Exact name of registrant as specified in its charter)

Delaware	80-0318351
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

2701 Patriot Blvd

Glenview, Illinois 60026

(Address of principal executive offices and zip code)

Registrant’s telephone number including area code: (847) 832-2420

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  þ    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):

Large accelerated filer  ¨	Accelerated filer  ¨	Non-accelerated filer  þ
Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  ¨    No  þ

As of August 7, 2009, there were 76,844,571 shares of Class A common stock outstanding and 127,655,429 shares of Class B common stock outstanding.

MEAD JOHNSON NUTRITION COMPANY

FORM 10-Q

INDEX

	PAGE
PART I – Financial Information
ITEM 1. Financial Statements
Consolidated Statements of Earnings for the three and six months ended June 30, 2009 and 2008 (unaudited)	1
Consolidated Statements of Comprehensive Income and Equity (Deficit) for the three and six months ended June 30, 2009 and 2008 (unaudited)	2
Consolidated Balance Sheets as of June 30, 2009 and December 31, 2008 (unaudited)	3
Consolidated Statements of Cash Flows for the six months ended June 30, 2009 and 2008 (unaudited)	4
Notes to Consolidated Financial Statements	5
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk	28
ITEM 4. Controls and Procedures	28
PART II – Other Information
ITEM 1.       Legal Proceedings	28
ITEM 1A.    Risk Factors	28
ITEM 6.       Exhibits	29

PART I - FINANCIAL INFORMATION

ITEM 1. Financial Statements.

INTERIM CONSOLIDATED FINANCIAL STATEMENTS OF

MEAD JOHNSON NUTRITION COMPANY

MEAD JOHNSON NUTRITION COMPANY

CONSOLIDATED STATEMENTS OF EARNINGS

(Dollars and shares in millions, except per share data)

(UNAUDITED)

	Three Months Ended June 30,				Six Months Ended June 30,
	2009		2008		2009		2008
NET SALES	$	719.3	$	728.6	$	1,412.3	$	1,431.9
COST OF PRODUCTS SOLD		236.1		272.3		483.7		524.1
GROSS PROFIT		483.2		456.3		928.6		907.8
MARKETING, SELLING AND ADMINISTRATIVE		154.8		152.2		318.2		291.1
ADVERTISING AND PRODUCT PROMOTION		101.6		95.1		177.5		179.3
RESEARCH AND DEVELOPMENT		18.4		17.4		33.7		33.7
OTHER (INCOME)/EXPENSES—NET		(9.7)		3.7		(7.7)		6.6
EARNINGS BEFORE INTEREST AND INCOME TAXES		218.1		187.9		406.9		397.1
INTEREST EXPENSE—NET		24.3		—		52.3		—
EARNINGS BEFORE INCOME TAXES		193.8		187.9		354.6		397.1
PROVISION FOR INCOME TAXES		(55.8)		(71.9)		(110.0)		(148.6)
NET EARNINGS		138.0		116.0		244.6		248.5
Less Net Earnings attributable to noncontrolling interests		(3.5)		(1.8)		(6.6)		(3.7)
NET EARNINGS ATTRIBUTABLE TO SHAREHOLDERS	$	134.5	$	114.2	$	238.0	$	244.8
Earnings per Common Share – Basic
Net Earnings attributable to shareholders	$	0.66	$	0.67	$	1.21	$	1.44
Earnings per Common Share – Diluted
Net Earnings attributable to shareholders	$	0.66	$	0.67	$	1.21	$	1.44
Weighted Average Common Shares Outstanding
Basic		204.5		170.0		196.7		170.0
Diluted		204.6		170.0		196.7		170.0
Dividends declared per Common Share	$	0.30	$	—	$	0.30	$	—

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

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MEAD JOHNSON NUTRITION COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME AND EQUITY (DEFICIT)

(Dollars in millions, except per share data)

(UNAUDITED)

	Total Equity (Deficit)			BMS Investment			Class A Common Stock		Class B Common Stock		Additional Paid-in (Distributed) Capital			Retained Earnings			Noncontrolling Interests			Accumulated Other Comprehensive Income (Loss) Attributable to Shareholders
BALANCE – January 1, 2008	$	637.8		$	609.4		$	-	$	-	$	-		$	-		$	7.0		$	21.4
Net transfers (to) from BMS		(221.8	)		(221.8	)
Comprehensive Income:
Net Earnings		248.5			244.8													3.7
Foreign currency translation adjustment, net of tax of $1.6		0.9																			0.9
Total Comprehensive Income		249.4			244.8			-		-		-			-			3.7			0.9
BALANCE – June 30, 2008	$	665.4		$	632.4		$	-	$	-	$	-		$	-		$	10.7		$	22.3
	Total Equity (Deficit)			BMS Investment			Class A Common Stock		Class B Common Stock		Additional Paid-in (Distributed) Capital			Retained Earnings			Noncontrolling Interests			Accumulated Other Comprehensive Income (Loss) Attributable to Shareholders
BALANCE – January 1, 2009	$	(1,395.5	)	$	(1,385.4	)	$	-	$	-	$	-		$	-		$	5.4		$	(15.5	)
Net transfers (to) from BMS		(294.4	)		(290.2	)						(4.2	)
Conversion of BMS Investment into Common Stock		-			1,624.2			0.4		1.3		(1,644.6	)								18.7
Issuance of Common Stock in connection with initial public offering, net of offering costs		782.3						0.3				782.0
Amortization of equity-based compensation awards granted to employees		6.2			1.2							5.0
Distributions to Noncontrolling Interests		(0.8	)															(0.8	)
Assumption of accumulated unrealized gains (losses) on pension and other postretirement benefits, net of tax of $59.2		(96.8	)																		(96.8	)
Cash dividends declared ($0.30 per share)		(61.4	)												(61.4	)
Comprehensive Income (Loss):
Net Earnings, January 1, 2009 - February 10, 2009		50.2			50.2
Net Earnings, February 11, 2009 – June 30, 2009		194.4													187.8			6.6
Foreign currency translation adjustment, net of tax of $(3.3)		9.4																			9.4
Deferred gains (losses) on derivatives qualifying as hedges, net of tax of $(1.6)		(4.5	)																		(4.5	)
Deferred gains (losses) on pension and other postretirement benefits, net of tax of $(2.3)		2.2																			2.2
Total Comprehensive Income (Loss)		251.7			50.2			-		-		-			187.8			6.6			7.1
BALANCE – June 30, 2009	$	(808.7	)	$	-		$	0.7	$	1.3	$	(861.8	)	$	126.4		$	11.2		$	(86.5	)

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

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MEAD JOHNSON NUTRITION COMPANY

CONSOLIDATED BALANCE SHEETS

(Dollars and shares in millions, except per share data)

(UNAUDITED)

	June 30, 2009		December 31, 2008
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents	$	576.9	$	—
Receivables—net of allowances of $6.9 and $7.0, respectively		257.9		262.7
Inventories		329.3		354.3
Deferred Income Taxes—net of valuation allowance		75.3		70.9
Foreign Income Taxes Receivable		3.5		4.5
Prepaid Expenses		34.0		24.7
Total Current Assets		1,276.9		717.1
Property, Plant and Equipment—net		455.8		453.6
Goodwill		117.5		117.5
Capitalized Software—net		34.9		39.2
Deferred Income Taxes—net of valuation allowance		10.6		2.0
Other Assets		30.7		32.0
TOTAL	$	1,926.4	$	1,361.4
LIABILITIES AND EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts Payable	$	207.0	$	198.5
Dividends Payable		61.4		—
Accrued Expenses		129.5		129.2
Accrued Rebates and Returns		277.5		250.6
Deferred Income—current		8.5		18.1
Deferred Income Taxes—current		0.1		0.1
U.S. and Foreign Income Taxes Payable		58.6		13.2
Related Party Debt and Lease—current		9.5		—
Related Party Payables—net		68.7		43.1
Total Current Liabilities		810.4		652.8
Related Party Debt and Lease—noncurrent		1,784.6		2,000.0
Deferred Income—noncurrent		3.4		6.4
Deferred Income Taxes—noncurrent		31.0		78.6
Pension, Post Retirement and Post Employment Liabilities		101.9		—
Other Liabilities		3.8		19.1
Total Liabilities		2,735.1		2,756.9
COMMITMENTS AND CONTINGENCIES
EQUITY (DEFICIT):
BMS Investment		—		(1,385.4)
Shareholders’ Equity:
Class A Common Stock, $0.01 par value: 3,000 authorized, 76.8 issued and outstanding		0.7		—
Class B Common Stock, $0.01 par value: 1,200 authorized, 127.7 issued and outstanding		1.3		—
Additional Paid-in (Distributed) Capital		(861.8)		—
Retained Earnings		126.4		—
Accumulated Other Comprehensive Income (Loss)		(86.5)		(15.5)
Total Shareholders’ Equity (Deficit)		(819.9)		(1,400.9)
Noncontrolling Interests		11.2		5.4
Total Equity (Deficit)		(808.7)		(1,395.5)
TOTAL	$	1,926.4	$	1,361.4

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

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MEAD JOHNSON NUTRITION COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in millions)

(UNAUDITED)

	Six Months Ended June 30,
	2009		2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Earnings	$	244.6	$	248.5
Adjustments to Reconcile Net Earnings to Net Cash Provided by Operating Activities:
Depreciation and Amortization		28.5		24.5
Changes in Current Assets and Liabilities		52.6		(40.8)
Other		(4.4)		13.1
Net Cash Provided by Operating Activities		321.3		245.3
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for Capital Expenditures		(41.8)		(26.8)
Proceeds from Sale of Equipment		0.9		0.8
Proceeds from Sale of Intangible Asset		11.9		—
Net Cash Used in Investing Activities		(29.0)		(26.0)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Initial Public Offering, net of offering costs		782.3		—
Repayment of Related Party Foreign Notes Payable		(602.8)		—
Net Transfers (to) from BMS, excluding noncash items		97.7		(219.3)
Net Cash Provided by (Used in) Financing Activities		277.2		(219.3)
Effects of Changes in Exchange Rates on Cash and Cash Equivalents		7.4		—
NET INCREASE IN CASH AND CASH EQUIVALENTS		576.9		—
CASH AND CASH EQUIVALENTS:
Beginning of Period		—		—
End of Period	$	576.9	$	—

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

4

MEAD JOHNSON NUTRITION COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. ORGANIZATION

Mead Johnson Nutrition Company (MJN or the Company) manufactures, distributes and sells infant formulas, 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, pediatric vitamins, dietary supplements for pregnant and breastfeeding mothers, and products for metabolic disorders. These products are generally sold to wholesalers and retailers and are promoted to healthcare professionals, and, where permitted by regulation or policy, directly to consumers.

2. SEPARATION ACTIVITIES AND INITIAL PUBLIC OFFERING

MJN historically operated as a wholly owned subsidiary of Bristol-Myers Squibb Company (BMS). On January 31, 2009, BMS transferred to MJN the non-U.S. businesses of MJN through a sale of shares, sale of assets and contributions of stock with some exceptions as described below. The consideration for these transfers was in the form of cash, which was contributed or otherwise provided by BMS, and the issuance by MJN’s subsidiaries of foreign intercompany notes to BMS subsidiaries related to the purchase of assets or shares in Indonesia, Malaysia, the Netherlands and the Philippines. The terms of these foreign intercompany notes were substantially similar, except that the principal amount of each note varied by jurisdiction. The aggregate principal amount of the foreign intercompany notes was approximately $597.0 million and the rate of interest per annum on each note was equal to LIBOR plus 0.75%.

Also on January 31, 2009, MJN entered into an employee matters agreement with BMS that included the allocation of assets and liabilities related to certain employee benefit, pension, welfare, compensation, employment, severance and termination-related matters.

On February 17, 2009, MJN completed the initial public offering (IPO) of 34.5 million shares of Class A common stock at a price of $24.00 per share. The net proceeds from the IPO, after deducting a total of $45.7 million of underwriting discounts, commissions and offering expenses, totaled $782.3 million. All of the net proceeds of the IPO were paid to BMS and were used to (i) repay in full approximately $597.0 million of the foreign intercompany notes payable to subsidiaries of BMS and (ii) satisfy payables and other obligations owing to one or more subsidiaries of BMS.

Immediately following the IPO, there were 76.8 million outstanding shares of Class A common stock and 127.7 million outstanding shares of Class B common stock. The holders of Class A common stock and Class B common stock generally have identical rights, except that holders of Class A common stock are entitled to one vote per share while holders of Class B common stock are entitled to 10 votes per share on all matters voted upon by stockholders (including the election and removal of directors). Of the outstanding Class A and Class B common stock, BMS beneficially owned 42.3 million shares of Class A common stock and all of the Class B common stock. This represented 83.1% of the total outstanding shares of combined common stock, and 97.5% of the combined voting power. MJN sold 34.5 million shares of Class A common stock, or 16.9% of the total outstanding shares of combined common stock, to the public.

Expensed transaction costs for the IPO and separation from BMS recorded withinmarketing, selling, and administrative expense over the three and six months ended June 30, 2009, were $6.9 million and $24.1 million, respectively.

3. ACCOUNTING POLICIES

Basis of Presentation—Prior to the IPO, the financial statements were derived from the consolidated financial statements and records of BMS, principally from statements and records representing the MJN business. The Company prepared the accompanying unaudited consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (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 included in the Form 10-Q.

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The consolidated financial statements include all of the normal and recurring adjustments necessary for a fair presentation of the Company’s financial position at June 30, 2009, and December 31, 2008, the results of operations for the three and six months ended June 30, 2009 and 2008, and its cash flows for the six months ended June 30, 2009, and 2008. Material subsequent events are evaluated for disclosure up to the time of issuance of the financial statements, August 13, 2009. Certain prior-year amounts have been reclassified to conform to the current-year presentation, including $43.1 million of accrued interest payable to BMS that was reclassified fromaccrued expenses torelated party payables-net.

The Company’s unaudited interim results of operations, financial position and cash flows may not be indicative of its future performance and do not necessarily reflect what its combined results of operations, financial position and cash flows would have been had the Company operated as a separate, stand-alone entity during the periods presented.

The accounting policies used in preparing these consolidated financial statements are the same as those used to prepare the Company’s 2008 Annual Report on Form 10-K (2008 Form 10-K), with the exception of the accounting policies adopted in 2009. These consolidated unaudited financial statements and the related notes should be read in conjunction with the year-end financial statements and accompanying notes included in the Company’s 2008 Form 10-K.

Cash and Cash Equivalents—Cash and cash equivalents consist of bank deposits, time deposits and money market funds. Cash equivalents are primarily highly liquid investments with original maturities of three months or less at the time of purchase and are recorded at cost, which approximates fair value. The Company maintains cash and cash equivalent balances in U.S. dollars and foreign currencies which are subject to currency rate risk.

Income Taxes—The income tax provision prepared in the post-IPO period reflects a separate return methodology based on the actual legal entity structure as if the Company were a separate taxpayer in the respective jurisdictions with certain accommodations pursuant to a tax matters agreement as noted below. This is in contrast to the pre-IPO period in which the income tax provision was prepared on a separate return stand-alone methodology reflecting a hypothetical legal entity structure in which the Company was included in the tax grouping of other BMS entities within the respective entity’s tax jurisdiction.

The provision for income taxes has been determined using the asset and liability approach of accounting for income taxes. Under this approach, deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. The provision for income taxes represents income taxes paid or payable for the current year plus the change in deferred taxes during the year. Deferred taxes result from differences between the financial and tax bases of the Company’s assets and liabilities. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable earnings in effect for the years in which those tax attributes are expected to be recovered or paid, and are adjusted for changes in tax rates and tax laws when changes are enacted.

Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. The assessment of whether or not a valuation allowance is required often requires significant judgment including the long-range forecast of future taxable earnings and the evaluation of tax planning initiatives. Adjustments to the deferred tax valuation allowances are made to earnings in the period when such assessments are made.

Interest and penalties are classified as a component ofprovision for income taxes.

Effective February 10, 2009, MJN entered into a tax matters agreement with BMS to allocate the responsibility of BMS and its subsidiaries, on the one hand, and MJN, on the other hand, for the payment of taxes resulting from filing (i) tax returns on a combined, consolidated or unitary basis and (ii) single entity tax returns for entities that have both MJN and non-MJN operations. Pursuant to this tax matters agreement, BMS prepares returns for MJN for all periods during which MJN is included in a combined, consolidated or unitary group with BMS or any of its subsidiaries for federal, state, local or foreign tax purposes, as if MJN itself were filing as a combined, consolidated or unitary group. BMS also prepares returns for the Company for all periods during which a single-entity tax return is filed for an entity that has both MJN and non-MJN operations. MJN makes payments to BMS and BMS makes payments to the Company with respect to such returns, as if such returns were actually required to be filed under the laws of the applicable taxing jurisdiction and BMS were the relevant taxing authority of such jurisdiction. If and when MJN ceases to be included in BMS’ consolidated tax returns, BMS will compensate the Company for tax attributes for which MJN was not previously compensated and that BMS used, and MJN will reimburse BMS for tax attributes for which MJN was previously compensated but that BMS never used.

Earnings Per Share—For the periods prior to the Company’s IPO, theweighted average common shares outstanding is calculated using 170.0 million shares of Class A and Class B common stock outstanding, which is the number of shares owned by BMS immediately prior to the IPO. The same number of shares has been used to calculate basic earnings per share and diluted earnings per share for the periods prior to the IPO as no MJN restricted stock units, stock options or performance shares were outstanding prior to the IPO. Restricted stock units, stock options and performance shares issued subsequent to the IPO may have a dilutive impact to the calculation of earnings per share under the treasury stock method. For the three and six months ended June 30, 2009, diluted earnings

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per share was computed using the weighted average common shares outstanding during the period plus the incremental shares outstanding assuming the exercise of dilutive restricted stock units, stock options and performance shares.

Recently Issued Accounting Standards—Effective January 1, 2009, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 141(R),Business Combinations, which replaces SFAS No. 141,Business Combinations. This pronouncement requires recognition of assets acquired, liabilities assumed, and any non-controlling interest in the acquiree at the acquisition date, measured at their fair values as of that date. In a business combination achieved in stages, this statement requires recognition of identifiable assets and liabilities, as well as the non-controlling interest in the acquiree, at the full amounts of their fair values. This statement also requires the fair value of acquired in-process research and development to be recorded as indefinite lived intangibles, contingent consideration to be recorded on the acquisition date, and restructuring and acquisition-related deal costs to be expensed as incurred. In addition, any excess of the fair value of net assets acquired over purchase price and any subsequent changes in estimated contingencies are to be recorded in earnings. This statement applies to business combinations occurring on or after January 1, 2009. The Company’s adoption of SFAS 141(R) did not have a material effect on the Company’s financial statements.

Effective January 1, 2009, the Company adopted SFAS No. 157, Fair Value Measurements, with respect to non-financial assets and liabilities. This pronouncement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The Company’s adoption of SFAS No. 157 did not have a material effect on the Company’s financial statements.

Effective January 1, 2009, the Company retrospectively adopted SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements,an amendment of ARB No. 51. SFAS No. 160 establishes accounting and reporting standards that require the ownership interests in subsidiaries held by parties other than the parent be clearly identified, labelled and presented in the consolidated statement of financial position within equity, but separate from the parent’s equity. This SFAS also requires the amount of consolidated net earnings attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of earnings. Changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary must be accounted for consistently, and when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary must be initially measured at fair value. This SFAS also requires entities to provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners.

Effective January 1, 2009, the Company adopted SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, as an amendment to SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 161 requires that objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation. The fair value of derivative instruments and their gains and losses are presented in tabular format in order to present a more complete picture of the effects of using derivative instruments.

Effective June 30, 2009, the Company adopted SFAS No. 165,Subsequent Events. SFAS No. 165 establishes guidance for the accounting and disclosure of events that happen after the date of the balance sheet but before the release of the financial statements. The adoption of this accounting pronouncement did not have a material effect on the Company’s consolidated financial statements.

In June 2009, the Financial Accounting Standards Board (FASB) issued SFAS No. 166,Accounting for Transfers of Financial Assets, an amendment of SFAS No. 140. Among other items, SFAS No. 166 removes the concept of a qualifying special-purpose entity and clarifies that the objective of paragraph 9 of SFAS No. 140 is to determine whether a transferor and all the entities included in the transferor’s financial statements being presented have surrendered control over transferred financial assets. SFAS No. 166 is effective for the Company January 1, 2010. The Company does not expect the adoption of this pronouncement to have a material effect on the consolidated financial statements.

In June 2009, the FASB issued SFAS No. 167,Amendments to FASB Interpretation No. 46(R). SFAS No. 167 amends FIN 46(R) in determining whether an enterprise has a controlling financial interest in a variable interest entity. This determination identifies the primary beneficiary of a variable interest entity as the enterprise that has both the power to direct the activities of a variable interest entity that most significantly impacts the entity’s economic performance, and the obligation to absorb losses or the right to receive benefits of the entity that could potentially be significant to the variable interest entity. SFAS No. 167 also requires ongoing reassessments of whether an enterprise is the primary beneficiary and eliminates the quantitative approach previously required for determining the primary beneficiary. SFAS No. 167 is effective for the Company January 1, 2010. The Company does not expect the adoption of this pronouncement to have a material effect on the consolidated financial statements.

Effective July 1, 2009, the FASB issued SFAS No. 168,The Hierarchy of Generally Accepted Accounting Principles.SFAS No. 168 reduces the GAAP hierarchy to two levels, one that is authoritative and one that is not. The adoption of this pronouncement is not expected to have a material effect on the consolidated financial statements.

4. RELATED PARTIES

These financial statements include transactions with affiliated companies. MJN entered into transactions with BMS and its subsidiaries for the sale of inventory and services provided to and received from BMS pharmaceutical divisions in various markets

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worldwide, as well as corporate services provided by BMS for the financial statement periods presented. Product transfers from BMS to MJN were made at various transfer prices.Related party payables-netincludes $68.2 million in related party receivables as of June 30, 2009. There were no related party receivables as of December 31, 2008. Related party dividends of $51.0 million are excluded from therelated party payables-net balance and presented individends payable.

Prior to the IPO, the Company had no sales to related parties. For the three months ended June 30, 2009, MJN had related party sales to BMS of $25.2 million. For the period subsequent to the IPO through June 30, 2009, MJN had related party sales to BMS of $45.3 million. Purchases of goods from BMS and its subsidiaries were $0.1 million and $2.2 million for the three and six months ended June 30, 2009, respectively, compared to $7.0 million and $13.7 million for the three and six months ended June 30, 2008, respectively.

Prior to the IPO, the Company was allocated costs for various services from BMS. On January 31, 2009, MJN entered into a Transitional Services Agreement (TSA) with BMS whereby BMS agreed to provide MJN with various corporate support services (the BMS Services) and MJN agreed to provide BMS with certain services (the MJN Services). The BMS Services and the MJN Services will continue for a specified initial term, which will vary with the types of services to be provided, unless earlier terminated or extended according to the terms of the TSA. MJN will pay BMS mutually agreed-upon fees for the BMS Services and BMS will pay MJN mutually agreed-upon fees for the MJN Services. The annual cost to MJN is $19.3 million for services that have terms of up to 18 months, $66.4 million for services that have terms from 18 months up to three years, and $2.9 million for services that have terms greater than three years. The annual cost charged by MJN to BMS for services is $23.6 million, the majority of which have terms of up to eighteen months. The statement of earnings for the six months ended June 30, 2009, includes one month of costs allocated from BMS and five months of expenses related to the TSA. Total net costs for the three and six months ended June 30, 2009, were $13.5 million and $29.5 million, respectively. For the similar periods ending June 30, 2008, total net costs to MJN were $26.9 million and $53.9 million as allocated from BMS based on either the ratio of MJN’s annual net sales or headcount to BMS’ comparable consolidated net sales or headcount.

On August 26, 2008, MJN declared and issued a dividend in the form of a 10-year intercompany note to BMS in the amount of $2.0 billion, which was recorded as a reduction of equity. The note had an annual interest rate of 6.1% with interest payments settled no less than annually.

On February 17, 2009, this related party note payable was amended and restructured into three separate notes. The terms of these related party notes payable are detailed in the table below:

Description	Principal Amount	Interest Rate	Terms
2014 Note	$744.2 million	LIBOR + 3.0% per annum	Annual amortization of $75.0 million payable in quarterly installments 2010 to 2014, remaining principal due on February 17, 2014
2016 Note	$500.0 million	6.43% fixed	Interest due semi-annually, not subject to amortization, aggregate principal due on February 17, 2016
2019 Note	$500.0 million	6.91% fixed	Interest due semi-annually, not subject to amortization, aggregate principal due on February 17, 2019

The related party notes are senior unsecured obligations of MJN and rank equally in right of payment with each other and with all existing and future senior indebtedness of MJN. In addition, the notes are structurally subordinated to all liabilities of the subsidiaries of MJN, including trade payables. The notes may be prepaid at any time, in whole or in part, without premium or penalty. Each note is mandatorily repayable in cash upon a change of control, in an amount equal to 100% of the then outstanding principal amount plus accrued and unpaid interest. BMS will not be permitted to transfer the notes to other persons, other than its affiliates. Based on the Company’s assessment of current market conditions for debt of similar maturity, structure and risk, the estimated fair value of the related party debt was $1,791.8 million as of June 30, 2009.

On January 31, 2009, Mead Johnson Venezuela, S.C.A., a wholly owned indirect subsidiary of MJN, issued a note payable with the local currency equivalent of $5.8 million to Bristol-Myers Squibb de Venezuela S.C.A., a wholly owned subsidiary of BMS. During the second quarter, this note payable was paid in full.

On January 31, 2009, Mead Johnson Nutricionales de Mexico, S. De R.L. de C.V., a subsidiary of MJN, entered into an agreement with BMS to lease all of the property, plant and equipment assets at the manufacturing facility in Delicias, Mexico, for 20 years. This facility is included in the financial statements of the Company for all periods. The lease qualifies as a capital lease, and MJN will continue to carry the property, plant and equipment in the Company’s financial statements. The Company recorded a lease liability of $41.5 million, representing the present value of the minimum lease payments set forth by the lease agreement. The liability is being amortized over the lease term.

Some MJN entities maintain short-term lines of credit with the BMS treasury center in Europe for short-term working capital needs. The borrowings bear interest at a rate of LIBOR, or the appropriate currency equivalent, plus 0.77% per annum and are repayable at any time. As of June 30, 2009, the outstanding balance under these lines of credit was $7.2 million.

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During the three and six months ended June 30, 2009, related party interest expense was $25.0 million and $53.4 million, respectively, and cash interest paid was $9.6 million and $68.9 million, respectively. Additionally, the Company recorded interest income from third parties of $0.7 million and $1.1 million during the three and six months ended June 30, 2009, respectively.

With the exception of the net proceeds from the IPO, the impact of the separation activities and IPO, as described above, on equity are captured innet transfers (to) from BMS on the consolidated statements of comprehensive income and equity (deficit). The components ofnet transfers (to) from BMS on the consolidated statements of comprehensive income and equity (deficit) and the related cash flows for the six months ended June 30, 2009, are as follows:

(Dollars in millions)	Statement of Comprehensive     Income and Equity (Deficit) – Changes in Equity		Statement of Cash Flows – Financing Activities
Establishment of Foreign Notes/Repayment of Related Party Debt to BMS	$	(597.0)	$	(597.0)
Repayment of Related Party Foreign Notes Payable				(5.8)
			$	(602.8)
Cash Contribution by BMS		286.0	$	286.0
Debt Reduction		250.0
Establishment/Settlement of Related Party Payable		(176.8)		(176.8)
Mexico Capital Lease Liability		(41.5)
Other Activity		(15.1)		(11.5)
Net Transfers (to) from BMS	$	(294.4)	$	97.7

TheOther Activity withinChanges in Equity above of ($15.1) million relates to various separation and operating activities, including the assumption of certain net assets from BMS resulting from the acquisition of legal entities from BMS, excluding certain net assets that had previously been allocated to MJN in the historical financial statements and the activity in January prior to the separation.

5. EARNINGS PER SHARE

Basic earnings per share is calculated by dividingnet earnings attributable to shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share is calculated by adjusting the weighted average number of outstanding shares to assume conversion of all potentially dilutive unvested restricted stock units, unexercised stock options and unvested performance shares. The Company uses the treasury stock method to reflect the potential dilutive effect of the unvested restricted stock units, unexercised stock options and unvested performance shares. In calculating the number of dilutive shares outstanding, the shares of common stock underlying unvested restricted shares are assumed to have been delivered on the grant date.

The following table presents the calculation of basic and diluted earnings per share:

	Three Months Ended June 30,				Six Months Ended June 30,
(In millions, except per share data)	2009		2008		2009		2008
Basic Earnings per Share:
Weighted Average Common Shares Outstanding – Basic		204.5		170.0		196.7		170.0
Net Earnings Attributable to Shareholders	$	134.5	$	114.2	$	238.0	$	244.8
Dividends and undistributed earnings attributable to unvested shares		—		—		—		—
Net Earnings Attributable to Shareholders used for Basic Earnings per Common Share Calculation	$	134.5	$	114.2	$	238.0	$	244.8
Net Earnings Attributable to Shareholders per Common Share	$	0.66	$	0.67	$	1.21	$	1.44
Diluted Earnings per Share:
Weighted Average Common Shares Outstanding – Basic		204.5		170.0		196.7		170.0
Incremental shares outstanding assuming the exercise/vesting of dilutive stock options/restricted stock		0.1		—		—		—
Weighted Average Common Shares Outstanding – Diluted		204.6		170.0		196.7		170.0
Net Earnings Attributable to Shareholders	$	134.5	$	114.2	$	238.0	$	244.8
Dividends and undistributed earnings attributable to unvested shares		—		—		—		—
Net Earnings Attributable to Shareholders used for Diluted Earnings per Common Share Calculation	$	134.5	$	114.2	$	238.0	$	244.8
Net Earnings Attributable to Shareholders per Common Share	$	0.66	$	0.67	$	1.21	$	1.44

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Potential shares outstanding were 1.4 million as of June 30, 2009, of which 1.3 million and 1.4 million were not included in the diluted earnings per share calculation in accordance with the treasury stock method for the three and six months ended June 30, 2009, respectively.

6. INCOME TAXES

For the three and six months ended June 30, 2009, the effective tax rate was 28.8% and 31.0%, respectively, compared with 38.3% and 37.4% for the same periods in 2008, as prepared in each case on the conditions noted in “Accounting Policies, Income Taxes.” The lower rate was attributable primarily to benefits associated with restructuring the Company’s foreign operations as part of the separation from BMS in the IPO process and the earnings mix in foreign markets.

The Company operates under a new legal entity structure created to facilitate the IPO. As such, adjustments have been made to the income tax accounts and equity (deficit) during the six months ended June 30, 2009, to reflect the impact of this restructuring.

On February 10, 2009, the Company entered into a tax matters agreement with BMS. Under this agreement responsibility is allocated between BMS and its subsidiaries, on the one hand, and MJN, on the other hand, for the payment of taxes resulting from filing (i) tax returns on a combined, consolidated or unitary basis and (ii) single entity tax returns for entities that have both MJN and non-MJN operations. Accordingly, BMS prepares returns for MJN for all periods during which MJN is included in a combined, consolidated or unitary group with BMS or any of its subsidiaries for federal, state, local or foreign tax purposes, as if MJN itself were filing as a combined, consolidated or unitary group. BMS also prepares returns for the Company for all periods during which a single-entity tax return is filed for an entity that has both MJN and non-MJN operations. MJN makes payments to BMS and BMS makes payments to the Company with respect to such returns, as if such returns were actually required to be filed under the laws of the applicable taxing jurisdiction and BMS were the relevant taxing authority of such jurisdiction. If and when MJN ceases to be included in BMS’ consolidated tax returns, BMS will compensate the Company for tax attributes for which MJN was not previously compensated and that BMS used, and MJN will reimburse BMS for tax attributes for which MJN was previously compensated but that BMS never used. As of June 30, 2009, the Company holds a net payable of $28.3 million to BMS, which is recorded inrelated party payables-net, based upon the terms of the tax matters agreement discussed above.

The Company’s reserve for unrecognized tax benefits as of June 30, 2009, was $0.6 million related to both domestic and international matters that are not expected to reverse in the next 12 months. The Company’s reserve for unrecognized tax benefits as of December 31, 2008 was $17.9 million. The Company believes that it has provided adequately for all uncertain tax positions that are not otherwise indemnified by BMS. Pursuant to the tax matters agreement dated February 10, 2009, BMS maintains responsibility for all uncertain tax positions which may exist in the pre-IPO period or which may exist as a result of the IPO transaction. MJN anticipates that it is reasonably possible that new issues may be raised by tax authorities and that these issues may require increases in the balance of unrecognized tax benefits.

7. INVENTORIES

The major categories of inventories were as follows:

	June 30,		December 31,
(Dollars in millions)	2009		2008
Finished Goods	$	169.9	$	191.3
Work in Process		21.2		28.0
Raw and Packaging Materials		138.2		135.0
Inventories	$	329.3	$	354.3

8. PROPERTY, PLANT, AND EQUIPMENT

The major categories of property, plant, and equipment were as follows:

	June 30,		December 31,
(Dollars in millions)	2009		2008
Land	$	4.3	$	4.4
Buildings		393.8		382.5
Machinery, Equipment, and Fixtures		523.6		504.2
Construction in Progress		55.7		67.9
Accumulated Depreciation		(521.6)		(505.4)
Property, Plant and Equipment—net	$	455.8	$	453.6

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9. REVOLVING CREDIT FACILITY

On February 17, 2009, MJN entered into a three-year syndicated revolving credit facility agreement (Credit Facility). The Credit Facility is unsecured and repayable on maturity at February 2012, subject to annual extensions if sufficient lenders agree. The maximum amount of outstanding borrowings and letters of credit permitted at any one time under the facility agreement is $410.0 million, which amount may be increased from time to time up to $500.0 million at the Company’s request and with the consent of the lenders, subject to customary conditions contained in the Credit Facility. The proceeds of the Credit Facility are to be used for working capital and other general corporate purposes.

Borrowings under the Credit Facility will bear interest either at (a) LIBOR for specified interest periods plus a margin determined with reference to the Company’s consolidated leverage ratio, or (b) a floating rate based upon JPMorgan Chase Bank’s prime rate, the Federal Funds rate or LIBOR plus, in each case, a margin determined with reference to the Company’s consolidated leverage ratio. The margin on the borrowings can range from 1.125% to 2.65% over the applicable base.

The Company’s subsidiaries may become borrowers under the Credit Facility.

The Credit Facility contains customary covenants, including covenants applicable to limiting liens, substantial asset sales and mergers. Most of these restrictions are subject to certain minimum thresholds and exceptions. The Credit Facility also contains the following financial covenants:

Ÿ      The Company is required to maintain a ratio of (a) consolidated total debt to (b) consolidated Earnings Before Interest, Income Taxes, Depreciation and Amortization (EBITDA) of not greater than 3.25 to 1.0. Compliance with this covenant is tested on the last day of each fiscal quarter and as a condition precedent to each credit extension under the Credit Facility.

Ÿ      The Company is required to maintain a ratio of (a) consolidated EBITDA to (b) consolidated interest expense of at least 3.00 to 1.00. Compliance with this covenant is tested on the last day of each fiscal quarter for the preceding four consecutive fiscal quarters.

In addition, the Credit Facility has customary events of default, including (subject to certain materiality thresholds and grace periods) payment default, failure to comply with covenants, material inaccuracy of representation or warranty, bankruptcy or insolvency proceedings, change of control, ERISA matters and cross-default to other debt agreements. The Company was in compliance with all debt covenants as of June 30, 2009.

There were no borrowings under the revolving credit facility during the three and six months ended June 30, 2009.

10. VARIABLE INTEREST ENTITY

The Company’s business activities in China are conducted through MJN China, a subsidiary of BMS. BMS and MJN entered a service agreement pursuant to which BMS agreed to cause MJN China to operate in a manner that is consistent with the instructions and directions of MJN. In return, MJN provides all necessary support and access to assets and resources, including intellectual property, for BMS to cause MJN China to operate in a manner consistent with MJN’s instructions and directions. The agreement was designed so that MJN is entitled to the cash flow, benefit and risk of MJN China’s operations and business. MJN China is consolidated in the Company’s financial statements as MJN is the primary beneficiary.

The China operations are material to MJN. As of June 30, 2009, total assets of MJN China included in the accompanying consolidated financial statements were $183.9 million and the associated liabilities were $69.7 million. There are no assets of MJN that serve as collateral for MJN China and the creditors of MJN China have no recourse to the general credit of MJN.

11. NONCONTROLLING INTERESTS

Net earnings attributable to noncontrolling interests consists of an 11% interest in MJN China and a 10% interest in MJN Indonesia held by third parties.

12. EMPLOYEE STOCK BENEFIT PLANS

MJN 2009 Stock Award and Incentive Plan—In December 2008, the MJN Board of Directors approved the MJN 2009 Stock Award and Incentive Plan (MJN 2009 Plan). The MJN 2009 Plan provides for the grant of options to purchase MJN Class A common stock intended to qualify as incentive stock options, nonqualified stock options, non-statutory stock options, stock appreciation rights, restricted stock, stock units, stock granted as a bonus or in lieu of another award, dividend equivalents, other stock-based awards and performance awards. Executive officers and other employees of MJN or one of its subsidiaries or affiliates, and non-employee directors and others who provide substantial services to MJN, are eligible to be granted awards under the MJN 2009 Plan. Twenty-five million shares of Class A common stock were approved for grants to participants under the MJN 2009 Plan. Shares used for awards assumed in an acquisition or combination will not count against the shares reserved under the MJN 2009 Plan. The shares

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reserved may be used for any type of award under the MJN 2009 Plan. Stock based compensation expense is based on awards ultimately expected to vest. Forfeitures were estimated based on the historical experience of participants in the BMS plan.

Under the MJN 2009 Plan, executive officers and key employees of MJN may be granted options to purchase common stock at no less than 100% of the market price on the date the option is granted. Options generally become exercisable in installments of 25% per year on each of the first through the fourth anniversaries of the grant date and have a maximum term of 10 years. Generally, MJN will issue shares for the stock option exercises from treasury stock, if available, or will issue new shares.

The MJN 2009 Plan provides for the granting of restricted stock units to key employees, subject to restrictions as to continuous employment. Restrictions generally expire over a four or five year period from the date of grant. Compensation expense is recognized over the restricted period. A stock unit is a right to receive stock at the end of the specified vesting period. A stock unit has no voting rights.

The MJN 2009 Plan also incorporates performance awards which are delivered in the form of a target number of performance shares and have a three-year performance cycle. For the 2009 to 2011 cycle, the awards have annual goals set at the beginning of each year. For 2009, the goals are based 50% on earnings per share, 25% on sales and 25% on working capital and capital spending. Maximum performance will result in a maximum payout of 165% of the award. If threshold targets are not met for the performance period, no payment will be made under the plan.

MJN Stock Options—On March 11, 2009, MJN granted approximately 1.0 million stock options under the MJN 2009 Plan. For stock options with a service condition, the grant date fair value was $4.87. For stock options with service and market conditions, the grant date fair value was $7.30. In the second quarter of 2009, a nominal amount of stock options with a service condition was granted to eligible employees. As of June 30, 2009, there were 1.0 million stock options outstanding with a weighted average grant date fair value of $6.10 and a total unrecognized compensation cost related to these stock options of approximately $5.4 million that is expected to be recognized over a weighted average period of 2.79 years. Expense of $0.6 million and $0.8 million was recognized for the three and six months ended June 30, 2009, respectively. The fair value of employee stock options granted in 2009 was estimated on the date of grant using the Black-Scholes option pricing model for stock options with a service condition, and the Monte Carlo simulation model for options with service and market conditions, with the following assumptions:

	Black-Scholes Model	Monte Carlo Model
Expected volatility	23.76%	28.66%
Risk-free interest rate	2.31%	2.95%
Dividend yield	2.89%	2.89%
Expected life	6.25 years	6.79 years

The expected volatility assumption required in the Black-Scholes model and Monte Carlo model was calculated based on peer group analysis of stock price volatility with a 6.25-year and 10-year look back period ending on the grant date, respectively. The selection of this approach was based on MJN’s assessment that this calculation of expected volatility is more representative of future stock price trends than using historical MJN volatility given the short time period that the Company’s stock has been traded. The risk-free interest rate assumption in the Black-Scholes model is based upon the U.S. Treasury yield curve in effect at the time of grant. The risk-free interest rate assumption in the Monte Carlo model is based upon the 10-year U.S. Treasury yield curve. The dividend yield assumption is based on MJN’s expectation of dividend payouts. The expected life of employee stock options represents the weighted average period the stock options are expected to remain outstanding and is a derived output based on the vesting period and the contractual term for each grant, or for each vesting tranche for awards with graded vesting. The selection of this approach was based on MJN’s assessment that this simplified method is appropriate given the terms of the stock option plans and given that there is not sufficient historical share option exercise experience upon which to estimate expected terms.

MJN 2009 Restricted Stock Units—In the first quarter of 2009, MJN granted approximately 0.3 million restricted stock units to approximately 120 employees, including each of the Company’s Named Executive Officers and outside directors. The awards had a grant date fair value of $24.00 per share, which was determined based on the IPO price. These restricted stock units will vest in equal installments on each of the third, fourth and fifth anniversaries of the date of grant. In the second quarter of 2009, a nominal amount of restricted stock units was granted to eligible employees. As of June 30, 2009, there were 0.3 million unvested restricted stock units with a weighted average grant date fair value of $24.07 and total unrecognized compensation cost related to these awards of approximately $7.4 million that is expected to be recognized over a weighted average period of 4.58 years. Expense of $0.4 million and $0.5 million was recognized for the three and six months ended June 30, 2009, respectively.

MJN Performance Share Awards—On March 11, 2009, MJN granted approximately 0.1 million performance share awards to certain employees. The awards had a weighted average grant date fair value of $26.58 per award. As of June 30, 2009, there were 0.1 million awards outstanding with a weighted average fair value of $26.58 and a total unrecognized compensation cost related to these awards of approximately $2.9 million that is expected to be recognized over a weighted average period of 2.5 years. Expense of

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$0.3 million and $0.6 million was recognized for the three and six months ended June 30, 2009, respectively. The value of nonvested performance awards was based on the closing trading price of MJN’s stock on the date of the grant.

BMS Employee Stock Benefit Plans—Prior to the separation from BMS, certain MJN employees were granted options to purchase BMS’s stock under the BMS plans. These plans also incorporate restricted stock and long-term performance awards. As of June 30, 2009, total unrecognized compensation costs related to unvested stock options, restricted stock units and performance awards under the BMS plans was approximately $12.8 million and the weighted average period over which such awards are expected to be recognized was 2.27 years. Expense of $1.6 million and $2.0 million was recognized for the three months ended June 30, 2009 and 2008, respectively, and $4.3 million and $4.5 million was recognized for the six months ended June 30, 2009 and 2008, respectively, which resulted in an increase tototal equity (deficit).

Stock Based Compensation Expense—The following table summarizes stock based compensation expense related to MJN stock options, MJN 2009 restricted stock units, MJN performance share awards and BMS stock benefit plans for the three and six months ended June 30, 2009 and 2008:

	Three Months Ended June 30,				Six Months Ended June 30,
(Dollars in millions)	2009		2008		2009		2008
MJN Stock Options	$	0.6	$	—	$	0.8	$	—
MJN 2009 Restricted Stock Units		0.4		—		0.5		—
MJN Performance Share Awards		0.3		—		0.6		—
BMS Stock Benefit Plans		1.6		2.0		4.3		4.5
Total Stock Based Compensation Expense	$	2.9	$	2.0	$	6.2	$	4.5
Deferred Tax Benefit		0.8		0.6		1.9		1.5
Stock Based Compensation Expense, net of taxes	$	2.1	$	1.4	$	4.3	$	3.0

13. RETIREMENT BENEFITS

Pension and Other Postretirement Benefits—Prior to the separation from BMS, employees who met certain eligibility requirements participated in various defined benefit pension plans administered and sponsored by BMS. As part of the separation, the BMS defined benefit pension plan assets and liabilities for active U.S. MJN employees were transferred to a U.S. MJN defined benefit pension plan. The related assets and liabilities primarily held in the BMS defined benefit pension plan for the transferring participants were allocated based on assumptions set forth in an employee matters agreement with BMS. Outside of the United States, BMS transferred to MJN defined benefit plans pension assets and liabilities allocable to the employees transferring to MJN in certain countries as described in the employee matters agreement. MJN assumed liabilities allocable to employees transferring to the Company under certain pension, supplemental retirement and termination indemnity plans. For the purpose of the MJN defined benefit pension plans, the measurement date was the separation date.

Concurrent with the establishment of the U.S. MJN defined benefit pension plan, benefits under the plan were frozen to limit service used in the calculation of benefits to service accrued under the BMS defined benefit pension plan.

As part of the separation, BMS transferred to MJN an estimated net obligation of $97.1 million and unrealized loss, recorded toaccumulated other comprehensive income, of $156.0 million ($96.8 million net of tax), with the difference recorded toBMS investment within equity. The estimated net obligation will be updated upon completion of the actuarial valuation and conclusion with BMS on the allocation methodology to be used to determine the final amount of plan assets to be transferred to MJN later in 2009. At June 30, 2009, the projected benefit obligation and fair value of plan assets, including post-separation activity, were $286.3 million and $191.3 million, respectively.

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The net periodic benefit cost of the Company’s defined benefit pension and postretirement benefit plans included the following components:

	Three Months Ended June 30, 2009				Separation Date through June 30, 2009
(Dollars in millions)	Pension       Benefits		Other       Benefits		Pension       Benefits		Other       Benefits
Service cost — benefits earned during the period	$	0.1	$	0.2	$	0.5	$	0.3
Interest cost on projected benefit obligation		4.3		0.3		7.5		0.5
Expected return on plan assets		(4.6)		—		(7.9)		—
Amortization of prior service cost (benefit)		—		—		—		—
Amortization of net actuarial loss		1.6		0.3		4.0		0.5
Amortization of transition cost		—		—		—		—
Net periodic benefit cost	$	1.4	$	0.8	$	4.1	$	1.3
Curtailments and settlements		0.1		—		0.1		—
Total net periodic benefit cost	$	1.5	$	0.8	$	4.2	$	1.3

For the six months ended June 30, 2009, contributions to pension plans were $2.9 million. Although no minimum contributions will be required, the Company may choose to make further cash contributions to the pension plans in 2009. There will be no cash funding for other postretirement benefits.

Prior to the separation from BMS, the pension and postretirement plans for MJN were accounted for under a multi-employer plan. MJN specifically identified the pension expense attributable to MJN participants for the pension plans in the Philippines, Indonesia and the Netherlands. For the pension plans in the United States, Canada, Taiwan and Mexico, costs associated with the pension plans were allocated to MJN on the basis of pensionable wages.

Defined Contribution Benefits—Prior to the separation from BMS, employees who met certain eligibility requirements participated in various defined contribution plans administered and sponsored by BMS. As part of the separation, the U.S. BMS qualified defined contribution plan transferred to a U.S. MJN qualified defined contribution plan, with assets and liabilities allocable to the participants transferring to the U.S. MJN qualified defined contribution plan. Outside of the United States, BMS transferred to MJN’s defined contribution plans assets allocable to the employees transferring to the Company in certain countries as described in the employee matters agreement. MJN also assumed supplemental benefit plan liabilities allocable to employees transferring to the Company as set forth in the employee matters agreement. The Company provides a base contribution in addition to a Company match of certain employee contributions.

14. SEGMENT INFORMATION

MJN operates in four geographic operating segments: North America, Latin America, Asia and Europe. This operating segmentation is how the chief operating decision maker regularly assesses information for decision making purposes, including allocation of resources. Due to similarities in the economics, products offered, production process, customer base, and regulatory environment, these operating segments have been aggregated into two reportable segments:Asia/Latin America andNorth America/Europe.

Corporate and Other consists of unallocated general and administrative activities and associated expenses, including in part, executive, legal, finance, information technology, human resources, research and development, global marketing costs, global supply chain and certain facility costs.

On January 1, 2009, the Company began classifying the operations of a plant fromCorporate and Other toAsia/Latin America to coincide with the final destination of the majority of the product manufactured at this plant. This change did not have a material effect on the net sales or earnings before interest and income taxes for the segments. Assets at December 31, 2008 of $79.8 million have been reclassified fromCorporate and Other to theAsia/Latin America segment.

	Three Months Ended June 30,								Six Months Ended June 30,
	Net Sales				Earnings Before Interest and Income Taxes				Net Sales				Earnings Before Interest and Income Taxes
(Dollars in millions)	2009		2008		2009		2008		2009		2008		2009		2008
Asia/Latin America	$	396.5	$	389.4	$	146.1	$	119.7	$	786.3	$	738.6	$	294.8	$	251.2
North America/Europe		322.8		339.2		119.0		119.2		626.0		693.3		220.2		242.0
Total Reportable Segments		719.3		728.6		265.1		238.9		1,412.3		1,431.9		515.0		493.2
Corporate and Other		—		—		(47.0)		(51.0)		—		—		(108.1)		(96.1)
Total	$	719.3	$	728.6	$	218.1	$	187.9	$	1,412.3	$	1,431.9	$	406.9	$	397.1

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15. FINANCIAL ASSETS AND LIABILITIES

The Company is exposed to market risk due to changes in currency exchange rates, interest rates and, to a lesser extent, natural gas pricing. 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. MJN’s financial assets and liabilities are measured using inputs based on quoted market prices for similar assets and liabilities in active markets, i.e. level two of the fair value hierarchy. Derivative financial instruments are not used for speculative purposes. The Company does not hedge the interest rate risk associated with money market funds, which are measured from level two of the fair value hierarchy and totaled $235.1 million as of June 30, 2009.

Cash Flow Hedges

Foreign Exchange contracts

The Company utilizes foreign currency contracts to hedge forecasted transactions, primarily intercompany and related party transactions, on certain foreign currencies and designates these derivative instruments as foreign currency cash flow hedges when appropriate. The notional and fair value amount of the Company’s foreign exchange derivative contracts at June 30, 2009, were $75.9 million and $2.6 million net assets, respectively. For these derivatives, in which the majority qualify as hedges of probable forecasted cash flows, the effective portion of changes in fair value is temporarily reported inaccumulated other comprehensive income (loss) and recognized in earnings when the hedged item affects earnings.

The table below summarizes the Company’s outstanding foreign exchange forward contracts at June 30, 2009. 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.

	Weighted Average     Forward Rate	Notional Amount		Fair Value Asset	Maturity
		(Dollars in millions)
Foreign Exchange Forwards:
Cash Flow Hedges:
Canadian Dollar	1.155	$	42.4	$              0.2	2009/2010
Mexican Peso	13.101		33.5	2.4	2009/2010
Total Cash Flow Hedges		$	75.9	$              2.6

At June 30, 2009, the balance of deferred gains on foreign exchange forward contracts that qualified for cash flow hedge accounting included inaccumulated other comprehensive income on a pre-tax basis was $2.2 million ($1.6 million net of tax), all of which is expected to be reclassified into earnings within the next 17 months.

The Company assesses effectiveness at the inception of the hedge 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 not deferred inaccumulated other comprehensive income (loss) and is included in current period earnings. For the three and six months ended June 30, 2009, the impact of hedge ineffectiveness on earnings was not significant.

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.

Natural Gas contracts

The Company utilizes forward contracts to hedge forecasted purchases of natural gas, and designates these derivative instruments as cash flow hedges when appropriate. Natural gas forward contracts are valued using quoted NYMEX futures prices for natural gas at the reporting date. For these derivatives, in which the majority qualify as hedges of future forecasted cash flows, the effective portion of changes in fair value is temporarily reported inaccumulated other comprehensive income (loss) and recognized in earnings when the hedged item affects earnings. The notional and fair value amounts of natural gas contracts at June 30, 2009, were 0.4 decatherms and $1.4 million liability, respectively. At June 30, 2009, the balance of deferred losses on natural gas contracts that qualified for cash flow hedge accounting included inaccumulated other comprehensive income (loss) on a pre-tax basis was $1.4 million ($0.9 million net of tax), all of which is expected to be reclassified into earnings within the next 6 months. For the three and six months ended June 30, 2009, there was no earnings impact from discontinued natural gas hedges.

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The following table summarizes the Company’s fair value of outstanding derivatives:

(Dollars in millions)	Balance Sheet Location	June 30,         2009		December 31,     2008
Derivatives designated as hedging instruments:
Foreign Exchange Contracts	Other Assets	$	4.4	$	10.1
Foreign Exchange Contracts	Accrued Expenses		(1.8)		(0.3)
Natural Gas Contracts	Accrued Expenses		(1.4)		(2.1)
Total Derivatives designated as hedging instruments		$	1.2	$	7.7

The change inaccumulated other comprehensive income (loss) and the impact on earnings from foreign exchange and natural gas forwards, and that qualified as cash flow hedges for the six months ended June 30, 2009 and 2008, was as follows:

	Foreign Exchange     Contracts				Natural Gas Contracts					Total Cash Flow     Hedges
(Dollars in millions)	2009		2008		2009			2008		2009		2008
Balance at January 1:	$	6.6	$	—	$	(1.4)		$	—	$	5.2	$	—
Derivatives qualifying as cash flow hedges deferred in other comprehensive income		(1.9)		—		(1.3)			—		(3.2)		—
Derivatives qualifying as cash flow hedges reclassified to cost of products sold (effective portion)		(5.1)		—		2.2			—		(2.9)		—
Change in deferred taxes		2.0		—		(0.4	)		—		1.6		—
Balance at June 30:	$	1.6	$	—	$	(0.9)		$	—	$	0.7	$	—

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 with Standard & Poor’s and Moody’s long term debt ratings of A or higher. In addition, only conventional derivative financial instruments are utilized. The Company would not be materially impacted if any of the counterparties to the derivative financial instruments outstanding at June 30, 2009, failed to perform according to the terms of its agreement. At this time, the Company does not require collateral or any other form of securitization to be furnished by the counterparties to its derivative financial instruments.

16. LEGAL PROCEEDINGS AND CONTINGENCIES

In the ordinary course of business, MJN is subject to lawsuits, investigations, government inquiries and claims, including, but not limited to, product liability claims, advertising disputes and inquiries, other commercial disputes, premises claims and employment and environmental, health, and safety matters. MJN records accruals for such contingencies when it is probable that a liability will be incurred and the loss can be reasonably estimated. Although MJN cannot predict with certainty the ultimate resolution of lawsuits, investigations and claims asserted against the Company, MJN does not believe any currently pending legal proceeding to which MJN is a party will have a material adverse effect on the Company’s business, prospects, financial condition, cash flows and results of operations.

17. OTHER (INCOME)/EXPENSES—NET

Included inother (income)/expenses—net for the three months ended June 30, 2009, was an $11.9 million gain on sale of a non-strategic intangible asset. For the six months ended June 30, 2009,other (income)/expenses—net included the $11.9 million gain on sale of a non-strategic intangible asset, $7.6 million of severance expense and $10.0 million of income for a patent settlement.

18. SUBSEQUENT EVENT

On August 7, 2009, as part of the separation from BMS, the Company entered into a master services agreement with IBM primarily to replace services provided by BMS under the existing Transitional Services Agreement. The term of the agreement is 10 years, commencing on August 7, 2009. The total commitment for the information technology, accounting and indirect procurement services included in the agreement is estimated to be approximately $307.0 million payable over 10 years beginning in the third quarter of 2009 with no single year’s payment expected to exceed approximately $37.0 million. Additionally, the master services agreement includes the design and implementation of a global Enterprise Resource Planning system at an estimated cost of approximately $82.0 million, half of which is anticipated to be capitalized, payable over three years beginning in the third quarter of 2009. The Company retains the right to terminate the contract both for cause and convenience. However, terminating the contract, unless due to a material breach by IBM, will require the Company to pay termination charges of up to $27.0 million or less depending on the time of

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termination. Payment obligations in regard to the agreement with IBM vary due to factors such as volume of data processed, changes in our servicing needs as a result of new product offerings, acquisitions or divestitures, the introduction of significant new technologies, foreign currency, or the general rate of inflation.

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview of Our Business

We are a global leader in pediatric nutrition. We are committed to creating trusted nutritional brands and products that help improve the health and development of infants and children around the world and provide them with the best start in life. Our comprehensive product portfolio addresses a broad range of nutritional needs for infants, children and expectant and nursing mothers. We have over 100 years of innovation experience during which we have developed or improved many breakthrough or industry-defining products across each of our product categories. We operate in four geographic regions: Asia, Latin America, North America and Europe. Due to similarities in the economics, products offered, production process, customer base and regulatory environment, these operating regions have been aggregated into two reportable segments: Asia/Latin America and North America/Europe.

Financial Highlights

For the six months ended June 30, 2009, net sales totaled $1,412.3 million, down 1% including an unfavorable foreign exchange impact of 7%, compared to $1,431.9 million from the first half of 2008. In our Asia/Latin America segment sales grew by 16%, excluding the adverse impact of foreign exchange, driven by market growth and market share gains in key markets due to our investments in product innovation and promotion. Sales decreased in our North America/Europe segment due to market share losses and a market decline due to a decrease in births in the United States.

Earnings before interest and income taxes (EBIT) increased to $406.9 million, up from $397.1 million a year earlier. Factors affecting EBIT in the first six months of 2009 include the benefit of lower commodity costs, the carryover benefit of pricing actions taken in 2008, productivity savings and manufacturing efficiencies. These benefits were somewhat offset by higher costs incurred as a stand-alone public company and the impact of a stronger dollar. Results for 2009 include costs associated with the initial public offering (IPO) and separation from Bristol-Myers Squibb Company (BMS) of $24.1 million and severance charges of $7.6 million, partly offset by an $11.9 million gain from the sale of a non-strategic intangible asset, as well as $10.0 million received from a patent settlement.

Net earnings attributable to shareholders for the first six months of 2009 totaled $238.0 million, compared with $244.8 million, for the same period a year ago. Interest expense in the first half of 2009 totaled $52.3 million. Results for 2008 include no interest expense as the company was a wholly owned subsidiary of BMS and carried no debt at that time. Results for 2009 benefited from a lower effective tax rate (ETR) compared with 2008 largely due to benefits associated with the restructuring of our foreign operations as part of the separation from BMS. The ETR for the first half of 2009 was 31.0% versus 37.4% for 2008. Earnings per diluted share for the first half of 2009 were $1.21, compared with $1.44 in 2008. There were approximately 196.7 million diluted shares outstanding in the first half of 2009, versus 170.0 million shares in 2008.

Factors Affecting Comparability

The results for the three and six months ended June 30, 2009 include several items related to the IPO and our separation from BMS that affect the comparability of the company’s financial results between 2009 and 2008. These items include specified IPO-related costs, interest expense, operating model changes, the ETR and the number of shares outstanding.

We incurred $6.9 million and $24.1 million in costs in connection with our IPO and separation during the three and six months ended June 30, 2009, respectively, compared to $0.2 million during the three and six months ended June 30, 2008. These costs relate to legal, accounting, systems separation and consulting services.

On August 26, 2008, we issued a $2.0 billion intercompany note to BMS. The note was restructured at the IPO date reducing the related party debt to approximately $1.8 billion. Interest expense—net during the three and six months ended June 30, 2009, was $24.3 million and $52.3 million, respectively. The company had no debt outstanding and no interest expense during the three and six months ended June 30, 2008.

Our 2009 results include operating model changes in Brazil, Europe and Mexico. In Brazil, our ability to operate as a new stand-alone subsidiary that is separate from BMS is delayed for a period of time due to certain statutory and regulatory requirements for permits and applications. Until we are able to operate as a stand-alone entity in Brazil, BMS is distributing and recording sales for our products and our role is limited to marketing activities. In Europe, we have transitioned to a third-party distributor model with BMS temporarily serving as our distributor. This will reduce net sales by the amount of the distributors’ margin and lower costs for the distribution-related expenses. In Mexico, we now operate our business through a newly formed operating subsidiary that is expected to incur higher profit sharing costs than were allocated to us when we operated within BMS. The combined effect of these operating model changes was to reduce net sales growth for the three months ended June 30, 2009, by approximately $10.3 million and to increase EBIT by approximately $0.5 million. The combined effect of these operating model changes was to reduce net sales and EBIT growth for the six months ended June 30, 2009, by approximately $17.6 million and $1.4 million, respectively.

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For the three and six months ended June 30, 2009, the effective tax rate was 28.8% and 31.0%, respectively, compared to 38.3% and 37.4% for the three and six months ended June 30, 2008, respectively. The lower rate was attributable primarily to benefits associated with restructuring the Company’s foreign operations as part of the separation from BMS in the IPO process and the earnings mix.

Prior to February 10, 2009, there were 170.0 million shares of common stock outstanding. The company issued an additional 34.5 million shares of common stock in the IPO. As of June 30, 2009, we had 204.6 million diluted common shares outstanding.

In addition to these items that affect the 2009 results of operations, there are several adjustments to the balance sheet related to our separation from BMS. These include the recognition of pension and capital lease liabilities, inclusion of cash balances and restructuring of related-party debt and divisional equity. See “Item 1. Financial Statements.”

Three Months Results of Operations

Below is a summary of comparative results of operations and a more detailed discussion of results for the three months ended June 30, 2009 and 2008:

	Three Months Ended June 30,
									% of Net Sales
(In millions, except per share data)	2009			2008			% Change		2009	2008
Net Sales	$	719.3		$	728.6		(1%	)	—	—
Earnings before Interest and Income Taxes		218.1			187.9		16%		30%	26%
Interest Expense—net		(24.3	)		—		—		3%	—
Earnings before Income Taxes		193.8			187.9		3%		27%	26%
Provision for Income Taxes		(55.8	)		(71.9	)	(22%	)	8%	10%
Effective Tax Rate		28.8	%		38.3	%
Net Earnings		138.0			116.0		19%		19%	16%
Less: Net Earnings Attributable to Noncontrolling Interests		(3.5	)		(1.8	)	—		0%	0%
Net Earnings Attributable to Shareholders		134.5			114.2		18%		19%	16%
Weighted Average Common Shares Outstanding – Diluted		204.6			170.0
Earnings per Common Share - Diluted	$	0.66		$	0.67

Net Sales

Sales declined 1% due to a 6% unfavorable foreign exchange impact offset by a 4% increase in pricing and a 1% increase in volume. The majority of the price benefit is a carryover from 2008 price increases. Volume growth was negatively impacted by the operating model change in Brazil as described in “Factors Affecting Comparability.”

Our net sales by reportable segments are shown in the table below:

	Three Months Ended June 30,
							% Change Due to
(Dollars in millions)	2009		2008		% Change		Volume	Price		Foreign     Exchange
Asia/Latin America	$	396.5	$	389.4	2%		1%	9%		(8%)
North America/Europe		322.8		339.2	(5%	)	1%	(3%	)	(3%)
Net Sales	$	719.3	$	728.6	(1%	)	1%	4%		(6%)

Our Asia/Latin America segment represented 55% of net sales for the three months ended June 30, 2009, compared to 53% for the three months ended June 30, 2008. We continue to have strong sales growth in our international markets, particularly in Asia where sales grew by double digits. Our success in the Asia/Latin America segment comes from market growth and market share gains in key countries driven by our investments in product innovation, advertising and product promotion, and an increased sales force. Our strongest performance continues to be in China, which is our second largest market behind the United States. Several other Asian and Latin American countries grew sales by double digits, excluding foreign exchange impacts; however, volume growth in the segment was adversely impacted by the operating model change in Brazil.

The decrease in North America/Europe sales was due to lower sales in the United States as a result of share loss and lower births, partially offset by higher trade inventories associated with new products launched in the United States. The negative change in price

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for the segment was primarily due to return reserve accruals for discontinued products as well as introductory allowances and discounts given on the new products launched in the United States. The decrease in North America/Europe sales was also due to unfavorable foreign exchange impacts and reduced distributor inventory levels in Europe.

We have three product categories: (1) infant formula, (2) children’s nutrition and (3) other. The North America/Europe segment is principally an infant formula market whereas the Asia/Latin America segment sells a balance of infant formula and children’s nutrition products. Our net sales by product category are shown in the table below:

	Three Months Ended June 30,
(Dollars in millions)	2009		2008		% Change
Infant Formula	$	480.5	$	482.7	0%
Children’s Nutrition		214.7		223.5	(4%)
Other		24.1		22.4	8%
Net Sales	$	719.3	$	728.6	(1%)

All categories were negatively impacted by foreign exchange during the quarter. Excluding foreign exchange, infant formula increased 4%, reflecting the mix resulting from lower sales in the North America/Europe segment and growth in the Asia/Latin America segment. Excluding foreign exchange, children’s nutrition increased 5%, which is below the growth rate of the Asia/Latin America segment due to the change in the Brazil operating model.

We recognize revenue net of various sales adjustments to arrive at net sales as reported on the statements of earnings. These adjustments are referred to as gross-to-net sales adjustments. The reconciliation of our gross sales to net sales was as follows:

	Three Months Ended June 30,
(Dollars in millions)	2009		2008		% Change
Gross Sales	$	988.2	$	1,003.2	(1%)
Gross-to-Net Sales Adjustments
WIC Rebates		(187.2)		(202.9)	(8%)
Sales Discounts		(26.6)		(22.3)	19%
Returns		(21.8)		(16.4)	33%
Cash Discounts		(11.5)		(11.5)	0%
Prime Vendor Charge-Backs		(9.7)		(10.0)	(3%)
Coupons and Other Adjustments		(12.1)		(11.5)	5%
Total Gross-to-Net Sales Adjustments		(268.9)		(274.6)	(2%)
Total Net Sales	$	719.3	$	728.6	(1%)

Adjustments as a percentage of gross sales decreased slightly. The decline in WIC rebates is due to the reduction of infant formula vouchers provided by government agencies in select states and a decline in U.S. births. This decline was offset by an increase in sales discounts and returns. The increase in sales discounts was largely concentrated in the United States driven by introductory allowances to support second quarter product launches. Sales returns were higher due to a reserve for discontinued products in the United States compared with the three months ended June 30, 2008.

Gross Profit

	Three Months Ended June 30,
(Dollars in millions)	2009		2008		% Change
Net Sales	$	719.3	$	728.6	(1%)
Cost of Products Sold		236.1		272.3	(13%)
Gross Profit	$	483.2	$	456.3	6%
Gross Margin		67.2%		62.6%

The increase in gross profit and margin was driven by lower commodity costs, the carryover benefit of pricing actions taken in 2008, productivity savings and manufacturing efficiencies.

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Operating Expenses

	Three Months Ended June 30,
					% of Net Sales
(Dollars in millions)	2009	2008		% Change	2009	2008
Operating Expenses:
Marketing, Selling and Administrative	$    154.8	$	152.2	2%	22%	21%
Advertising and Product Promotion	101.6		95.1	7%	14%	13%
Research and Development	18.4		17.4	6%	3%	2%
Other (Income)/Expenses—net	(9.7)		3.7	—	(1%)	1%

Marketing, Selling and Administrative Expenses

The increase in marketing, selling and administrative expenses was due to approximately $8.1 million in additional costs that we now carry as a public company such as legal and audit fees, along with treasury and other functions that were not necessary when we operated as a wholly owned subsidiary of BMS. The increase was also driven by $6.9 million of costs related to our IPO and other separation costs. These increases were offset by a favorable foreign exchange impact, lower distribution costs and productivity savings.

Advertising and Product Promotion Expenses

Our advertising and product promotion expenses are influenced by the timing of key product launches and special promotions. Spending measured as a percent of sales increased in both of our geographic segments, reflecting the timing of new product launches in the United States as well as continued investment in the Asia/Latin America segment.

Research and Development Expenses

The increase in research and development expenses is driven by our growth strategy and initiatives to increase our innovation capability and pipeline.

Other (Income)/Expenses—net

Other (income)/expenses—net for the three months ended June 30, 2009, changed by $13.4 million due primarily to an $11.9 million gain from the sale of a non-strategic intangible asset.

Earnings before Interest and Income Taxes

EBIT from our two reportable segments, Asia/Latin America and North America/Europe, is reduced by corporate and other costs. Corporate and other costs consist of unallocated general and administrative activities and associated expenses, including in part, executive, legal, finance, information technology, human resources, research and development, global marketing and global supply chain costs.

	Three Months Ended June 30,
(Dollars in millions)	2009		2008		% Change
Asia/Latin America	$	146.1	$	119.7	22%
North America/Europe		119.0		119.2	0%
Corporate and Other		(47.0)		(51.0)	(8%)
Total Earnings before Interest and Income Taxes	$	218.1	$	187.9	16%

The increase in EBIT for Asia/Latin America was driven by broad-based sales growth across the segment and improved gross margins, offset by investments in advertising and product promotion and sales force and the adverse impact from foreign exchange.

The North America/Europe segment was flat as the sales decline was offset by improved gross margins.

Expenses for the Corporate and Other segment were reduced in 2009 versus 2008 due to a gain from the sale of a non-strategic intangible asset, partially offset by additional costs that we now carry as a public company as well as non-recurring costs related to our IPO and other separation costs.

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Interest Expense—net

Interest expense—net of $24.3 million primarily represents interest incurred on the $744.2 million 2014 Note, the $500.0 million 2016 Note and the $500.0 million 2019 Note.

Income Taxes

The ETR for the three months ended June 30, 2009, decreased to 28.8% from 38.3% for the three months ended June 30, 2008. The lower rate is primarily attributable to benefits associated with the restructuring of our foreign operations as part of the separation from BMS in the IPO process and the earnings mix in foreign markets.

Net Earnings Attributable to Noncontrolling Interests

Net earnings attributable to noncontrolling interests consists of an 11% interest in MJN China and a 10% interest in MJN Indonesia held by third parties.

Net Earnings Attributable to Shareholders

For the three months ended June 30, 2009, net earnings attributable to shareholders increased $20.3 million, or 18%, to $134.5 million compared with the three months ended June 30, 2008. The increase is primarily due to gross margin improvements and a reduction in the ETR, partially offset by interest expense, the adverse effect of foreign exchange and higher costs incurred as a stand-alone public company.

Six Months Results of Operations

Below is a summary of comparative results of operations and a more detailed discussion of results for the six months ended June 30, 2009 and 2008:

	Six Months Ended June 30,
						% of Net Sales
(In millions, except per share data)	2009		2008		% Change	2009	2008
Net Sales	$	1,412.3	$	1,431.9	(1%)	—	—
Earnings before Interest and Income Taxes		406.9		397.1	2%	29%	28%
Interest Expense—net		(52.3)		—	—	4%	—
Earnings before Income Taxes		354.6		397.1	(11%)	25%	28%
Provision for Income Taxes		(110.0)		(148.6)	(26%)	8%	10%
Effective Tax Rate		31.0%		37.4%
Net Earnings		244.6		248.5	(2%)	17%	17%
Less: Net Earnings Attributable to Noncontrolling Interests		(6.6)		(3.7)	—	0%	0%
Net Earnings Attributable to Shareholders		238.0		244.8	(3%)	17%	17%
Weighted Average Common Shares Outstanding – Diluted		196.7		170.0
Earnings per Common Share – Diluted	$	1.21	$	1.44

Net Sales

Sales declined 1% due to a 7% unfavorable foreign exchange impact offset by a 6% increase in pricing. While we raised prices during the first half of 2009 in certain countries, the majority of the price benefit is a comparative carryover from 2008 price increases.

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Our net sales by reportable segments are shown in the table below:

	Six Months Ended June 30,
						% Change Due to
(Dollars in millions)	2009		2008		% Change	Volume	Price	Foreign       Exchange
Asia/Latin America	$	786.3	$	738.6	6%	4%	12%	(10%)
North America/Europe		626.0		693.3	(10%)	(6%)	(1%)	(3%)
Net Sales	$	1,412.3	$	1,431.9	(1%)	(0%)	6%	(7%)

Our Asia/Latin America segment represented 56% of net sales for the six months ended June 30, 2009, compared to 52% for the six months ended June 30, 2008. We continue to have strong sales growth in our international markets, particularly in Asia where sales grew by double digits. Our success in the Asia/Latin America segment comes from market growth as well as market share gains driven by our investments in product innovation, advertising and product promotion and sales force. Our strongest performance continues to be in China, which is our second largest market behind the United States. Several other Asian and Latin American countries grew sales by double digits, excluding foreign exchange impacts; however, volume growth in the segment was adversely affected by the operating model change in Brazil.

The decrease in North America/Europe sales was primarily due to sales declines in the United States as a result of market share losses and a decline in births.

We have three product categories: (1) infant formula, (2) children’s nutrition and (3) other. The North America/Europe segment is principally an infant formula market whereas the Asia/Latin America segment sells a balance of infant formula and children’s nutrition products. Our net sales by product category are shown in the table below:

	Six Months Ended June 30,
(Dollars in millions)	2009		2008		% Change
Infant Formula	$	931.2	$	965.4	(4%)
Children’s Nutrition		434.0		420.0	3%
Other		47.1		46.5	1%
Net Sales	$	1,412.3	$	1,431.9	(1%)

All categories were adversely affected by foreign exchange during the quarter. Excluding foreign exchange, infant formula increased 1% reflecting the mix between the lower growth North America/Europe and the higher growth Asia/Latin America segments. Excluding foreign exchange, children’s nutrition increased 14%, which is below the growth rate of the Asia/Latin America segment due to the change in the Brazil operating model.

We recognize revenue net of various sales adjustments to arrive at net sales as reported on the statements of earnings. These adjustments are referred to as gross-to-net sales adjustments. The reconciliation of our gross sales to net sales was as follows:

	Six Months Ended June 30,
(Dollars in millions)	2009		2008		% Change
Gross Sales	$	1,940.9	$	1,976.1	(2%)
Gross-to-Net Sales Adjustments
WIC Rebates		(381.7)		(400.0)	(5%)
Sales Discounts		(49.2)		(41.5)	19%
Returns		(36.8)		(29.3)	26%
Cash Discounts		(22.2)		(23.0)	(3%)
Prime Vendor Charge-Backs		(20.0)		(21.6)	(7%)
Coupons and Other Adjustments		(18.7)		(28.8)	(35%)
Total Gross-to-Net Sales Adjustments		(528.6)		(544.2)	(3%)
Total Net Sales	$	1,412.3	$	1,431.9	(1%)

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Adjustments as a percentage of gross sales decreased slightly. The decline in WIC rebates is due to the reduction of infant formula vouchers provided by government agencies in select states and a decline in U.S. births. The decline in coupons and other adjustments is driven by coupon activity in the United States. This decline was offset by an increase in sales discounts and returns. Sales discounts increased due to revenue growth in Asia and introductory allowances associated with new product launches in the United States. Sales returns were higher due to a reserve for discontinued products in the United States compared with the six months ended June 30, 2008.

Gross Profit

	Six Months Ended June 30,
(Dollars in millions)	2009		2008		% Change
Net Sales	$	1,412.3	$	1,431.9	(1%)
Cost of Products Sold		483.7		524.1	(8%)
Gross Profit	$	928.6	$	907.8	2%
Gross Margin		65.8%		63.4%

The increase in gross profit and margin was driven by the carryover benefit of pricing actions taken in 2008, lower commodity costs, productivity savings and manufacturing efficiencies, offset by the higher growth lower margin Asia/Latin America segment compared with the lower growth higher margin North America/Europe segment.

Operating Expenses

	Six Months Ended June 30,
							% of Net Sales
(Dollars in millions)	2009		2008		% Change		2009	2008
Operating Expenses:
Marketing, Selling and Administrative	$	318.2	$	291.1	9%		23%	20%
Advertising and Product Promotion		177.5		179.3	(1%	)	13%	13%
Research and Development		33.7		33.7	0%		2%	2%
Other Expenses—net		(7.7)		6.6	—		1%	0%

Marketing, Selling and Administrative Expenses

The majority of the increase in marketing, selling and administrative expenses was due to $24.1 million of non-recurring costs related to our IPO. The increase was also driven by approximately $13.8 million in additional costs that we now carry as a public company such as legal and audit fees, along with treasury and other functions that were not necessary when we operated as a wholly owned subsidiary of BMS. Our investment in our sales force and geographic expansion in China also contributed to the increase. These increases were offset by a favorable foreign exchange impact and savings in distribution costs.

Advertising and Product Promotion Expenses

Our advertising and product promotion expenses are influenced by the timing of our key product launches and special promotions. As a percentage of sales, advertising and product promotion expenses were essentially flat.

Research and Development Expenses

Research and development expenses remained constant as compared to the prior period as increases in local currency spending were offset by foreign exchange fluctuations. We expect these expenses for the full year of 2009 to exceed the amounts in 2008 as we continue our growth strategy and initiatives to increase our innovation capability and pipeline.

Other (Income)/Expenses—net

Other (income)/expenses—net for the six months ended June 30, 2009, changed by $14.3 million due primarily to a favorable patent settlement of $10.0 million and gain on sale of a non-strategic intangible asset of $11.9 million, offset by severance charges of $7.6 million.

Earnings before Interest and Income Taxes

EBIT from our two reportable segments, Asia/Latin America and North America/Europe, is reduced by corporate and other costs. Corporate and other costs consist of unallocated general and administrative activities and associated expenses, including in part, executive, legal, finance, information technology, human resources, research and development, global marketing and global supply chain costs.

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	Six Months Ended June 30,
(Dollars in millions)	2009		2008		% Change
Asia/Latin America	$	294.8	$	251.2	17%
North America/Europe		220.2		242.0	(9%)
Corporate and Other		(108.1)		(96.1)	12%
Total Earnings before Interest and Income Taxes	$	406.9	$	397.1	2%

The increase in EBIT for Asia/Latin America was driven by broad-based sales growth across the segment and improved gross margins, offset by the investments in advertising and product promotion and sales force and the adverse impact from foreign exchange.

The decrease in EBIT for North America/Europe was primarily due to lower sales partially offset by improved gross margins.

The change in EBIT for Corporate and Other was principally due to $24.1 million in expenses related to our IPO and separation from BMS, and $7.6 million in severance costs, offset by a $10.0 million favorable patent settlement and an $11.9 million gain on sale of a non-strategic intangible asset.

Interest Expense—net

Interest expense—net of $52.3 million primarily represents interest incurred on the $2.0 billion intercompany note payable issued in August 2008 and restructured into three senior unsecured related-party notes with an aggregate principal amount of $1,744.2 million, on February 17, 2009.

Income Taxes

The ETR for the six months ended June 30, 2009, decreased to 31.0% from 37.4% for the six months ended June 30, 2008. The lower rate is attributable primarily to benefits associated with the restructuring of our foreign operations as part of the separation from BMS in the IPO process and the earnings mix in foreign markets.

The U.S. Administration has proposed reforms to the international tax laws that if adopted may increase taxes and reduce the Company’s results of operations and cash flows.

Net Earnings Attributable to Noncontrolling Interests

Net earnings attributable to noncontrolling interests consists of an 11% interest in MJN China and a 10% interest in MJN Indonesia held by third parties.

Net Earnings Attributable to Shareholders

For the six months ended June 30, 2009, net earnings attributable to shareholders decreased $6.8 million, or 3%, to $238.0 million compared with the six months ended June 30, 2008. The decrease is primarily due to interest expense, the adverse effect of foreign exchange and higher costs incurred as a stand-alone public company, partially offset by gross margin improvements and a reduction in the ETR.

Financial Position, Liquidity and Capital Resources

Overview

Our primary sources of liquidity are cash from operations and available borrowings under our $410.0 million revolving credit facility. Cash flows from operating activities represent the inflow of cash from our customers and the outflow of our cash for inventory purchases, operating expenses, interest and taxes. Cash flows used in investing activities primarily represent capital expenditure for maintenance, equipment, buildings and computer software. Cash flows used in financing activities historically have represented the transfer of cash to BMS. In 2009, cash flows from financing activities primarily represent activities related to the IPO and separation from BMS. Going forward, cash flows from financing activities will reflect any borrowings, repayment of debt and dividend payments. The declaration and payment of dividends is at the discretion of our board of directors and depends on many factors, including our financial condition, earnings, legal requirements, restrictions in our debt agreements and other factors our board of directors deem relevant. On June 23, 2009, our board of directors declared a dividend of $0.20 per share for the quarter ending June 30, 2009, and a $0.10 per share dividend prorated for the period from settlement of our IPO through March 31, 2009. The combined $0.30 per share dividend was paid on July 20, 2009, to shareholders of record on July 6, 2009.

Prior to the IPO, we did not report cash or cash equivalents on our balance sheet and BMS managed the treasury relationships for receiving and disbursing cash to cover all cash flow activity from operations and investing activities. Following the IPO, we assumed responsibility for our treasury function, including the management and reporting of cash and cash equivalents, with support services

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provided by BMS under the Transition Services Agreement. We believe that cash from operations will be sufficient to support our working capital needs, pay our operating expenses, satisfy debt obligations, fund capital expenditures and make dividend payments. In addition, we have $410.0 million available to us under our revolving credit facility. There were no borrowings outstanding under the revolving credit facility as of June 30, 2009.

	Six Months Ended June 30,
(Dollars in millions)	2009		2008
Cash flow provided by/(used in):
Operating Activities	$	321.3	$	245.3
Investing Activities		(29.0)		(26.0)
Financing Activities		277.2		(219.3)
Effects of Changes in Exchange Rates on Cash and Cash Equivalents		7.4		-
Net Increase in Cash and Cash Equivalents	$	576.9	$	-

Cash flow provided by operating activities increased $76.0 million primarily due to a $52.6 million decrease in net current assets and liabilities in 2009 compared with a $40.8 million increase in net current assets and liabilities in 2008. The decrease in net current assets and liabilities in 2009 is attributable to increases in taxes payable, lower commodity costs and working capital improvement initiatives affecting inventory and accounts payable. The increase in net current assets and liabilities in 2008 is primarily attributable to inventory. Net cash used in investing activities increased slightly due to a $15.0 million increase in capital expenditures largely offset by an $11.9 million cash inflow before taxes related to the sale of a non-strategic intangible asset. The increase in cash flow provided by financing activities was due to the $782.3 million net cash proceeds from the IPO and a $97.7 million net transfer from BMS offset by, a $602.8 million repayment of related party debt. The net transfer from BMS included in financing activities consisted mainly of a $286.0 million cash contribution from BMS offset by a $176.8 million settlement of related party payables.

Cash flow provided by operating activities includes $85.4 million paid to BMS for interest expense and corporate services. Of this amount, $59.3 million of interest expense was paid from the IPO proceeds and $9.6 million of interest and $16.5 million for corporate services was paid post-IPO through June 30, 2009. In the remainder of the year, we will make cash payments to BMS for interest, debt amortization, corporate services provided under the Transitional Service Agreement, U.S. income taxes and dividends in addition to payments under local operating and service arrangements.

Capital Expenditures

Our capital expenditures were $33.8 million for the six months ended June 30, 2009. The cash outflow for capital expenditures was $41.8 million, reflecting additions and the net reduction in accounts payables for capital expenditures. We expect our capital expenditures to increase for the remainder of 2009 to support an expansion of our research and development facilities, additions to manufacturing capability and the initial investments in new information technology systems.

Debt

On August 26, 2008, MJN declared and issued a dividend in the form of a 10-year intercompany note to BMS in the amount of $2.0 billion, which was recorded as a reduction of equity. The note had an annual interest rate of 6.1% with interest payments settled no less than annually.

On February 17, 2009, this related party note payable was amended and restructured into three separate notes. The terms of these related party notes payable are detailed in the table below:

Description	Principal Amount	Interest Rate	Terms
2014 Note	$744.2 million	LIBOR + 3.0%     per annum	Annual amortization of $75.0 million payable in quarterly installments 2010 to 2014, remaining principal due on February 17, 2014
2016 Note	$500.0 million	6.43% fixed	Interest due semi-annually, not subject to amortization, aggregate principal due on February 17, 2016
2019 Note	$500.0 million	6.91% fixed	Interest due semi-annually, not subject to amortization, aggregate principal due on February 17, 2019

On January 31, 2009, Mead Johnson Venezuela, S.C.A., a wholly owned indirect subsidiary of MJN, issued a note payable with the local currency equivalent of $5.8 million to Bristol-Myers Squibb de Venezuela S.C.A., a wholly owned subsidiary of BMS. During the second quarter, this note payable was paid in full.

On January 31, 2009, Mead Johnson Nutricionales de Mexico, S. De R.L. de C.V., a subsidiary of MJN, entered into an agreement with BMS to lease all of the property, plant and equipment assets at the manufacturing facility in Delicias, Mexico, for 20 years. This facility is included in the financial statements of the Company for all periods. The lease qualifies as a capital lease, and MJN will

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continue to carry the property, plant and equipment in the Company’s financial statements. The Company recorded a lease liability of $41.5 million, representing the present value of the minimum lease payments set forth by the lease agreement. The liability is being amortized over the lease term.

Some MJN entities maintain short-term lines of credit with the BMS treasury center in Europe for short-term working capital needs. The borrowings bear interest at a rate of LIBOR, or the appropriate currency equivalent, plus 0.77% per annum and are repayable at any time. As of June 30, 2009, the outstanding balance under these lines of credit was $7.2 million.

Revolving Credit Facility Agreement

On February 17, 2009, we entered into a three-year syndicated revolving credit facility agreement (Credit Facility). The Credit Facility is unsecured and repayable on maturity in February 2012, subject to annual extensions if sufficient lenders agree. The maximum amount of outstanding borrowings and letters of credit permitted at any one time under the facility agreement is $410.0 million, which amount may be increased from time to time up to $500.0 million at our request and with the consent of the lenders, subject to customary conditions contained in the Credit Facility. The proceeds of the Credit Facility are to be used for working capital and other general corporate purposes.

Borrowings under the Credit Facility bear interest either at (a) LIBOR for specified interest periods plus a margin determined with reference to our consolidated leverage ratio, or (b) a floating rate based upon JPMorgan Chase Bank’s prime rate, the Federal Funds rate or LIBOR plus, in each case, a margin determined with reference to our consolidated leverage ratio. The margin on the borrowings can range from 1.125% to 2.65% over the applicable base.

Our subsidiaries may become borrowers under the Credit Facility.

The Credit Facility contains customary covenants, including covenants applicable to us limiting liens, substantial asset sales and mergers. Most of these restrictions are subject to certain minimum thresholds and exceptions. The Credit Facility also contains the following financial covenants:

•        We are required to maintain a ratio of (a) consolidated total debt to (b) consolidated Earnings Before Interest, Income Taxes, Depreciation and Amortization (EBITDA) of not greater than 3.25 to 1.0. Compliance with this covenant is tested on the last day of each fiscal quarter and as a condition precedent to each credit extension under the Credit Facility.

•        We are required to maintain a ratio of (a) consolidated EBITDA to (b) consolidated interest expense of at least 3.00 to 1.00. Compliance with this covenant is tested on the last day of each fiscal quarter for the preceding four consecutive fiscal quarters.

In addition, the Credit Facility has customary events of default, including (subject to certain materiality thresholds and grace periods) payment default, failure to comply with covenants, material inaccuracy of representation or warranty, bankruptcy or insolvency proceedings, change of control, ERISA matters and cross-default to other debt agreements. The Company was in compliance with all debt covenants as of June 30, 2009.

Contractual Obligations and Commitments

On August 7, 2009, the Company entered into a master services agreement with IBM for information technology, finance and indirect procurement services and for the design and implementation of a global Enterprise Resource Planning system. For discussion of this agreement, see “Item 1. Financial Statements, Notes to the Consolidated Financial Statements, 18. Subsequent Event.” For further discussion of the Company’s contractual obligations, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s 2008 Annual Report on Form 10-K (2008 Form 10-K).

Critical Accounting Policies

For a discussion of the Company’s critical accounting policies, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s 2008 Form 10-K.

Special Note Regarding Forward-Looking Statements

This quarterly report on Form 10-Q and other written and oral statements 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 in connection with any discussion of future operating or financial performance. You can also identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. Such forward-looking statements are based on current expectations and involve inherent risks and uncertainties, including factors that could delay, divert or change any

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of them, and could cause actual outcomes to differ materially from current expectations. These statements are likely to relate to, among other things, the Company’s goals, plans and projections regarding its financial position, results of operations, cash flows, market position, product development, product approvals, sales efforts, expenses, performance or results of current and anticipated products and the outcome of contingencies such as legal proceedings and financial results, which are based on current expectations that involve inherent risks and uncertainties, including internal or external factors that could delay, divert or change any of them in the next several years. The Company has included important factors in the cautionary statements included in its 2008 Form 10-K and in this quarterly report, particularly under “Item 1A. Risk Factors,” that the Company believes could cause actual results to differ materially from any forward-looking statement.

Although the Company believes it has been prudent in its plans and assumptions, we can give no assurance that any goal or plan set forth in forward-looking statements can be achieved and we caution readers not to place undue reliance on such statements, which speak only as of the date made. The Company undertakes no obligation to release publicly any revisions to forward-looking statements as a result of new information, future events or otherwise.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

There is no material change in the information reported under Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” contained in the Company’s 2008 Form 10-K.

ITEM 4. Controls and Procedures

Disclosure Controls and Procedures. Under the supervision and with the participation of our management, including the Chief Executive Officer and the Chief Financial Officer of the Company (its principal executive officer and principal financial officer, respectively), we have evaluated our disclosure controls and procedures (as defined in the Securities Exchange Act Rule 13a-15(e)) as of June 30, 2009. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting. There has been no change in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ended June 30, 2009, 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 “Item 1. Financial Statements—Note 16. Legal Proceedings and Contingencies,” to the interim consolidated financial statements, and is incorporated by reference herein.

ITEM 1A. Risk Factors

There have been no material changes from the risk factors disclosed in the Company’s 2008 Form 10-K.

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ITEM 6. Exhibits

EXHIBIT INDEX

EXHIBIT NO.
31.1	Rule 13a-15(e) and 15(d)-15(e) Certification of the President and Chief Executive Officer.
31.2	Rule 13a-15(e) and 15(d)-15(e) Certification of the President and Chief Financial Officer.
32.1	Certification of the Chief Executive Officer and President 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.

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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: August 13, 2009		By: /s/ Stanley D. Burhans
			Stanley D. Burhans Vice President and Controller and Chief Accounting Officer

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