Mead Johnson Nutrition Co. (NYSE: MJN) announced its financial results for the quarter ended March 31, 2014.
- First quarter sales of $1,113.3 million increased seven percent from $1,037.9 million in the prior-year quarter. Sales were up 11 percent on a constant dollar basis.
- Sales for the Asia and North America/Europe segments each grew nine percent, while the Latin America segment grew 21 percent, all on a constant dollar basis. Venezuela and Argentina price increases, which helped mitigate the unfavorable impact of weaker local currencies, contributed 10 percent to the segment's growth and two percent to overall company growth.
- In the first quarter of 2014, MJN adopted mark-to-market accounting (“MTM”) for all of its defined benefit pension and other post-employment benefit plans (“New Pension Accounting”). As such, all results and prior year comparisons have been recast. See the company's Form 10-Q for the first quarter of 2014 for details regarding the impact of this change.
- Following the New Pension Accounting change, GAAP net earnings of $1.00 per diluted share for the first quarter of 2014 were up from $0.92 per diluted share a year ago. Earnings increased from higher sales volume and pricing, along with a favorable tax rate, offset in part by the impact of a stronger dollar, higher demand-generation investments and the impact of a 2013 pension MTM actuarial gain.
- Non-GAAP net earnings of $1.02 per diluted share for the first quarter of 2014 increased from $0.88 per diluted share in 2013.
- For full-year 2014, GAAP net earnings are now expected to be between $3.54 and $3.66 per diluted share compared to the previously reported range of $3.44 to $3.56 per diluted share. Possible future quarterly and annual pension MTM actuarial gains or losses are not reflected in the current GAAP guidance because they cannot be estimated with certainty. Non-GAAP net earnings in 2014 are now expected to be between $3.60 and $3.72 per diluted share compared to the previously reported range of $3.50 to $3.62 per diluted share. Of the expected $0.10 increase in earnings per share, approximately two-thirds is attributed to the New Pension Accounting with the remainder the result of stronger anticipated operational performance. To provide a better view of underlying operational performance, pension MTM actuarial gains or losses will be treated as a Specified Item.
“We achieved record sales and earnings in the quarter,” said Chief Executive Officer Kasper Jakobsen. “Sales growth was strong across all segments, including within our two largest markets. With innovations launched last year and increased investment in demand creation, we continued to see market share gains in all three segments. We invested appropriately to support future growth, while delivering 16 percent growth in earnings per share on a non-GAAP basis.”
First quarter results
Sales for the first quarter of 2014 were $1,113.3 million, up seven percent from $1,037.9 million a year ago. Sales increased seven percent from volume and four percent from price, partially offset by a four percent decline from foreign exchange. Gross margin for the first quarter of 2014 was 63.6 percent, up from 62.9 percent in the first quarter of the prior year. The gross margin improvement was due to pricing and productivity gains, somewhat offset by higher dairy costs. Advertising and promotion investments grew in line with sales growth. Operating expenses were higher mainly due to the impact of a 2013 pension MTM actuarial gain not repeated in 2014. Earnings before interest and income taxes (“EBIT”) totaled $291.2 million, up from $273.5 million in the prior-year quarter.
The company’s effective tax rate (“ETR”) was 25.5 percent in the first quarter, compared to 26.7 percent in the prior-year quarter. The ETR improvement was primarily attributed to a change in the geographic earnings mix.
Net earnings attributable to shareholders totaled $202.4 million, or $1.00 per diluted share, in the first quarter of 2014, compared to $188.0 million, or $0.92 per diluted share, in the prior-year quarter.
On a non-GAAP basis, which excludes Specified Items, net earnings attributable to shareholders totaled $206.1 million, or $1.02 per diluted share, for the first quarter of 2014, compared to $179.9 million, or $0.88 per diluted share, for the same quarter a year ago.
First quarter segment results
The Asia segment reported sales of $592.7 million for the first quarter of 2014, up seven percent from $554.2 million in the prior-year quarter. Sales increased six percent from volume and three percent from price, reduced by two percent from foreign exchange. Volume growth was driven by category growth and market share gains. Several Asian markets, including China, saw a continued benefit from competitors' supply disruptions that occurred in 2013. EBIT for the Asia segment totaled $241.3 million in the first quarter of 2014, up from $221.6 million for the same quarter a year ago. The increase in EBIT was mainly driven by higher sales.
The Latin America segment reported sales of $212.4 million for the first quarter of 2014, up six percent from $201.1 million in the same period of the prior year. Sales increased 11 percent from price and 10 percent from volume offset by a 15 percent foreign exchange decline. Price increases in Venezuela and Argentina substantially mitigated the unfavorable sales impact from weaker local currencies in both markets. Volume growth was driven by share gains across most markets and continued category growth. Operating expenses were up due to a receivable allowance for a pharmacy distributor in Mexico and a Venezuelan balance sheet remeasurement loss. Effective February 28, 2014, the company adopted the Venezuelan government-supported rate, commonly referred to as SICAD I. EBIT for the Latin America segment totaled $46.6 million in the first quarter of 2014, from $47.0 million for the same quarter a year ago.
The North America/Europe segment reported sales of $308.2 million for the first quarter of 2014, up nine percent from $282.6 million in the first quarter of 2013. Sales increased seven percent from volume and two percent from price. Volume growth was primarily in the U.S. driven by an expanding children's nutrition business, non-WIC market share gains and retailer inventory adjustments. Gross margin improved from pricing, manufacturing efficiencies and timing of WIC accruals. Higher demand-generation spending helped to drive growth in children's nutrition products. EBIT for the North America/Europe segment totaled $66.1 million in the first quarter of 2014, up 25 percent from $52.9 million in the first quarter a year ago.
Corporate and Other expenses increased mainly due to legal costs and the impact of a 2013 pension MTM actuarial gain not repeated in 2014.
Outlook for 2014
“We now anticipate constant dollar sales growth of approximately eight percent for the full year 2014, up from seven percent in our prior guidance, on expected stronger revenue momentum,” Mr. Jakobsen said. “We are planning for higher demand-generating investments throughout the remainder of the year, despite foreign exchange pressure on our earnings.” With the New Pension Accounting changes and stronger underlying business performance, the company has raised guidance and expects full-year non-GAAP EPS to be in the range of $3.60 to $3.72 per diluted share.