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Mead Johnson Misses Q3 Earnings, Revenues; Guides Low

Mead Johnson Nutrition CompanyMJN reported third-quarter 2015 results with adjusted earnings per share (EPS) of 80 cents, missing the Zacks Consensus Estimate by a nickel. Adjusted earnings also dropped from the prior-year quarter number by 14%.

Including the impact of certain one-time items, reported net earnings came in at $155.2 million or 77 cents per share, down 17.3% or 16.3% year over year, respectively.

Net Sales

Net sales in the reported quarter totaled $0.978 billion, down 10.4% y/y (down 4% at constant exchange rate or CER). The top line also missed the Zacks Consensus Estimate of $1.041 billion.

Volume adversely affected sales in the reported quarter by 4%. Foreign exchange also adversely impacted sales by 6%. However, pricing had no impact on third quarter's sales.

Segments in Detail

Currently, the company has three reportable segments - Asia, Latin America and North America/Europe.

Sales in Asia (representing 48.8% of total sales) declined 15% y/y (down 11% at CER) to $476.8 million. While volume adversely affected this segment's revenue by 7%, foreign exchange impacted sales by 4%. Pricing too weighed on the segment's sales by 4%. In China, although price-based promotional activities were observed across all channels, weakness in demand for locally manufactured products was a challenge.

In Latin America (18.9%), sales dropped 17% y/y (down 1% at CER) to $184.5 million. Foreign exchange adversely affected this segment's growth significantly by 16% while volume affected to the tune of 5%. However, pricing gains in the overall segment contributed 5% growth to this segment's sales, which partially offset the negatives.

In North America/Europe (32.3%), sales grew 3% (up 7% at CER) to $316.2 million, driven by 4% pricing improvement and 3% volume improvement. However, foreign exchange adversely impacted this segment's sales by 4%. Sales growth was mainly driven by market share gains and favorable market conditions in the U.S. and Canada.

Margins

Adjusted gross margin during the reported quarter expanded 480 basis points (bps) to 64.9%, owing to lower dairy costs which benefited all segments.

Adjusted operating margin expanded 330 bps y/y to 25%, on account of a 10% drop in adjusted selling, general and administrative expenses to $209.2 million, 1.8% decline in adjusted advertising and promotion-related expenses to $156.1 million, and a 9.7% drop in adjusted research and development expenses to $25.1 million.

Balance Sheet and Cash Flow

Mead Johnson exited the quarter with cash and cash equivalents of $1.364 billion, compared with $1.298 billion as of Dec 31, 2014. Long-term debt was $1.839 billion, compared with $1.504 billion of Dec 31, 2014. As of Sep 30, 2015, the company generated operating cash flow of $608.9 million, reflecting a significant improvement from the year-ago equivalent of $564.9 million.

Updated Guidance

Mead Johnson has reduced its adjusted EPS guidance for full-year 2015. The company now expects adjusted EPS in the range of $3.33-$3.43, down from the prior range of $3.63-$3.78. The current Zacks Consensus Estimate for EPS of $3.64 lies much above the company's guided range.

Moreover, the company now expects revenues to decline by 2-3% at CER (down from the previous estimate of 0-2% growth at CER). Including the estimated impact of foreign exchange, reported sales are expected to decline by 7% to 8% below the prior-year level, down from the earlier estimated 2-4% year-over-year sales growth. The current Zacks Consensus Estimate for 2015 revenues is pegged at $4.245 billion.

Our Take

Mead Johnson posted dismal financial numbers in the third quarter of 2015, missing the Zacks Consensus Estimate on both lines. The company's segmental performance was also considerably weak. Moreover, Mead Johnson's near-term challenges in its emerging market segments are expected to continue in 2016 as well. This, along with the company's reduced EPS guidance for 2015, disappoints us.

However, on an encouraging note, during the third quarter, the company witnessed strong performance in its recently introduced fully imported range of products in China. We may thus expect the company to deliver positive growth in China in the quarters ahead.

Although adverse foreign exchange headwind continues to weigh on the company's performance, we believe Mead Johnson's diverse geographic portfolio that has earlier enabled the company to deliver continued solid revenue growth in a challenging global economic environment, will eventually help it return to a positive growth trajectory, going ahead.

Zacks Rank

Currently, Mead Johnson has a Zacks Rank #4 (Sell). Some better-ranked medical stocks are Masimo Corporation MASI , EDAP TMS SA EDAP and Cesca Therapeutics Inc. KOOL . All the three stocks sport a Zacks Rank #1 (Strong Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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