Mead Johnson Nutrition Company (MJN), a renowned provider of pediatric nutritional products, reported fourth-quarter 2014 results with adjusted earnings per share (EPS) of 92 cents, ahead of the Zacks Consensus Estimate by 4 cents. The adjusted result also exceeded the prior-year quarter number by a dime.
Including the impact of certain one-time items, reported net earnings came in at $158.4 million or 78 cents per share, up 4% year over year for both figures.
Net Sales
Net sales in the reported quarter totaled $1.094 billion, up 3.2% y/y (up 8% at constant currency). However, the top line missed the Zacks Consensus Estimate of $1.103 billion. Volume and price positively impacted sales in the reported quarter by 3% and 5%, respectively, which was partially offset by 5% unfavorable foreign exchange impact.
Segments in Detail
Currently, the company has three reportable segments – Asia, Latin America and North America/Europe.
Sales in Asia (representing 50.1% of total sales) increased 0.8% y/y (up 3% at cc) to $548.6 million owing to 5% increase in price. However, a 2% decline in volume negatively impacted sales growth in this geographical segment. Foreign exchange also adversely impacted sales growth by 2%.
The segment's growth was also influenced by strong comparison, since in the fourth quarter of 2013, the company had benefited from competitors' supply disruptions in China.
In Latin America (19%), sales dropped 3.7% y/y (up 14% at cc) to $207.8 million. Despite a 3% rise in volume and 11% in price, foreign exchange adversely impacted sales growth by 18%. Notably in Venezuela and Argentina, price increases were not sufficient enough to outweigh the impact of currency depreciation.
In North America/Europe (30.9%), sales were up 12.3% (up 14% at cc) to $337.8 million. In this region, sales increased owing to 11% rise in volume and 3% in price. Sales growth in this segment was primarily driven by Mead Johnson's infant formula market share gains, expanding children's business and U.S. retailer inventory increases in the fourth quarter.
Margins
Adjusted gross margin during the reported quarter contracted 120 basis points (bps) to 61.9%. This deterioration in the fourth quarter's gross margin was primarily driven by higher dairy input costs and adverse foreign exchange.
Adjusted operating margin expanded 190 bps y/y to 23.7% on account of 0.7% drop in selling, general and administrative expenses to $239.7 million, and 11.6% decline in advertising and promotion related expenses to $149.5 million. However, research and development expenses increased 2.9% to $28.6 million.
Balance Sheet and Cash Flow
Mead Johnson exited 2014 with cash and cash equivalents of $1.297 billion, up 23.5% from the year-ago equivalent, and had long-term debt of $1.504 billion, compared with the year-ago number of $1.009 billion. As of Dec 31, 2014, the company generated operating cash flow of $793.4 million compared with the year-ago equivalent number of $806.6 million.
Guidance
Mead Johnson has provided its full-year 2015 financial guidance. The company expects adjusted EPS to lie in the range of $3.90 to $4.00. The current Zacks Consensus Estimate for EPS is pegged at $4.13, which lies above the company's guided range.
Moreover, the company expects 3% sales growth for 2015, which includes adverse foreign exchange of 4%. The current Zacks Consensus Estimate for 2015 revenues is pegged at $4.693 billion.
Our Take
Mead Johnson posted mixed financial results in the fourth quarter of 2014. The company achieved positive sales growth in two of its three segments, while sales growth in Asia was not up to the mark owing to Mead Johnson's weak performance in China. However, management seems pleased with the strong volume growth the company achieved in North America/Europe and Latin America segments, which helped mitigate lower growth in China/Hong Kong.
It is worth noting that Mead Johnson's business in the U.S. market performed especially well as the company gained market share and expanded its children's business in the region. As the company enters 2015, management expects to face significant headwinds from a strengthening dollar and anticipates earnings to remain partially exposed to currency fluctuations. However management expects lower commodity costs will allow the company to improve gross margins and invest incrementally on its brands.
Moreover, we believe it is Mead Johnson's diverse geographic portfolio that has allowed the company to deliver continued solid revenue growth in a challenging global economic environment.
Zacks Rank
Currently, Mead Johnson has a Zacks Rank #3 (Hold).
Some Better-ranked medical products stocks are ICU Medical, Inc. (ICUI), Nxstage Medical, Inc. (NXTM) and Phibro Animal Health Corp. (PAHC). All these stocks sport a Zacks Rank #1 (Strong Buy).
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