Mead Johnson (MJN) Lags Q1 Earnings, Awaits Merger Closure

Mead Johnson Nutrition Company (NYSE:MJN) reported first-quarter 2017 adjusted earnings per share (EPS) of 80 cents at constant exchange rate or CER, down 8% year over year. The figure also missed the Zacks Consensus Estimate by a couple of cents.

Including the impact of certain one-time items, reported net earnings were 65 cents per share, up 66.6% year over year.

Net Sales

Net sales in the reported quarter were $883.5 million, down 8.2% year over year (down 5% year over year at CER). The top line also missed the Zacks Consensus Estimate of $930 million.

Sales in the reported quarter were affected by lower volume and unfavorable foreign exchange rate.

Segments in Detail

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

Sales in Asia (representing 49% of total sales) declined 13% year over year (down 10% at CER) to $434.1 million due to volume decline and adverse foreign exchange fluctuations. Buisness in China was impacted by lower cross-border trade, reduced demand for locally manufactured products and decreased promotional activities related to the Chinese New Year.

Such downsides were partially offset by improved market share within growing channels, including the successful launch of imported premium products and a shift to e-commerce in the Hong Kong channel. Market share weakness and retail inventory adjustments continued to negatively impact sales volume, particularly in the Philippines.

In Latin America (18%), sales declined 3% year over year (up 6% at CER) to $156.2 million. Sales were affected by adverse foreign exchange, mainly in Mexico. Price increases across the segment, most noticeably in Mexico, more than offset the impact of market share losses following competitive pricing in Colombia.

In North America/Europe (33%), sales dropped 3% to $293.2 million (down 2% at CER). Sales in the U.S. were below the prior-year quarter level due to market share weakness in the current year and the favorable timing of 2016 retail shipments. In the U.S., price increases taken in the second quarter of 2016 benefited the first quarter 2017 comparison. In Canada, sales of infant products increased from the prior-year quarter.

Margins

Gross margin during the reported quarter was 62.6%, down 124 basis points (bps). Benefits from lower dairy costs and price increases were offset by higher costs for new premium products, increased trade investments and adverse foreign exchange.

Adjusted operating margin contracted 464 bps year over year to 20.1% on account of a 5.6% drop in advertising and promotion expenses. However, there has been a 2.6% drop in selling, general and administrative and 16% decline in research and development expenses.

Balance Sheet and Cash Flow

Mead Johnson exited the first quarter of 2017 with cash and cash equivalents of $1.72 billion, compared with $1.79 billion at the end of fiscal 2016. Long-term debt was $2.97 billion at the end of Mar 31, 2016, reflecting a decline from $2.98 billion recorded at the end of 2016. The company generated operating cash flow of $196.4 million at the end of the first quarter of 2017, compared with $160.1 million at the end of 2016.

Proposed Merger Update

We take note that on Feb 10, 2017, Mead Johnson had reached an agreement to be acquired by Reckitt Benckiser Group plc, a leading consumer health and hygiene company. The total transaction value of the deal has been fixed at $17.9 billion, which includes Mead Johnson’s net debt of $1.2 billion as of Dec 31, 2016. The deal, which has already been unanimously approved by Mead Johnson’s board of directors, is expected to close in the third quarter of 2017, subject to certain customary closing conditions.

In view of the proposed merger agreement, Mead Johnson has not provided any update to its 2017 guidance and will also not report subsequent financial results.

Our Take

Mead Johnson’s first-quarter report was quite disappointing, with both the top and the bottom line missing the Zacks Consensus Estimate. The company’s sales were quite dismal, with each of its segments posting weak numbers. In emerging markets, turmoil in Mexico and Colombia dented overall growth. Foreign currency also remained a major dampener across all regions.

On a brighter note, lower dairy input costs boosted gross margin at CER. Management is looking forward to benefits from the proposed merger with Reckitt Benckiser, including gains from scale and potential geographic expansion to help strengthen Mead Johnson’s business.

Zacks Rank & Key Picks

Mead Johnson currently has a Zacks Rank #3 (Hold). Better-ranked stocks in the broader Medical space include Inogen, Inc. (NASDAQ:INGN) , ZELTIQ Aesthetics, Inc. (NASDAQ:ZLTQ) and Hill-Rom Holdings, Inc. (NYSE:HRC) . While Inogen and ZELTIQ Aesthetics sport a Zacks Rank #1 (Strong Buy), Hill-Rom carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Inogen gained 66.5% in the last one year, compared with the S&P 500’s gain of 15.01%. The company reported a stellar four-quarter positive average earnings surprise of over 49.08%.

ZELTIQ Aesthetics surged 87.4% in the last one year, compared with the S&P 500. Its four-quarter average earnings surprise was a positive of 12.30%.

Hill-Rom gained over 37.8% in the past one year, better than the S&P 500 mark. It posted a trailing four-quarter positive average earnings surprise of 3.1%.

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