Mead Johnson (MJN) Tops Q2 Earnings, Sales Down Y/Y (Revised)

Mead Johnson Nutrition Company (NYSE:MJN) reported second-quarter 2016 results with adjusted earnings per share (EPS) of 88 cents beating the Zacks Consensus Estimate by 12.8%.

Also, adjusted earnings improved from the prior-year quarter’s figure by 15.8%.

Including the impact of certain one-time items, reported net earnings were 83 cents per share, up 3.8% year over year.

Net Sales

Net sales in the reported quarter grossed $941.5 million, down 9% year over year (down 4% at CER, or constant exchange rate). To note, the top line missed the Zacks Consensus Estimate of $958.9 million.

Sales in the reported quarter was adversely affected by 5% from decreasing volume and unfavorable foreign exchange rate. However, second-quarter sales were positively impacted by 1% from favorable price mix.

Segments in Detail

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

Sales in Asia (representing 50% of total sales) declined 11% year over year (down 7% at CER) to $456.2 million. While poor volume affected this segment’s revenues by 5%, unfavorable foreign exchange rate impacted sales by 4%. An increase in trade investments in China, with a portion diverted from advertising and promotional spending, affected this segment’s growth primarily. Two other factors that impacted sales were: new product testing for imported goods in China towards the end of the second quarter; and, market share losses on the company’s mid-priced children's products in the Philippines.

In Latin America (18%), sales dropped 16% year over year (down 3% at CER) to $166.5 million. Foreign exchange hurt growth in this segment by 1% while volume strained salesby 12%. However, positive pricing gains in the overall segment contributed 9% growth to this segment’s sales, which partially offset the negative impacts.

In North America/Europe (34%), sales dropped 1% to $318.8 million, on account of foreign exchange and volume marring sales growth by 1%. Within this segment, the company experienced lower-than-expected market share in the U.S., which was partially offset by market share gains in both infant and children's products in Canada.

Margins

Adjusted gross margin at CER during the reported quarter was 66.6%, up 120 basis points on the back of lower dairy input cost.

Adjusted operating margin improved 540 bps year over year to 27.4%, on account of a drop of 9.4% in adjusted selling, general and administrative expenses, a fall of 12.7% in advertising and promotion expense, and a squeeze of 4.7% in research and development expense. .

Balance Sheet and Cash Flow

Mead Johnson exited the quarter with cash and cash equivalents of $1.72 billion, compared with $1.70 billion in the previous quarter. Long-term debt was $3.02 billion, in line with the previous year’s identical quarter. As of Jun 30, 2016, the company generated operating cash flow of $276.1 million, against the year-ago quarter’s equivalent of $458.5 million.

Updated Guidance

Mead Johnson reiterated its guidance for 2016. The company expects to deliver adjusted EPS of $3.48–$3.60, based on the current exchange rates. Meanwhile, the Zacks Consensus Estimate for EPS is pegged at $3.51, which is within the company's guided range.

In terms of the top line, the company has revised its outlook and now expects year-over-year net sales to be 0-2% below the prior year at CER. The Zacks Consensus Estimate for revenues lies at $3.88 billion.

Our Take

Mead Johnson’s second-quarter results were a mixed bag, with the bottom line comfortably beating the Zacks Consensus Estimate and the top line missing the same. Actually, the company’s sales were quite poor, with all of its segments delivering a bleak performance on the whole.

In emerging markets, macroeconomic turmoil in Brazil, Venezuela and Argentina spoiled whatever growth the company achieved in Mexico and Columbia. Foreign currency also remained a major challenge for the company across all regions. On a brighter note, lower dairy input costs boosted gross margin. The company’s Fuel for Growth project also played a major role in improving profitability of Mead Johnson.

Zacks Rank & Key Picks

Mead Johnson currently holds a Zacks Rank #3 (Hold). Some better-ranked medical stocks are Abiomed, Inc. (NASDAQ:ABMD) , Masimo Corporation (NASDAQ:MASI) and Natus Medical Inc. (NASDAQ:BABY) . All these stocks hold a Zacks Rank #1 (Strong Buy).

(We have revised this article to correct a mistake. The previous version, published earlier today, should not be relied upon.)