Notes to Financial Statements
Year Ended
December 31, 2016
Note 1 - Description of Plan
The following description of the Mead Johnson & Company, LLC Retirement Savings Plan (the “plan”) provides only general information. Participants should refer to the plan agreement for a complete description of the plan’s provisions. The plan is a tax-qualified defined contribution plan that is subject to the provisions of the Employee Retirement Income Security Act of 1974 (“ERISA”).
General
The plan was established by Mead Johnson & Company, LLC (the “Company”), a subsidiary of Mead Johnson Nutrition Company (“MJN”), on February 9, 2009 and covers substantially all employees of the Company. The plan does not cover leased employees or members of a collective bargaining agreement, which does not provide for participation under the plan.
Administration of the Plan
The Company is the plan’s sponsor and the Mead Johnson Nutrition Company Benefits Committee is the plan administrator. Fidelity Workspace Services LLC is the plan’s third-party administrator, and Fidelity Management Trust Company (“Fidelity”) is the plan’s trustee.
Certain administrative expenses for the plan, including legal, trustee and consulting fees, are paid by the Company. Only expenses paid by the plan are reflected in the plan’s financial statements.
Eligibility
Employees are eligible to participate in the plan upon date of hire provided that they are scheduled to work at least 1,000 hours during a 12-month period.
Participant Contributions
Participants may contribute an amount equal to 1% to 25% (in whole percentages) of their total compensation in
401(k) deferral contributions, after tax contributions or a combination of the two. Participants who have attained age 50 may make catch-up contributions in addition to their regular contributions. All participant contributions are subject to certain Internal Revenue Service (“IRS”) limitations. The plan also accepts rollovers from other qualified retirement plans. Eligible employees who do not decline enrollment are automatically enrolled in the plan 45 days after their start date, at a deferral rate equal to 6% of their total compensation.
As reported on Schedule H, line 4a, Schedule of Delinquent Participant Contributions for the year ended
December 31, 2016
, certain participant contributions and participant loan payments were not remitted to the trust within the time frame specified by the Department of Labor's Regulation 29 CFR 2510.3-102, thus constituting nonexempt transactions between the plan and the Company for the year ended
December 31, 2016
.
Employer Contributions
Employer matching contributions are equal to 100% of a participant’s deferral or after-tax contributions not to exceed 6% of earnings.
The Company also makes additional employer contributions to participants who are employed at the end of the plan year. The additional contribution is calculated as follows:
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Age plus Years
of Service
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Percentage of
Earnings
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Less than 40
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2
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%
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40 - 59
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3
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%
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Greater than 60
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4
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%
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Participant Accounts
Each participant’s account is credited with the participant’s contributions, the Company’s contributions and allocations of plan earnings, and is charged with an allocation of administrative expenses and plan losses. Participants may transfer assets and change their investment elections at any time and at their discretion. The benefit to which a participant is entitled is the benefit that can be provided from the participant’s vested account. Participants are immediately vested in all of their accounts.
Notes Receivable from Participants
Participants may borrow from their accounts a minimum of $1,000 up to a maximum equal to the lesser of $50,000 or 50% of their vested account balance. The loans are collateralized by the balance in the participant’s account and bear interest at rates which are commensurate with local prevailing rates at the time of issuance. Principal and interest are paid ratably through periodic payroll deductions.
Payment of Benefits
Participants are entitled to their vested account balance upon retirement, termination, disability or death. A participant may elect to receive their benefit in the form of a lump-sum payment or periodic installments not to exceed 15 years. Employees hired prior to October 1994 by Bristol-Myers Squibb Company (“BMS”), the former employer before MJN’s spinoff from BMS in 2009, who were participants in the BMS Savings and Investment Program may also elect to receive their benefit in the form of an annuity option. Participants experiencing financial hardship may make in-service withdrawals in accordance with the provisions of the plan.
Agreement and Plan of Merger
On February 10, 2017, MJN entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Reckitt Benckiser Group plc, a company incorporated in England and Wales (“Reckitt Benckiser”), and Marigold Merger Sub, Inc., a Delaware corporation and a wholly owned indirect subsidiary of Reckitt Benckiser (“Merger Sub”), pursuant to which Reckitt Benckiser will indirectly acquire MJN by means of a merger of Merger Sub with and into MJN on the terms and subject to the conditions set forth in the Merger Agreement (the “Merger”). The Merger Agreement and the consummation of the transactions contemplated by the Merger Agreement have been unanimously approved by MJN’s board of directors.
At the effective time of the Merger (the “Effective Time”), on the terms and subject to the conditions set forth in the Merger Agreement, each share of MJN’s common stock outstanding immediately prior to the Effective Time (other than (i) each share held by MJN as treasury stock (other than shares held for the account of clients, customers or other persons), (ii) each share held by Reckitt Benckiser or by any subsidiary of either MJN or Reckitt Benckiser and (iii) each share held by a holder who has not voted in favor of the Merger or consented thereto in writing and who has demanded appraisal for such shares in accordance with Delaware law) will be converted into the right to receive $90.00 in cash, without interest.
Consummation of the Merger is subject to the satisfaction or waiver of certain customary closing conditions, including, among others: (i) the affirmative vote of the holders of a majority of MJN's outstanding shares of common stock; (ii) the affirmative vote of a simple majority of Reckitt Benckiser’s shareholders at a shareholder meeting; (iii) the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended ("HSR"), and the receipt of certain other non-United States regulatory approvals required to consummate the Merger; and (iv) in the case of Reckitt Benckiser's obligations to consummate the Merger, the absence of a Company Material Adverse Effect (as defined in the Merger Agreement). Reckitt Benckiser and Merger Sub's respective obligations to consummate the Merger are not subject to any financing condition or other contingency. With regard to subsection (iii) of the foregoing sentence, MJN received early termination of the HSR waiting period effective as of March 24, 2017.
Under the Merger Agreement, subject to certain exceptions, MJN cannot establish, adopt, enter into or amend any employee plan, except as required by applicable law or the terms of the plan.
Following the Merger,
MJN
expects that employees will be able to adjust the investment mix in their accounts per the standard procedures currently in place. Additional information regarding any changes to the plan sponsor or plan administrator will be provided to account holders at the appropriate time.
Note 2 - Summary of Significant Accounting Policies
Basis of Accounting
The financial statements of the plan are prepared under the accrual method of accounting.
New Accounting Pronouncements
In January 2016, FASB issued Accounting Standards Update (ASU) No. 2016-01,
Financial Instruments (Subtopic 825-10) - Overall Recognition and Measurement of Financial Assets and Financial Liabilities
. ASU No. 2016-01 amended ASC 825,
Financial Instruments
, which eliminates the requirement to disclose the fair value of financial instruments not recorded at fair value required under ASC 825. This ASU is effective for years beginning after December 15, 2018. Management does not expect the adoption of this ASU to have a significant impact on the Plan’s financial statements.
Investments
Investments are reported at fair value in accordance with accounting principles generally accepted in the United States (“GAAP”). See Note 3 for a discussion on fair value measurements.
Purchases and sales of securities are recorded on a trade-date basis. Interest income is recorded on the accrual basis. Dividends are recorded on the ex-dividend date.
Net appreciation in the fair value of the plan's investments includes gains and losses on investments bought and sold, as well as held during the year.
Notes Receivable from Participants
Notes receivable from participants are measured at their unpaid principal balance plus any accrued but unpaid interest. Delinquent participant loans are reclassified as distributions based on the terms of the plan document.
Payment of Benefits
Benefits are recorded when paid.
Management Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of additions to and deductions from net assets available for benefits during the reporting period. Actual results could differ from those estimates.
Note 3 - Fair Value Measurements
GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal market or, in the absence of a principal market, the most advantageous market accessible to the reporting entity as of the measurement date. Under GAAP, the principal market is the market in which the reporting entity would sell the asset or transfer the liability with the greatest volume and level of activity. The most advantageous market, which may be a hypothetical market, is the market in which the reporting entity would sell the asset or transfer the liability with the price that maximizes the amount that would be received for the asset or minimizes the amount that would be paid to transfer the liability, considering transaction costs in the respective market.
GAAP describes three approaches to measuring fair value: the market approach, the income approach and the cost approach. Each approach includes multiple valuation techniques. GAAP does not prescribe which valuation technique should be used when measuring fair value, but does establish a fair value hierarchy that prioritizes the inputs used in applying the various techniques based on the degree to which such inputs are observable to market participants. Inputs broadly refer to the assumptions that market participants use to make pricing decisions, including assumptions about risk.
The plan’s investments are classified in one of the following three categories based upon the inputs used to determine their respective fair values.
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•
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Level 1 - Quoted prices (unadjusted) for identical assets or liabilities in active markets as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
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•
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Level 2 - Observable market-based inputs or unobservable inputs that are corroborated by market data. These inputs may include quoted prices for similar assets or liabilities in active markets as well as quoted prices for identical or similar assets or liabilities in inactive markets.
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•
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Level 3 - Unobservable inputs that cannot be corroborated by market data. These inputs reflect management’s best estimate of fair value using its own assumptions about the assumptions a market participant would use in pricing the asset or liability.
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When the inputs used to value an investment fall into more than one level, the investment is classified in its entirety based on the lowest level input that is significant to that investment’s fair value measurement. Management’s assessment of the significance of a particular input to the fair value measurement requires judgment and is dependent on factors specific to the investment. Valuation techniques used need to maximize the use of relevant observable inputs and minimize the use of unobservable inputs.
As of
December 31, 2016
and
2015
, the following valuation methodologies have been used to value the plan’s investments:
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•
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Mutual funds - Valued at the publicly traded reported NAV of the shares held by the plan at year-end.
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•
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Common collective trusts - Valued at the NAV as determined by the administrator of the trust. Such NAV is based on the value of the underlying assets and liabilities of the trust.
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The fair value of the Fidelity Managed Income Portfolio II is based on the NAV of such fund as reported by the fund manager. This investment has certain limitations on withdrawals and exchanges as follows:
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•
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Participant-directed - Withdrawals made in order to accommodate distributions to participants or transfers to non-competing investments may be made on any business day. Transferred amounts must be held in a non-competing investment option for 90 days before subsequent transfers to a competing fund can occur.
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•
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Non-participant-directed - Withdrawals directed by a plan sponsor must be preceded by a twelve month written notice to Fidelity. Fidelity, however, may, in its discretion complete any such plan-level withdrawal before the expiration of such twelve month period. No such notice has been given to Fidelity.
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There are no unfunded commitments or other redemption notice requirements related to the common collective trust funds.
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•
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Common stock fund - Valued at the closing price of the underlying stock as reported on a national securities exchange plus uninvested cash held in the fund.
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•
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Money market fund - Based on quoted market price.
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The methods described above may produce a fair value calculation that might not be indicative of net realizable value or reflective of future fair values. Furthermore, while the plan believes its valuation methods are appropriate and consistent with other market participants, the different methodologies or assumptions used to determine fair value of certain financial instruments could result in a different fair value measurement as of the reporting date.
The following table summarizes by level within the fair value hierarchy the plan’s investments that are measured at fair value on a recurring basis as of
December 31, 2016
and
2015
:
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December 31, 2016
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Level 1
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Level 2
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Level 3
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Total
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Mutual Funds
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$
|
287,004,132
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|
|
$
|
—
|
|
|
$
|
—
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|
|
$
|
287,004,132
|
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MJN Common Stock Fund
|
11,397,492
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—
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—
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11,397,492
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Money Market Fund
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20,429,845
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|
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—
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—
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20,429,845
|
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$
|
318,831,469
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|
|
$
|
—
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|
|
$
|
—
|
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|
$
|
318,831,469
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Investments measured at NAV:
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Common Collective Trusts
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96,196,477
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Total investments at fair value
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$
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415,027,946
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December 31, 2015
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Level 1
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Level 2
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Level 3
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Total
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Mutual Funds
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$
|
269,940,285
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|
|
$
|
—
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$
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—
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$
|
269,940,285
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MJN Common Stock Fund
|
12,470,181
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—
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—
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12,470,181
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Money Market Fund
|
20,821,988
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—
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—
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|
|
20,821,988
|
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Total
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$
|
303,232,454
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$
|
—
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$
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—
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$
|
303,232,454
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Investments measured at NAV:
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Common Collective Trusts
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89,121,625
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Total investments at fair value
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$
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392,354,079
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The plan’s investments are exposed to risks such as interest rate, credit and overall market volatility. Due to these risk factors, it is reasonably possible that changes in the value of investments will occur in the near term and could materially affect the amounts reported in the financial statements.
The plan also holds other assets and liabilities not measured at fair value on a recurring basis, including contributions receivable and payables. The fair value of these assets and liabilities approximates the carrying amounts in the accompanying financial statements due to the short maturity of the instruments. These financial instruments are valued primarily using level 3 inputs.
Note 4 - Common Stock Fund
Dividends pertaining to MJN common stock may be reinvested or received by participants in cash in accordance with the provisions of the plan. Dividends received in cash will be taxed as ordinary income to the participant but will not be subject to the 10% additional tax associated with early withdrawals.
Note 5 - Party-in-Interest Transactions
Certain plan investments are shares in mutual funds managed by an affiliate of the plan’s third-party administrator and trustee and, therefore, transactions in these investments qualify as party-in-interest transactions.
In addition, certain administrative, legal and accounting services are performed by Company personnel on behalf of the plan. No charges are made to the plan for such services.
See Note 4 for additional exempt party-in-interest transactions.
Note 6 - Plan Termination
Although it has not expressed any intent to do so, the Company has the right under the plan to discontinue its contributions at any time and to terminate the plan subject to the provisions of ERISA.
Note 7 - Tax Status
The plan was established on February 9, 2009. The plan has applied for and has received a determination letter from the Internal Revenue Service indicating that the plan, as designed, is qualified for tax-exempt treatment under the applicable section of the Internal Revenue Code (IRC). The plan administrator believes that the plan is designed, and is currently being operated, in compliance with the applicable requirements of the IRC.
Note 8 - Reconciliation of Financial Statements to Form 5500
The following is a reconciliation of net assets available for benefits per the financial statements to Form 5500 as of
December 31, 2016
and
2015
:
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2016
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2015
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Net assets available for benefits per the financial statements
|
$
|
425,842,743
|
|
|
$
|
403,666,089
|
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Employee and employer contributions receivable
|
(5,902,751
|
)
|
|
(6,822,847
|
)
|
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Valuation adjustment for Common Collective Trust
|
103,191
|
|
|
213,583
|
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Net assets available for benefits per Form 5500
|
$
|
420,043,183
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|
$
|
397,056,825
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The following is a reconciliation of changes in net assets available for benefits per the financial statements to Form 5500 for the year ended
December 31, 2016
:
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Net increase in net assets available for benefits per the financial statements
|
$
|
22,176,654
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2015 contributions receivable
|
6,822,847
|
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2016 contributions receivable
|
(5,902,751
|
)
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Valuation adjustment for Common Collective Trust
|
(110,392
|
)
|
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Net increase in net assets available for benefits per Form 5500
|
$
|
22,986,358
|
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