NESTLÉ HOLDINGS, INC. and SUBSIDIARIES Annual Financial Report Management Report Responsibility Statement Consolidated Financial Statements
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NESTLÉ HOLDINGS, INC. AND SUBSIDIARIES Annual Financial Report Management Report Responsibility Statement Consolidated Financial Statements December 31, 2014 and 2013 (With Independent Auditors’ Report Thereon) NESTLÉ HOLDINGS, INC. AND SUBSIDIARIES Table of Contents Page Management Report 3 Responsibility Statement 8 Independent Auditors’ Report 9 Consolidated Financial Statements Consolidated Balance Sheet 10 Consolidated Income Statement 11 Consolidated Statement of Comprehensive Income 12 Consolidated Statement of Changes in Equity 13 Consolidated Statement of Cash Flows 14 Notes to Consolidated Financial Statements 15 2 NESTLÉ HOLDINGS, INC. AND SUBSIDIARIES December 31, 2014 and 2013 Management Report Nestlé Holdings, Inc. (“NHI”) (hereinafter, together with its subsidiaries, referred to as the “Company”) is a wholly owned subsidiary of NIMCO US, Inc., which is an indirectly wholly owned subsidiary of Nestlé S.A., incorporated in Switzerland, which is the holding company of the Nestlé group of companies (hereinafter, referred to as the “Nestlé Group”). NHI is the holding company for Nestlé S.A.’s principal operating subsidiaries in the United States, other than Nestlé Waters North America Inc., Prometheus Laboratories, Inc., Nestlé Health Science-Pamlab, Inc., and Galderma Laboratories, Inc. The Company manufactures food and beverages, as well as products related to the nutrition, health, and wellness industries. The Company’s products are primarily distributed in the United States. Key Figures 2014 2013 Change (Dollars in millions) Sales $ 21,200.9 21,623.6 (2.0)% Cost of goods sold (11,888.9) (11,955.2) (0.6)% as a percentage of sales (56.1)% (55.3)% Trading operating profit 2,822.3 2,687.0 5.0% as a percentage of sales 13.3% 12.4% Net financial expenses (241.6) (307.1) (21.3)% Income tax expense (750.8) (580.3) 29.4% Net income 323.6 1,113.9 (70.9)% as a percentage of sales 1.5% 5.2% Operating cash flows 2,462.5 2,757.8 (10.7)% as a percentage of sales 11.6% 12.8% Capital expenditures 728.3 765.8 (4.9)% as a percentage of sales 3.4% 3.5% Overview The United States economy in 2014 continued to be adversely impacted by concerns over the labor market and soft consumer demand. Despite these economic challenges, the Company has delivered improvements in trading operating profit. This performance is due to the ongoing execution of its proven strategies, combined with the successful implementation of operational efficiencies through the Nestlé Continuous Excellence cost savings program. 3 NESTLÉ HOLDINGS, INC. AND SUBSIDIARIES December 31, 2014 and 2013 Sales For the years ended December 31, 2014 and 2013, consolidated sales totaled $21.2 and $21.6 billion, respectively. The main factors per segment are as follows: • Nestlé USA Brands sales were $9.8 and $10.3 billion for the years ended December 31, 2014 and 2013, respectively. Performance in this segment was affected by the frozen category. Projects are underway to reposition Lean Cuisine, Hot Pockets, and Stouffers. They address all elements of the marketing mix, reflecting trends such as organic and ethnic, enhancing the brands’ relevance to consumers. The Company is taking the same approach in frozen pizza, where the Company’s California Pizza Kitchen performed well. In ice cream, the super-premium business performed well with Gelato, and the ice cream snacks returned to growth, although the premium business was subdued. In the confectionery category, the successful roll-out of Butterfinger Peanut Butter Cups continued. In liquid products, innovations like Natural Bliss and seasonal renovations of flavors helped Coffee-mate deliver good growth. Some prominent brands in this segment include Coffee-mate, Nescafé, Nesquik, Stouffer’s, DiGiorno, Lean Cuisine, Hot Pockets, Nestlé Crunch, Butterfinger, Nestlé Toll House, and Dreyer’s/Edy’s. • Nestlé Purina PetCare sales were $7.1 and $6.9 billion for the years ended December 31, 2014 and 2013, respectively. Sales in PetCare continued to grow due to growth in sales of dog and cat food, dog snacks, and cat litters. The launch of Beyond natural pet food and innovations in Dog Chow, Pro Plan and Tidy Cats Lightweight cat litter assisted in gaining momentum. Some notable brands in this segment include Beneful, Alpo, Purina ONE, Purina Dog Chow, Pro Plan, Fancy Feast, Friskies, Purina Cat Chow, and Tidys Cats Litter. • Nutrition sales were $2.0 and $2.3 billion for the years ended December 31, 2014 and 2013, respectively. Sales in this segment decreased from 2013 as the business environment was challenging. Infant cereals saw a steady recovery and Gerber Organic fruit purée pouches for infants, combining good nutrition with convenience, were a highlight within the meals and drinks category. There was also growth in the juvenile life insurance business. The weight management business, Jenny Craig, was divested at the end of 2013 and the Performance Nutrition business, PowerBar, was divested during 2014. A notable brand in this segment is Gerber. • Other businesses sales were $2.3 and $2.1 billion for the years ended December 31, 2014 and 2013, respectively. The Nestlé Health Science business benefited from growth in aging medical care driven by Boost. Nespresso delivered a strong performance, supported by the successful launch of the VertuoLine system machines. Profitability Trading operating profit was $2.8 and $2.7 billion for the years ended December 31, 2014 and 2013, respectively. There was an increase as a percentage of sales from 12.4% in 2013 to 13.3% in 2014, primarily due to a decrease in marketing, general and administrative expenses. Cost of goods sold was $11.9 billion and $12.0 billion for the years ended December 31, 2014 and 2013, respectively. The decrease was primarily due to lower sales, partially offset by an increase in fixed overhead expenses and commodity prices. 4 NESTLÉ HOLDINGS, INC. AND SUBSIDIARIES December 31, 2014 and 2013 Distribution expenses were $1.9 billion for each of the years ended December 31, 2014 and 2013, which equaled approximately 9.1% and 8.9% of sales, respectively. The increase as a percentage of sales was due to increased supply and delivery expenses. Marketing, general and administrative expenses were $3.3 and $3.6 billion for the years ended December 31, 2014 and 2013, respectively. There was a decrease in these expenses as a percentage of sales from 16.8% in 2013 to 15.6% in 2014, primarily due to lower consumer marketing spend and other general expenses. Net other trading expenses were $76.8 million and $214.3 million for the years ended December 31, 2014 and 2013, respectively. The decrease was primarily due to decreases in restructuring expenses, litigation and onerous contracts, and deferred compensation costs, partially offset by a decrease in the return on company owned life insurance. Net Profit Margin – Other Items of Interest Net financial expenses decreased by $65.4 million in 2014 primarily due to lower interest rates on borrowings and increased interest income on defined benefit assets. The Company’s income tax expense increased by $170.5 million in 2014, primarily as a result of adjustments to prior years’ taxes, an increase in pre-tax accounting income before the impairment of goodwill and losses on business divestitures, offset by benefits realized as a result of these divestitures. Cash Flow Operating cash flow decreased from $2.8 billion in 2013 to $2.5 billion in 2014. The change is primarily due to the increase in cash used for working capital. Principal Risks and Uncertainties Risk Management At the Nestlé S.A. level, the Nestlé Group Enterprise Risk Management Framework (“ERM”) is designed to identify, communicate, and mitigate risks in order to minimize their potential impact on the Nestlé Group, including the Company. The Nestlé Group has adopted a dual approach in identifying and assessing risks. A top-down assessment is performed annually at the Nestlé Group level to create a good understanding of the Group’s mega-risks, to allocate ownership to drive specific actions around them and take any relevant steps to address them. A bottom-up assessment occurs in parallel annually and focuses on the global risk portfolio in the businesses/corporate functions. It involves the aggregation of individual assessments by the Zones, Globally Managed Businesses and all markets of the Nestlé Group. It is intended to provide a high-level risk mapping of Company risk and allows Company management to make sound decisions on the future operations of the Company and ensure that any risk growing in importance within the organization is captured and addressed in Nestlé’s ERM agenda. An annual compliance risk assessment is performed by the Nestlé Group Compliance Committee. Risk assessments are the responsibility of line management; this applies equally to a business or a function, and any mitigating actions identified in the assessments are the responsibility of the individual line management. If Nestlé S.A. intervention is required, responsibility for mitigating actions will generally be determined by the Nestlé Group Executive Board. The results of the ERM are presented annually to the Nestlé Group Executive Board and to the Audit Committee of Nestlé S.A., and conclusions are reported to the Board of Directors of Nestlé S.A. 5 NESTLÉ HOLDINGS, INC. AND SUBSIDIARIES December 31, 2014 and 2013 Factors Affecting Results The Company’s reputation is based on consumers’ trust. Any major event triggered by a serious food safety or other compliance issue could have a negative effect on the Company’s reputation or brand image. The Company has policies, processes, controls and regular monitoring (dedicated dashboard with relevant KPIs) in place to prevent such events. The success of the Company depends on its ability to anticipate consumer preferences and to offer high-quality, appealing products.