2016 Nestlé Holdings, Inc. Financial Statements
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NESTLÉ HOLDINGS, INC. AND SUBSIDIARIES Annual Financial Report Management Report Responsibility Statement Consolidated Financial Statements December 31, 2016 and 2015 (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 14 Consolidated Income Statement 15 Consolidated Statement of Comprehensive Income 16 Consolidated Statement of Changes in Equity 17 Consolidated Statement of Cash Flows 18 Notes to Consolidated Financial Statements (1) Accounting Policies 19 (2) Analyses by Segment 23 (3) Trade and Other Receivables, net 26 (4) Inventories, net 27 (5) Derivative Assets and Liabilities and Hedge Accounting 27 (6) Property, Plant and Equipment, net 30 (7) Employee Benefits 32 (8) Investments in Joint Ventures and Associated Companies 38 (9) Deferred Taxes 39 (10) Goodwill and Intangible Assets 40 (11) Financial Instruments 45 (12) Financial Risks 50 (13) Assets Held for Sale 55 (14) Accruals 55 (15) Provisions and Contingencies 55 (16) Net Financial Income/(Expense) 57 (17) Net Other Trading and Operating Income/(Expenses) 58 (18) Income Tax Expense 59 (19) Lease Commitments 61 (20) Acquisitions and Disposals of Businesses 62 (21) Events after the Balance Sheet Date 64 (22) Transactions with Related Parties 64 2 NESTLÉ HOLDINGS, INC. AND SUBSIDIARIES December 31, 2016 and 2015 Management Report Nestlé Holdings, Inc. (“NHI”) (hereinafter, together with its subsidiaries, referred to as the “Company”) incorporated in the State of Delaware, United States, is a wholly owned subsidiary of NIMCO US, Inc., which is a 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., The Proactiv Company, LLC, and NSH Service, Inc. (formerly Galderma Laboratories, Inc.). The Company engages primarily in the manufacture and sale of food products, pet care products, beverage products and juvenile life insurance. These businesses derive revenue across the United States. Key Figures 2016 2015 Change (Dollars in millions) Sales $ 22,069.2 21,399.1 3.1% Cost of goods sold (11,963.9) (11,824.1) 1.2% as a percentage of sales (54.2)% (55.3)% Trading operating profit 3,034.8 2,843.8 6.7% as a percentage of sales 13.8% 13.3% Net financial expenses (211.9) (237.1) (10.6)% Income tax expense (1,045.9) (678.2) 54.2% Net income 1,784.0 1,922.8 (7.2)% as a percentage of sales 8.1% 9.0% Operating cash flows 3,424.9 2,621.8 30.6% as a percentage of sales 15.5% 12.3% Capital expenditures 688.3 655.8 5.0% as a percentage of sales 3.1% 3.1% Overview While the labor market continued to improve, the United States economy still faced a variety of significant challenges in 2016. Despite these economic challenges, the Company has delivered improvements in sales and trading operating profit margins. This performance is due to the increased investment in its brands and ongoing execution of its proven strategies and operational efficiencies. 3 NESTLÉ HOLDINGS, INC. AND SUBSIDIARIES December 31, 2016 and 2015 Sales For the years ended December 31, 2016 and 2015, consolidated sales totaled $22.1 and $21.4 billion, respectively. The main factors per segment are as follows: Nestlé USA Brands sales were $9.9 and $9.8 billion for the years ended December 31, 2016 and 2015, respectively. Coffee Mate sustained good momentum through innovations such as the 64 ounces packaging and new flavors in Natural Bliss. In the frozen meals business, sales of the new ranges of Lean Cuisine and Stouffer’s Fit Kitchen delivered strong growth supported by new line extensions. The performance of the confectionery business was disappointing, impacted by the competitive environment and low growth in the mainstream chocolate market. Some prominent brands in this segment include Coffee Mate, Nescafé, Nesquik, Stouffer’s, DiGiorno, Lean Cuisine, Hot Pockets, Nestlé Crunch, Butterfinger, Nestlé Toll House, Dreyer’s, and Edy’s. Nestlé Purina PetCare sales were $7.7 and $7.3 billion for the years ended December 31, 2016 and 2015, respectively. Innovation supported good growth across the cat food range. In dog food, the premium portfolio performed well as Merrick, Purina ONE and Pro Plan all delivered double-digit growth. Beneful stabilized as there was progress in restaging the brand. Some notable brands in this segment include Beneful, Alpo, Purina ONE, Dog Chow, Pro Plan, Beyond, Fancy Feast, Friskies, Cat Chow, and Tidys Cats. Nutrition sales were $2.0 billion for the years ended December 31, 2016 and 2015. The Company started to renovate the Gerber brand and made improvements to product packaging and recipes, including many organic offerings. There was growth in the juvenile life insurance business. A notable brand in this segment is Gerber. Other businesses sales were $2.5 and $2.4 billion for the years ended December 31, 2016 and 2015, respectively. The Nestlé Professional business continued to have good growth. Nespresso saw strong momentum from the VertuoLine system machines. The Nestlé Health Science business maintained a good pace of growth. Consumer care was once again the key source of growth including the Boost range of products and Carnation Breakfast Essentials. Profitability Trading operating profit was $3.0 and $2.8 billion for the years ended December 31, 2016 and 2015, which equaled approximately 13.8% and 13.3% of sales, respectively. The increase, as a percentage of sales, was due to lower costs of goods sold, partially offset by the increases in marketing, general and administrative expenses, and net other trading expenses. Cost of goods sold was $12.0 and $11.8 billion for the years ended December 31, 2016 and 2015, which equaled 54.2% and 55.3% of sales, respectively. The decrease, as a percentage of sales, was driven by operational efficiencies generated through the Nestlé Continuous Excellence cost savings program and commodity costs reductions. Distribution expenses were $2.0 and $1.9 billion for the years ended December 31, 2016 and 2015, which equaled 9.0% of sales for both years. 4 NESTLÉ HOLDINGS, INC. AND SUBSIDIARIES December 31, 2016 and 2015 Marketing, general and administrative expenses were $3.8 and $3.6 billion for the years ended December 31, 2016 and 2015, respectively. The increase in expenses as a percentage of sales from 16.7% in 2015 to 17.0% in 2016 was primarily due to increases in media communication and other marketing and general expenses. Net other trading expenses were $117.7 and $45.4 million for the years ended December 31, 2016 and 2015, respectively. The increase was primarily due to restructuring costs, partially offset by an increase in the returns on company-owned life insurance. Net Profit Margin – Other Items of Interest Net financial expenses decreased by $25.2 million in 2016 primarily due to a reduction in net financing cost partially offset by increased net interest expense on defined benefit plans. The Company’s income tax expense increased by $367.7 million in 2016, primarily as a result of adjustments to prior years’ taxes being a $65.1 million expense in the current year compared to a $274.1 million credit in the prior year. Cash Flow Operating cash flow increased from $2.6 billion in 2015 to $3.4 billion in 2016. The change is primarily due to the effect of a decrease in cash used for working capital, partially offset by lower net income. 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. A top-down assessment is performed at the Nestlé Group level once a year 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 resulting in the aggregation of individual assessments by all Markets and Globally Managed Businesses of the Nestlé Group. These different risk mappings allow the Company to make sound decisions on the future operations of the Company. 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, half-yearly to the Audit Committee of Nestlé S.A., and reported annually to the Board of Directors of Nestlé S.A. The factors identified below are considered the most relevant for the Company’s business and performance. 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 5 NESTLÉ HOLDINGS, INC. AND SUBSIDIARIES December 31, 2016 and 2015 has policies, processes, controls and regular monitoring to ensure high-quality products and prevention of health risks arising from handling, preparation and storage throughout the value chain. The success of the Company depends on its ability to anticipate consumer preferences and to offer high-quality, competitive, relevant, and innovative products.