Financial Analysis of Unilever's Share-Based Compensation Programs and Pension Liabilities, Study notes of Accounting

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Nonconsolidated Financial Statements December 31, 2019 and 2018

Table of Contents

• December 31, 2019 and
• Independent Auditor’s Report. ……………..………………………………….……………….…
  • Nonconsolidated Statements of Financial Position………………………………….……............. Financial Statements
  • Nonconsolidated Statements of Operations……..………………………………….……………..
  • Nonconsolidated Statements of Comprehensive Income (Loss) ………………….………………
  • Nonconsolidated Statements of Changes in Equity……………………………….….……...........
  • Nonconsolidated Statements of Cash Flows……………………………………….……………...
• Notes to Nonconsolidated Financial Statements ………………………………………………... 7 -

Table of Contents December 31, 2019 and 2018

Nonconsolidated Statements of Financial Position December 31, 2019 and 2018

The accompanying notes form an integral part of these financial statements.

$ thousands 2019 2018 Assets Non-current assets: Investments in subsidiaries (note 3) 28,394,076 28,159, Funds in escrow (note 10,16) 1,573 1, Right of use asset - 23 Deferred taxes (note 8) 7,470 8, Total non-current assets 28,403,119 28,170, Current assets: Cash and cash equivalents (note 10) - - Investment in equity shares of Ultimate Parent (note 10,11) 2,317 2, Prepaid expenses (note 13) 7,837 5, Net amounts due from Unilever Group affiliates (note 9) 6,134 4, Total current assets 16,288 11, Total assets 28,419,407 28,182, Liabilities and Equity Equity: (note 14) Called up share capital 1 1 Share premium 1,350,173 1,341, Retained earnings 16,023,876 16,448, Total equity 17,374,050 17,789, Non-current liabilities: Liabilities to employee benefit plans (note 5) 20,063 21, Liabilities for share-based compensation (note 6) 3,548 3, Other 1 123 Total non-current liabilities 23,612 25, Current liabilities: Trade and other payables (note 15) 19,663 18, Provisions (note 16) 6,171 1, Liabilities to employee benefit plans (note 5) 2,733 3, Liabilities for share-based compensation (note 6) 5,734 5, Lease liability - 94 Net amounts due to Unilever Group affiliates (note 9) 40 630 Net amounts due to UNUS Group affiliates (note 9) 10,987,404 10,337, Total current liabilities 11,021,745 10,366, Total liabilities and equity 28,419,407 28,182,

Nonconsolidated Statements of Comprehensive Income (Loss) Years Ended December 31, 2019 and 2018

The accompanying notes form an integral part of these financial statements.

$ thousands 2019 2018

Net income (loss) 175,681 (408,010)

Items that will not be reclassified to income: Actuarial gains (losses) on benefit programs, net of tax (expense) benefit of ($117) in 2019 and $190 thousand in 2018 123 (436) Comprehensive income (loss) 175,804 (408,446)

Nonconsolidated Statements of Changes In Equity Years Ended December 31, 2019 and 2018

The accompanying notes form an integral part of these financial statements.

$ thousands Share Share Retained Total Capital Premium Earnings

Equity, December 31, 2017 18,998,216 1 1,341,561 17,656, Adjustment on initial application of IFRS 16, net of tax (110) - - (110) Equity, December 31, 2017, restated 18,998,106 1 1,341,561 17,656, Net loss (408,010) - - (408,010) Comprehensive loss (436) - - (436) Dividends declared (800,000) - - (800,000) Equity, December 31, 2018, restated 17,789,660 1 1,341,561 16,448, Net income 175,681 - - 175, Comprehensive income 123 - - 123 Capital contribution 8,611 - 8,611 - Dividends declared (600,024) - - (600,024) Equity, December 31, 2019 17,374,050 1 1,350,172 16,023,

Notes to the Nonconsolidated Financial Statements December 31, 2019 and 2018

1. Presentation and Organization

Unilever United States, Inc. (the Company or UNUS) is a wholly owned subsidiary of UNUS Holding BV (incorporated in the Netherlands) (the “Parent”) which itself is an indirect, wholly- owned, joint subsidiary of Unilever N.V. (incorporated in the Netherlands) and Unilever PLC (incorporated in the United Kingdom) (collectively referred to as the “Unilever Group” or “Ultimate Parent”). The Company is incorporated and domiciled in the United States.

The Unilever Group is one of the world’s largest suppliers of fast-moving consumer goods. It manufactures, markets and sells products in the food, personal care and household products industries throughout the world. The Unilever Group conducts its business in the United States primarily through Conopco, Inc. (Conopco), an entity wholly owned by UNUS. Unilever Capital Corporation (UCC), another wholly owned subsidiary of the Company, provides financing for Unilever Group’s United States operations.

As a holding company UNUS provides management services to its operating subsidiaries (collectively the UNUS Group) and facilitates communications and the flow of information between those subsidiaries and other entities within the Unilever Group.

2. Basis of Presentation

The accompanying financial statements of Unilever United States, Inc. represent the separate (nonconsolidated) financial statements of the Company pursuant to the exemption afforded under paragraph 4a of International Financial Reporting Standard (“IFRS”) 10 – Consolidated Financial Statements. Accordingly, the accompanying financial statements are separate financial statements of the UNUS Group. The Company’s ultimate parents, Unilever N.V. and Unilever PLC, issue publicly available consolidated financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. These statements are available at Unilever N.V. Investor Relations Department, Weena 455, PO Box 760, 3000 DK Rotterdam, The Netherlands.

(a) Statement of Compliance

The accompanying financial statements have been prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.

The functional and reporting currency is the United States dollar.

(b) Basis of Measurement

The separate financial statements have been prepared on the historical cost basis unless otherwise indicated.

Notes to the Nonconsolidated Financial Statements December 31, 2019 and 2018

(c) Dividend Income

The Company’s primary source of income is dividends from Conopco. These are recognized in the statements of operations when the Company’s right to receive payment has been established, which is generally when the dividend has been declared. However, to the extent a distribution is considered a return of capital, the carrying value of the Company’s investment is reduced. There were no distributions in 2019 or 2018 that represent a return of capital.

(d) Financial Asset

A financial asset is recorded at fair value through profit or loss if it is classified as held for trading or designated as such upon initial recognition. Financial assets are designated at fair value through profit or loss if the Company manages such investment and makes purchase and sale decisions based on their fair value in accordance with the Company’s documented risk management or investment strategy. Financial assets at fair value through profit or loss are measured at fair value, and changes therein are recognized in profit or loss.

The Company’s financial asset consists of an investment in shares of the Ultimate Parent. The Company acquires Unilever N.V. shares and Unilever PLC American Depository Receipts (“ADRs”) to satisfy obligations under share-based compensation programs in the near term. These equity securities are recorded at fair value.

Loans and receivables are financial assets with fixed and determinable payments that are not quoted in an active market. Such assets are recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, loans and receivables are measured at amortized cost using the effective interest method, less any impairment charges.

(e) Cash and Cash Equivalents

Cash and cash equivalents are financial assets and include deposits, investments in money market funds and highly liquid investments that have are the following characteristics:

• Are readily convertible into cash
• Have an insignificant risk of change in value and
• Have a maturity of three months or less at acquisition

(f) Investment in Subsidiaries

Investments in the Company’s subsidiaries are recorded at cost.

(g) Financial Liabilities

Financial liabilities are recognized initially on the trade date at which the Company becomes a party to the contractual provisions of the instrument. The Company derecognizes a financial liability when its contractual obligations are discharged or canceled or expire.

Financial assets and liabilities are offset and the net amount presented in the statements of financial position when, and only when, the Company has a legal right to offset the amounts and intends either to settle on a net basis or to realize the asset and settle the liability simultaneously.

Notes to the Nonconsolidated Financial Statements December 31, 2019 and 2018

The liabilities to employee benefit plans in the statements of financial position are comprised of the present value of the defined benefit plan obligation (determined using the projected unit credit method) allocable to UNUS. That liability is discounted using rates based on high quality corporate bonds less the fair value of plan assets allocable to UNUS. All of the Company’s defined benefit plans are subject to annual independent actuarial valuations prepared as of the reporting date.

With respect to defined contribution plans, the Company records an expense in the statements of operations equal to its contribution payable to each plan. The Company’s obligation under defined contribution plans is limited to the amounts required to be contributed each year. The assets and liabilities of defined contribution plans are not reflected in these financial statements.

(k) Income Taxes

The Company files its tax returns on a consolidated basis with the UNUS Group for U. S. federal purposes and in many states in which it conducts business. Income taxes reflected in these financial statements are determined using the pro rata method whereby current and deferred income taxes are allocated to members of the UNUS Group based on each member’s relative contribution to the UNUS Group’s consolidated income tax expense or benefit.

Income taxes are comprised of current and deferred tax. Current taxes are based on the enacted and substantively enacted tax rates and are recognized in the statements of operations except to the extent that they relate to items recognized directly in equity. Current tax benefit may also include adjustments to amounts recorded for tax assets and liabilities in prior years.

The Company recognizes deferred taxes using the asset and liability method on its temporary differences and on any carryforwards except to the extent benefits are not expected to be utilized by the consolidated UNUS Group. Deferred taxes are based on the expected manner of realization or settlement using tax rates enacted or substantively enacted as of the fiscal year end. Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income tax is related to the same regulatory authority. Deferred taxes are not provided on temporary differences related to investments in subsidiaries to the extent that it is probable they will not reverse in the foreseeable future.

(l) Provisions

Provisions are recognized when the Company has a present obligation (legal or constructive) arising from a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation is available. Provisions are discounted if the effect is material to the financial statements. No provisions were discounted in these financial statements.

Notes to the Nonconsolidated Financial Statements December 31, 2019 and 2018

(m) Impairment of Assets

A financial asset not carried at fair value through profit and loss is assessed at each reporting date to determine whether there is objective evidence that it is impaired. A financial asset is impaired if objective evidence indicates that a loss event has occurred after the initial recognition of the asset and that the loss event had a negative effect on the estimated future cash flows of that asset that can be estimated reliably.

Objective evidence that financial assets are impaired can include default or delinquency to a debtor, restructuring of an amount due to the Company on terms that the Company would not consider otherwise, indications that a debtor or issuer will enter bankruptcy, or the disappearance of an active market for a security. In addition, for an investment in an equity security, a significant or prolonged decline in its fair value below cost is objective evidence of impairment.

Annually, in accordance with IAS 36 – Impairment of Assets , the Company determines whether indicators of asset impairment exist, particularly with respect to its investments in subsidiaries and its receivables from entities within the Unilever Group. There were no indicators of impairment in 2019 or 2018 , and therefore no impairment recorded in 2019 or 2018.

(n) Leases – Significant Accounting Policy

The Company has applied IFRS 16 – Leases, using the full retrospective approach and therefore comparative information has been restated. Under the policy applicable from January 1, 2018, the Company recognizes a right-of-use asset and a lease liability at the lease commencement date.

The right-of-use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to dismantle and remove the underlying asset or to restore the underlying asset or the site on which it is located, less any lease incentives received. The right-of-use asset is subsequently depreciated using the straight-line method from the commencement date to the end of the lease term, unless the lease transfers ownership of the underlying asset to the Company by the end of the lease term or the cost of the right-of-use asset reflects that the Company will exercise a purchase option. In that case the right-of-use asset will be depreciated over the useful life of the underlying asset, which is determined on the same basis as those of property and equipment. In addition, the right-of-use asset is periodically reduced by impairment losses, if any, and adjusted for certain remeasurements of the lease liability.

The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Company’s incremental borrowing rate. Generally, the Company uses its incremental borrowing rate as the discount rate. Lease payments included in the measurement of the lease liability comprise the following:

• fixed payments, including in-substance fixed payments;
• variable lease payments that depend on an index or a rate, initially measured using the index or rate as at the commencement date;

Notes to the Nonconsolidated Financial Statements December 31, 2019 and 2018

3. Investments in Subsidiaries

Following is a summary of the Company’s investments in wholly-owned subsidiaries as of December 31, 2019 and 2018:

Country Principal Of Place of $ thousands Subsidiary Incorporation Business 2019 2018 Conopco, Inc. U.S. U.S. 28,390,629 28,156, UCC U.S. U.S. 3,447 3,

28,394,076 28,159,

The carrying value of UCC is historical cost. UCC provides financing for all entities within the UNUS Group. It has no other independent operations.

The carrying value of the Company’s investment in Conopco is adjusted for the following:

• Acquisition of equity shares of the Ultimate Parent
• Generation of income tax receivables
• Impairment loss (recovery)

During the years ended December 31, 2019 and 2018, the Company acquired equity shares of its Ultimate Parent, which were then provided to employees of Conopco of $76.3 million and $83. million, respectively. The contribution of such amounts is not recovered from Conopco, and as such, is treated as an increase in the Company's investment in Conopco. In addition, there were related taxes on the share-based compensation plans in the amount of $835 thousand and $2. million for the years ended December 31, 201 9 and 201 8 , respectively. In addition, during the years ended December 31, 2019 and 2018, the Company generated income tax receivables of $130. million and $ 1 27.9 million, respectively, which are used to offset income taxes payable by Conopco in the Company's consolidated income tax returns. These income tax receivables are not recovered from Conopco, and as such are treated as increases to the Company's investment in Conopco.

During the year ended December 31, 201 9 , the Company received dividends totaling $ 600 million from Conopco. During the year ended December 31, 2018 the Company did not receive dividends from Conopco.

Notes to the Nonconsolidated Financial Statements December 31, 2019 and 2018

4. Employee Compensation

Staff and management costs for the years ended December 31, 2019 and 2018 consist of the following:

$ thousands 2019 2018 Staff costs: Remuneration of employees $ 14,619 $ 19, Social Security 1,449 1, Post-employment benefits 324 593 Share-based payments 3,025 7, $ 19,417 $ 29,

Key management compensation: Salaries and short-term benefits $ 2,555 $ 4, Post-employment benefits 4 6 Share-based payments 472 1, $ 3,031 $ 5,

Staff includes all persons not included within key management. Key management includes members of the Executive leadership team and other (executive and non-executive) Company officers.

Total staff and key management compensation of $22.4 million and $34.6 million for 2019 and 2018 , respectively are presented in the statements of operations within operating costs. All compensation, with the exception of share-based payments, is rebilled to affiliates. The above amounts represent gross costs incurred including amounts paid related to UNUS Group entities that the Company is reimbursed for. Refer to note 8 for a summary of amounts comprising the operating costs, net of rebilling to affiliates, for the years ended December 31, 2019 and 2018.

Notes to the Nonconsolidated Financial Statements December 31, 2019 and 2018

Investment Strategy

The Company follows Unilever Group policy guidelines with respect to the investment of pension assets. Those guidelines require the allocation of plan assets to various classes of investments with the goal of controlling risk and maintaining the right balance between risk and long-term returns in order to limit the cost of the plans to the Company. The diversification of plan assets is such that the failure of a single investment would not impact the overall level of plan assets. The plan continues to invest a significant proportion of assets in equities which offer the best returns over the long run commensurate with an acceptable level of risk. The plans expose the Company to investment risk, interest rate risk, and longevity risk. In order to mitigate such risks, the plan also has significant investments in bonds and other alternative investments.

Plan Assumptions

The following represent the significant assumptions in the determination of the benefit obligation under the Company’s pension and other post-retirement plans as of December 31, 2019 and 2018:

2019 2018 Discount rate for Balance Sheet 3.30% 4.30% Discount rate for Service Cost 3.40% 4.30% Inflation 2.00% 2.00% Rate of salary increase 3.00% 3.00% Weighted average return on assets 4.20% 4.90% Long-term medical care rate 5.00% 5.00%

Number of years a current pensioner is expected to live past 65 Men (^) 20.58 20. Women 22.55 22.

Number of years a future pensioner currently aged 45 is expected to live past 65 Men 22.16 21. Women 24.11 23.

Mortality assumptions are based on the table Pri- 2012 with generational mortality improvements using scale MP- 2019. This table has a built-in allowance for future improvements in longevity.

Notes to the Nonconsolidated Financial Statements December 31, 2019 and 2018

Sensitivities

The sensitivity of pension and post-retirement health benefit liabilities to changes in key assumptions are as follows:

Change in Change in Change in Liabilities Liabilities Assumptions Pension Post-retirement Health Discount rate Increase by 0.1% -1.4% -0.7% Inflation Increase by 0.1% 0.0% -0.1% Long-term medical care rate Increase by 0.1% 0.0% 0.0%

An equivalent decrease in the indicated rates would have a commensurate effect in the opposite direction. Sensitivity analyses have been determined based on reasonably possible changes in the respective assumptions occurring at the end of the reporting period and may not be representative of an actual change. The analysis is based on a change in the key assumption while holding all other assumptions constant. The methods and types of assumptions used in preparing the sensitivity analysis did not change when compared in the prior period.

Valuations of other post-retirement benefit plans assume a higher initial level of medical cost inflation, which drops from 7% to the long-term rate of 5% within 5 years. Healthcare cost trend assumptions can have a significant impact on the amounts reported for healthcare plans.

Statements of Operations Net defined benefit cost of the plans charged to the statement of operations for the Company and for the plans as a whole for the years ended December 31, 2019 and 2018 are as follows:

$ thousands Company The Plans 2019 2018 2019 2018 Charged to operating profit: Current service cost 945 500 16,161 17, Special termination benefits - - - 4, Past service cost - - (9,600) (6,251) Settlements/curtailments - - 4,719 2, Total operating costs 945 500 11,280 19,

Charged to finance costs: Interest on retirement benefits 2,787 2,816 62,601 60, Expected return on assets (1,852) (1,895) (37,874) (38,039) Finance costs 935 921 24,727 22,