filings.toolsItem 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion contains forward-looking statements that involve risks and uncertainties. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions, and projections about our industry, business, and future financial results. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those discussed in the section of our Split-Off Prospectus entitled “Risk Factors” and the section entitled “Cautionary Note Regarding Forward-Looking Statements” included herein.
Our accompanying Condensed Consolidated Financial Statements as of October 1, 2023 and for the fiscal three and nine months ended October 1, 2023 and October 2, 2022 have been prepared in accordance with U.S. GAAP and the rules and regulations of the SEC for interim financial statements, and should be read in conjunction with our audited combined financial
statements for the year ended January 1, 2023, which are included in the Split-Off Prospectus, and in conjunction with our unaudited Condensed Consolidated Financial Statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q. In our opinion, the Condensed Consolidated Financial Statements reflect all adjustments, consisting of normal and recurring adjustments, necessary for a fair statement of the financial condition, results of operations and cash flows for the periods indicated. All currency amounts are expressed in U.S. dollars unless otherwise noted.
Overview
Company Overview
At Kenvue, our purpose is to realize the extraordinary power of everyday care. As a global leader at the intersection of healthcare and consumer goods, we are the world’s largest pure-play consumer health company by revenue with $15.0 billion in Net sales in 2022. By combining the power of science with meaningful human insights and digital-first approach, we empower consumers to live healthier lives every day. Trusted by generations, our differentiated portfolio of iconic brands—including Tylenol®, Neutrogena®, Listerine®, Johnson’s®, BAND-AID®, Aveeno®, Zyrtec®, and Nicorette®—is backed by science and recommended by healthcare professionals, which further reinforces our consumers’ connections to our brands.
Our portfolio includes Self Care, Skin Health and Beauty, and Essential Health products, allowing us to connect with consumers globally—in their daily rituals and the moments that matter most.
Our well-known portfolio represents a combination of global and regional brands, many of which hold leading positions in their respective categories. In 2022, we held seven #1 brand positions across major categories globally, in addition to many #1 brand positions locally across our four regions. Our global footprint is also well balanced geographically with approximately half of our Net sales generated outside North America in 2022.
Our global scale and the breadth of our brand portfolio are complemented by our well-developed capabilities and accelerated through our digital-first approach, allowing us to dynamically capitalize on and respond to current trends impacting our categories and geographic markets.
With a sole focus on consumer health, our marketing organization operates efficiently by leveraging our precision marketing, e-commerce, and broader digital capabilities to develop unique consumer insights and further enhance the relevance of our brands. Similarly, our research and development organization combines these consumer insights with deep, multi-disciplinary scientific expertise, and engagement with healthcare professionals, to drive innovative new products, solutions, and experiences centered around consumer health.
Our Business Segments
We operate our business through the following three reportable business segments:
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Self Care. Our Self Care product categories include: Cough, Cold and Allergy; Pain Care; and Other Self Care (Digestive Health, Smoking Cessation, and Other). Major brands in the segment include Tylenol®, Nicorette®, and Zyrtec®.
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Skin Health and Beauty. Our Skin Health and Beauty product categories include: Face and Body Care and Hair, Sun and Other. Major brands in the segment include Neutrogena®, Aveeno®, and OGX®.
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Essential Health. Our Essential Health product categories include: Oral Care, Baby Care, and Other Essential Health (Women’s Health and Wound Care). Major brands in the segment include Listerine®, Johnson’s®, BAND-AID®, and Stayfree®.
For additional information about our three reportable business segments, see “—Key Factors Affecting Our Results—Our Brands and Product Portfolio” and Note 14, “Segments of Business,” to our Condensed Consolidated Financial Statements included herein.
Separation from Johnson & Johnson
In November 2021, Johnson & Johnson (“J&J”), our former parent company, announced its intention to separate its Consumer Health segment (the “Consumer Health Business”) into a new, publicly traded company (the “Separation”). We were incorporated in Delaware on February 23, 2022 in connection with the Separation and were formed to ultimately hold, directly
or indirectly, and conducted certain operational activities in anticipation of the planned separation of, the Consumer Health Business. Prior to the Kenvue IPO (as defined below), we were wholly owned by J&J and primarily represented the Consumer Health Business. We also included certain other product lines previously reported in another segment of J&J. On April 4, 2023, in connection with the Separation, J&J completed in all material respects the transfer of the assets and liabilities of the Consumer Health Business to us and our subsidiaries, other than the transfer of assets and liabilities in certain jurisdictions where we and J&J will defer the transfer of such assets and assumption of liabilities and other immaterial assets (such transfer, the “Consumer Health Business Transfer”).
The registration statement related to the initial public offering of Kenvue’s common stock was declared effective on May 3, 2023, and our common stock began trading on the New York Stock Exchange under the ticker symbol “KVUE” on May 4, 2023 (the “Kenvue IPO”).
On May 8, 2023, the Kenvue IPO was completed through the sale of 198,734,444 shares of common stock, par value $0.01 per share, including the underwriters’ full exercise of their option to purchase 25,921,884 shares to cover over-allotments, at an initial public offering price of $22 per share for net proceeds of $4.2 billion after deducting underwriting discounts and commissions of $131 million. On May 8, 2023, in conjunction with the Consumer Health Business Transfer, we distributed $13.8 billion to J&J from the (1) net proceeds received from the sale of the common stock in the Kenvue IPO and (2) net proceeds received from the Debt Financing Transactions as defined in Note 4, “Borrowings” to our Condensed Consolidated Financial Statements included herein, and (3) any cash and cash equivalents in excess of the $1.17 billion in cash and cash equivalents retained by the Company immediately following the Kenvue IPO. As of the closing of the Kenvue IPO, J&J owned 1,716,160,000 shares of Kenvue common stock, or approximately 89.6% of the total outstanding shares of Kenvue common stock.
On July 24, 2023, J&J initiated an exchange offer (the “Exchange Offer”) under which its shareholders could exchange shares of J&J common stock for shares of Kenvue Inc. common stock owned by J&J. On August 23, 2023, J&J announced the results of the Exchange Offer through which J&J accepted an aggregate of 190,955,435 shares of J&J common stock in exchange for 1,533,830,450 shares of Kenvue common stock, representing approximately 80.1% of Kenvue’s outstanding common stock as of August 23, 2023. As a result, Kenvue became a fully independent company and J&J now owns 9.5% of the outstanding shares of Kenvue common stock following the completion of the Exchange Offer.
We are incurring certain costs in connection with our establishment as a standalone public company (the “Separation-related costs”). We expect the non-recurring Separation-related costs will continue through at least fiscal year 2024. For additional information about the Separation, see “Agreements between Johnson & Johnson and Kenvue and Other Related Person Transactions—Relationship between Johnson & Johnson and Kenvue” and “Agreements between Johnson & Johnson and Kenvue and Other Related Person Transactions—Agreements Entered into in Connection with the Separation” in the Split-Off Prospectus.
Relationship with J&J
In connection with the Separation, we have entered into the Separation Agreement and various other agreements with J&J for the purpose of effecting the Separation. These agreements provide a framework for our relationship with J&J and govern various interim and ongoing relationships between us and J&J that follows the completion of the Kenvue IPO. These agreements with J&J are described in Note 8, “Related Parties,” to our Condensed Consolidated Financial Statements included herein.
Key Factors Affecting Our Results
We believe that our performance and future success depend on a number of factors that present significant opportunities for us but also pose risks and challenges, including those discussed below and in the section of our Split-Off Prospectus entitled “Risk Factors”.
Our Brands and Product Portfolio
We have a world class, global portfolio of iconic and modern brands that has been built over the last 135 years and is trusted by generations of consumers. Our business is balanced and resilient with leading brands across categories and geographic markets. Our brands are widely recognized and represents a combination of global powerhouses and regional brands, many of which hold leading positions in their respective categories. Our brands are built for moments that uniquely matter; these moments of care create an emotional connection to our products that creates deep bonds between consumers and our brands.
Our ability to compete successfully depends on the strength of these brands. The vast majority of our Net sales are derived from products bearing proprietary trademarks and trade names, and these trademarks and trade names convey that the products we sell are “brand name” products. Developing and maintaining the reputation of our brands is a critical component of our relationship with consumers, customers, manufacturers, suppliers, distributors, and other third-party partners, including healthcare professionals, influencers, and other individuals with whom we have relationships. We recognize that our reputation and our brands could be damaged by negative publicity, whether or not valid, related to our company, our brands, our products, our supply chain, our ingredients, our packaging, our environmental, social, and governance practices, our employees, or any other aspect of our business.
Consumers, customers, and third-party partners value and trust the reputation, reliability, and status of our brands and the quality, performance, and functionality of our products, and we believe there are significant opportunities to further increase our category and brand penetration by continuing to deepen our brand relevance and salience across our portfolio, continually earning a place for our products in consumers’ hearts and homes.
Shifting Consumer Preferences
Everyday care has never been a more essential part of the consumer health journey. Globally, people’s preferences and expectations for consumer health products continue to evolve, with a heightened focus on preventative care and science-backed solutions. While the focus on consumer health was already on the rise before the COVID-19 pandemic, this focus has further accelerated since the start of the pandemic. Consumers are also shifting the paradigm of beauty towards health. Other recent trends that have affected consumer preferences include an aging population, premiumization (where consumers switch their purchases to premium alternatives), a growing middle class in emerging markets and the rise of digital ecosystems that create new opportunities for personalized health solutions. We expect these trends to continue and that consumers will continue to seek solutions that meet their health goals, creating growth opportunities across our product portfolio.
Consumer preferences and purchasing patterns are difficult to predict and may fluctuate rapidly. Our success is dependent on our ability to anticipate, understand, and respond appropriately to market trends and changing consumer preferences more quickly than our competitors. Accordingly, we increasingly leverage our digital capabilities and data analytics to gain new commercial insights and develop targeted marketing and advertising initiatives to reach consumers. Moreover, market trends and consumer preferences and purchasing patterns may vary by geographic region, and we seek to complement our portfolio of iconic global brands with strong regional brands that are uniquely tailored to local preferences and trends.
Innovation
We rely on science. We have always prioritized science as the core of how we provide care, and we remain committed to this approach. Our ability to quickly develop new products and technologies and to adapt and market our products on an ongoing basis to meet evolving consumer preferences is an essential component of our business strategy. Several of our products have a long history of life-enhancing, first-to-market innovations. In many situations, we have driven the innovation and clinical compendium of entire categories. By leveraging world-class research and development capabilities and a team of research and development professionals, we have a multi-disciplinary and differentiated approach to innovation.
We have a successful track record of driving innovation across our categories with a science-based approach centered around human empathy and leveraging our long-standing relationships with healthcare professionals and academic institutions. Nonetheless, developing new products and technologies is a complex, time-consuming and costly process, and a new product may not achieve a successful launch or may not generate sufficient consumer interest and sales to become a profitable product. In order to remain competitive within the product markets we currently service, enter new product markets, and expand into adjacent categories, channels of distribution or geographies, we must continue to invest in innovation and develop, promote, and bring to market new high-quality products.
Expansion of e-Commerce and Digital Capabilities
Our digital-first mindset cuts across all we do. Over the last several years, our digital acceleration has transformed our ability to deliver better consumer health experiences. Today, we apply a digital-first mindset to all aspects of our operations, including research and development, supply chain, go-to-market, and marketing, by prioritizing digital investments, and we intend to continue to accelerate our implementation of this strategy in the future. Effective implementation of our digital-first approach, including effective integration of our digital and physical channels, is integral to the continued growth of our business but involves significant operational changes. We have gradually increased our investment focus into enhancing our digital capabilities, including data science, data analytics, artificial intelligence, machine learning, and natural language processing.
Our pursuit of this strategy has led us in recent years to promote new services, including e-commerce and direct-to-consumer (“DTC”) services, and introduce innovative new products and connected health offerings beyond the traditional services and products we have historically provided to our consumers and customers. Our investments in our digital capabilities are improving data quality and access, fostering innovation, driving e-commerce success, and enabling us to manage our supply chain more effectively while enhancing our marketing and commercial capabilities. However, expanding our service and product offerings through digital initiatives will also create additional risks and uncertainties associated with conducting business digitally, including the speed with which technology changes, technical failures, information security or cybersecurity incidents, consumer privacy and data protection concerns, ethical concerns, changes in state tax regimes, and government regulation of internet activities.
Geographic Expansion
We have a global footprint through which we sold and distributed our broad product portfolio in more than 165 countries across our four regions in 2022. In recent years, we have grown, and we intend to continue to grow, our business by expanding our global operations. Given our global scale, including in the United States and China, we are well positioned to work with our retail partners to meet increasing consumer health demands and develop new product adjacencies for evolving consumer needs globally. In addition to prioritizing expansion in our existing markets where we have identified the most attractive opportunities, we also intend to invest in other sizable, growing, and underpenetrated geographic markets throughout the world.
We expect competition to intensify in the geographic markets where we plan to expand our operations. Local companies based in markets outside the United States may have substantial competitive advantages because of their greater understanding of, and focus on, those local markets. Meanwhile, some of our multinational competitors may develop and grow in certain geographic markets more quickly than we will. Our ability to successfully expand our business globally will depend on a number of factors, including our marketing efforts and consumer acceptance of our products.
Increased Competition
Our products are sold in a highly competitive global marketplace, which, in recent years, has experienced increased retail trade concentration, the emergence of retail buying alliances, the rapid growth of e-commerce and the integration of traditional and digital operations at key retail trade customers. One of our customers accounted for approximately 12% and 13% of our total Net sales for the fiscal three and nine months ended October 1, 2023, respectively, and 13% and 14% of our total Net sales for the fiscal three and nine months ended October 2, 2022, respectively. Our top 10 customers represented approximately 40% and 42% of our total Net sales for the fiscal three and nine months ended October 1, 2023, respectively, and 42% and 44% of our total Net sales for the fiscal three and nine months ended October 2, 2022, respectively. Nonetheless, as a result of these trends, we are increasingly dependent on certain large-format retail trade customers in each of our business segments and some of these retail trade customers have significant bargaining strength.
We face substantial competition in each of our business segments and product lines and across all geographic markets in which we operate. We compete with companies of all sizes on the basis of cost-effectiveness, product performance, real or perceived product advantages, intellectual property rights, advertising, and promotional activities, brand recognition and loyalty, consumer convenience, pricing, and geographic reach. Our competitors include multinational corporations, smaller companies that often operate on a regional basis, retailers’ private-label brands, and generic non-branded products. Many of these competitors have benefited from the substantial growth in e-commerce and focus extensively on DTC or other non-traditional, digital business models. Competitive factors impacting our business also include market dynamics and evolving consumer preferences, brand image, a broad product portfolio, new product innovations and product development, pricing that is attractive to consumers, cost inputs, and the ability to attract and retain talented employees. We expect that the continued attractiveness of the categories and geographic markets in which we operate will encourage the entry of new competitors of all sizes, which could increase these and other competitive pressures in the future.
Sourcing, Manufacturing, and Supply Chain Management
Our ability to meet the needs of our consumers and customers depends on the proper functioning of our manufacturing and supplier operations. Our manufacturing operations require the timely delivery of sufficient amounts of complex, high-quality components and materials. We have built our supply chain network to deploy resources across the globe where they are most needed. Our extensive distribution network and sales organization enable us to establish strategic partnerships with key suppliers and retailers across multiple markets and channels, where we further leverage our scale to drive flexible manufacturing capacity and supply chain optimization. We believe this approach builds and supports our resilience across economic cycles and allows us to prioritize or expand our geographic focus based on our strategic priorities. Nonetheless, we have in the past faced, and may in the future face, unanticipated interruptions and delays in manufacturing through our internal
and external supply chain. For example, since 2021 we have experienced, and we continue to experience, higher than expected inflation, including escalating transportation, commodity and other supply-chain costs and disruptions that have adversely affected, and continue to adversely affect, our results of operations. Although certain costs have moderated to an extent, we continue to experience higher energy and labor costs. Manufacturing or supplier disruptions could result in product shortages, declining sales, reputational damage or significant costs.
Supply Chain Optimization Initiatives
Since 2019, we have taken significant steps to meet consumer demand and mitigate supply chain constraints. We have redesigned our manufacturing and distribution network, optimizing both in-house and external manufacturing and distribution footprints to improve lead time and reliability across the globe. We selectively invested in specific technologies and expanded our capacity in different geographic markets with the intent to increase competitiveness by improving cost, speed, compliance, and customer service. A series of different initiatives were deployed including (1) improving inter-region agility through end-to-end collaboration and shipping optimization, (2) distribution network redesign to manage the surge of e-commerce volume and mitigate constraints, (3) product offering optimization that eliminated a significant number of small external manufacturers and discontinued unprofitable SKUs, and (4) investments in technology, automation, and digital capabilities that modernized our supply chain operations and enabled inventory optimization, which improved profitability, quality control, and shipping container loading and utilization while reducing consumer complaints. As a result, our historical results of operations reflect savings delivered through these end-to-end supply chain optimization initiatives.
Macroeconomic Trends
Macroeconomic factors affect consumer spending patterns and thereby our results of operations. These factors include general economic conditions, inflation, consumer confidence, employment rates, business conditions, the availability of credit, interest rates, tax rates, and fuel and energy costs. Factors that impact consumer discretionary spending, which remains volatile globally, continue to create a complex and challenging retail environment for us and our third-party partners. We intend to continue to evaluate and adjust our operating strategies and cost management opportunities to help mitigate any impacts on our results of operations resulting from broader macroeconomic conditions and policy changes, while remaining focused on the long-term growth of our business.
Foreign Currency Exposure
We report our consolidated financial results in U.S. dollars but have significant non-U.S. operations. A large portion of our business is conducted in currencies other than U.S. dollars, and generally the applicable local currency is our functional currency in that locality. As a result, we face foreign currency exposure on the translation into U.S. dollars of our results of operations in numerous jurisdictions primarily in the European Union, the United Kingdom, Japan, China, Canada, Brazil, and India. In addition, as we continue to expand our global operations, our exposure to foreign currency risk could become more significant, particularly if the U.S. dollar strengthens in the future.
Where possible, we manage foreign currency exposure through a variety of methods. We may adopt natural hedging strategies whereby favorable and unfavorable foreign currency impacts to our foreign currency-denominated operating expenses are mitigated to a certain extent by the natural, opposite impact on our foreign currency-denominated Net sales. During 2022, in anticipation of operating as a standalone entity, we started to use derivative financial instruments to mitigate our foreign currency exposure and not for trading or speculative purposes. For example, we hedged a portion of forecasted foreign currency revenue and forecasted inventory purchases. Nonetheless, it is not practical for us to mitigate all of our foreign currency exposure, nor are we able to accurately predict the possible impact of future foreign currency exchange rate fluctuations on our results of operations, due to our constantly changing exposure to various foreign currencies, difficulty in predicting fluctuations in foreign currency exchange rates relative to the U.S. dollar, and the significant number of foreign currencies involved.
Acquisitions and Divestitures
We actively refine our portfolio through acquisitions towards high growth, high margin businesses as well as divestitures of assets that we do not believe are well integrated into our product portfolio and strategic direction. We have demonstrated an ability to successfully integrate and scale acquired businesses to further build upon our market leadership across our product portfolio. We did not complete any significant acquisitions or divestitures during the fiscal three and nine months ended October 1, 2023 and October 2, 2022.
We intend to continue to pursue a disciplined and prudent approach to acquisitions and partnership opportunities that accelerate growth within our business. We believe our strong balance sheet will allow us to strategically make acquisitions and
divestitures while maintaining our disciplined approach to capital allocation. However, the pursuit of acquisitions and divestitures of businesses, brands, assets, and technologies involves numerous potential risks.
Impacts of the COVID-19 Pandemic
The COVID-19 pandemic and government steps to reduce the spread and address the impact of COVID-19 have had and may continue to have an impact on the way people live, work, interact, travel and shop. During the COVID-19 pandemic, many of the communities in which we manufacture, market and sell our products experienced and may in the future experience “stay at home” orders, travel or movement restrictions and other government actions to address the pandemic.
Our Net sales in our Self Care segment and within certain product categories in our Essential Health segment were accelerated by changes in consumer behavior during the COVID-19 pandemic, which helped to offset the adverse impact on our Net sales from the remainder of the business, primarily Skin Health and Beauty products and the Baby Care and Women’s Health products within our Essential Health segment, due to lockdown-driven lost usage occasions, including the inability of consumers to purchase our products due to financial hardship, government actions imposing travel or movement restrictions, shifts in demand and consumption away from more discretionary or higher-priced products to lower-priced products and consumer pantry-loading activity. However, as governments began lifting restrictions, this negative trend began to level off and stabilize in the fourth quarter of 2021 while momentum in Self Care and Essential Health products continued due to a rising focus on consumer health. Although the impact of the COVID-19 pandemic on our business has largely subsided, the extent to which the COVID-19 pandemic will continue to impact our business and financial results will depend on many factors that cannot be predicted with certainty, including the duration of the outbreak and the impact of new variants.
Legal Proceedings
We and/or certain of our subsidiaries are involved from time to time in various lawsuits and claims relating to intellectual property, commercial contracts, product liability, labeling, marketing, advertising, pricing, antitrust and trade regulation, labor and employment, indemnification, data privacy and security, environmental, health and safety, and tax matters, governmental investigations, and other legal proceedings that arise in the ordinary course of our business. See Note 13, “Commitments and Contingencies,” to our Condensed Consolidated Financial Statements included herein for additional information regarding our current legal proceedings.
A significant number of personal injury claims alleging that talc causes cancer were made against J&J and certain of its affiliates arising out of the use of body powders containing talc, primarily Johnson’s Baby Powder. These personal injury suits were filed primarily in state and federal courts in the United States and in Canada.
Pursuant to the Separation Agreement, J&J has retained all liabilities on account of or relating to harm arising out of, based upon or resulting from, directly or indirectly, the presence of or exposure to talc or talc-containing products sold by J&J or its affiliates in the United States and Canada (the “Talc-Related Liabilities”) and, as a result, has agreed to indemnify us for the Talc-Related Liabilities and any costs associated with resolving such claims. We will, however, remain responsible for all liabilities on account of or relating to harm arising out of, based upon or resulting from, directly or indirectly, the presence of or exposure to talc or talc-containing products sold outside the United States or Canada.
Other Information
Baby Powder Transition
On August 11, 2022, we announced the commercial decision to transition to an all cornstarch-based baby powder portfolio. As a result of this transition, talc-based Johnson’s Baby Powder will be discontinued globally in 2023. Talc-based Johnson’s Baby Powder was previously discontinued during 2020 in certain markets including the United States and Canada. We do not expect the impact of this change to be material.
Russia-Ukraine War
Although the long-term implications of the ongoing military conflict between Russia and Ukraine (the “Russia-Ukraine War”) are difficult to predict at this time, the financial impact of the conflict to us during the fiscal nine months ended October 1, 2023 and October 2, 2022 was not material. For both the fiscal three and nine months ended October 1, 2023 and 2022, our Ukrainian business represented 0.2% of our Net sales. As of October 1, 2023 and January 1, 2023, our Ukrainian business represented less than 0.1% and 0.1% of our net assets, respectively. For both the fiscal three and nine months ended October 1, 2023, our
Russian business represented 1.0% of our Net sales. For the fiscal three and nine months ended October 2, 2022, our Russian business represented 1.3% and 1.4% of our Net sales, respectively.
In the first quarter of 2022, we announced our decision to suspend supply of all of our products into Russia other than our over-the-counter medicines within our Self Care segment, which we continued to supply as patients rely on many of these products for healthcare purposes. Supply of the suspended products terminated during the second quarter of 2022. We also suspended all advertising in Russia, all clinical trials in Russia, and any additional investment in Russia. We will continue to monitor the geopolitical situation in Russia and to evaluate our activities and future operations in Russia.
Deferred Markets
In order to ensure compliance with applicable law, to obtain necessary governmental approvals and other consents and for other business reasons, we deferred the transfer of certain assets and liabilities of businesses in certain non-U.S. jurisdictions, including China, Malaysia, and Russia, until after the completion of the Kenvue IPO. On September 11, 2023, J&J transferred the equity interests in the majority of the Deferred Legal Entities to the Company that previously had been consolidated as VIEs in the Company’s Condensed Consolidated Financial Statements. The Condensed Consolidated Financial Statements included herein include businesses in all jurisdictions in which we will operate following the completion of the Separation, including any Deferred Local Business (as defined in “Agreements between Johnson & Johnson and Kenvue and Other Related Person Transactions—Agreements Entered into in Connection with the Separation—Separation Agreement—Deferred Markets” in the Split-Off Prospectus). For more information regarding Deferred Local Businesses, see “Risk Factors—Risks Related to Kenvue’s Relationship with Johnson & Johnson—The transfer of certain assets and liabilities from Johnson & Johnson to Kenvue contemplated by the Separation will not be completed prior to the completion of the Exchange Offer.” and “Agreements between Johnson & Johnson and Kenvue and Other Related Person Transactions—Agreements Entered into in Connection with the Separation—Separation Agreement—Deferred Markets” in the Split-Off Prospectus.
Provision For Taxes
On December 15, 2022, the European Union (“EU”) Member States formally adopted the EU’s Pillar Two Directive, which generally provides for a minimum effective tax rate of 15%, as established by the Organization for Economic Co-operation Development (“OECD”) Pillar Two Framework that was supported by over 130 countries worldwide. The EU’s Pillar Two Directive effective dates are January 1, 2024, and January 1, 2025, for different aspects of the directive. On July 17, 2023, the OECD published Administrative Guidance proposing certain safe harbors that effectively extend certain effective dates to January 1, 2027. EU Member States still need to adopt the OECD Administrative Guidance in their local Pillar Two legislation for such safe harbor rules to apply. A significant number of other countries are also considering implementing similar legislation. We are continuing to evaluate the potential impact on future periods of the Pillar Two Framework, pending legislative adoption by additional individual countries, including those within the European Union. The global implementation of the minimum tax could have a material impact on our Condensed Consolidated Financial Statements in future periods.
Results of Operations
Fiscal Three Months Ended October 1, 2023 Compared with Fiscal Three Months Ended October 2, 2022
Our results for the fiscal three months ended October 1, 2023 and October 2, 2022 were as follows:
| Fiscal Three Months Ended | |||||||||||||||||||||||||||||||||||
| October 1, 2023 | October 2, 2022 | Change 2022 to 2023 | |||||||||||||||||||||||||||||||||
| (Dollars in Millions) | Amount | Percent | |||||||||||||||||||||||||||||||||
| Net sales | $ | 3,915 | $ | 3,789 | $ | 126 | 3.3 | % | |||||||||||||||||||||||||||
| Cost of sales | 1,665 | 1,664 | 1 | 0.1 | % | ||||||||||||||||||||||||||||||
| Gross profit | 2,250 | 2,125 | 125 | 5.9 | % | ||||||||||||||||||||||||||||||
| Selling, general, and administrative expenses | 1,531 | 1,376 | 155 | 11.3 | % | ||||||||||||||||||||||||||||||
| Other operating expense (income), net | 9 | (14) | 23 | * | |||||||||||||||||||||||||||||||
| Operating income | 710 | 763 | (53) | (6.9) | % | ||||||||||||||||||||||||||||||
| Other expense, net | 25 | 25 | — | — | % | ||||||||||||||||||||||||||||||
| Interest expense, net | 100 | — | 100 | * | |||||||||||||||||||||||||||||||
| Income before taxes | 585 | 738 | (153) | (20.7) | % | ||||||||||||||||||||||||||||||
| Provision for taxes | 147 | 152 | (5) | (3.3) | % | ||||||||||||||||||||||||||||||
| Net income | $ | 438 | $ | 586 | $ | (148) | (25.3) | % |
- Calculation not meaningful.
Net Sales
Net sales were $3.9 billion and $3.8 billion for the fiscal three months ended October 1, 2023 and October 2, 2022, respectively, an increase of $126 million, or 3.3%. Net sales growth was primarily driven by value realization (also referred to as Price/Mix), partially offset by lower volume. Excluding the impact of unfavorable changes in currency rates of $13 million, Organic growth, a non-GAAP financial measure as defined below, was $139 million, primarily attributable to Self Care, where successful brand activation and innovation continue to expand usage occasions, driving volume growth and strength across all product categories, despite a slow start to the cold, cough, and flu season. Momentum in Essential Health continued as value realization and premiumization initiatives took hold.
Cost of Sales
Cost of sales were $1.7 billion for both the fiscal three months ended October 1, 2023 and October 2, 2022, an increase of $1 million, or 0.1% primarily attributable to the impact of higher costs of key ingredients and packaging materials due to the impact of inflation. The increase was partially offset by the realization of benefits associated with our supply chain optimization initiatives. Cost of sales as a percentage of Net sales decreased 140 basis points to 42.5% as compared to the prior year, due primarily to Net sales growth, which was primarily driven by value realization and non-recurring separation-related benefits, partially offset by the impact of inflation on costs and the negative impact of transactional foreign currency fluctuations. Gross profit margin was 57.5% and 56.1% for the fiscal three months ended October 1, 2023 and October 2, 2022, respectively.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses (“SG&A expenses”) were $1.5 billion and $1.4 billion for the fiscal three months ended October 1, 2023 and October 2, 2022, respectively, an increase of $155 million, or 11.3%. SG&A as a percentage of Net sales increased 280 basis points to 39.1%, as compared to the prior year, primarily attributable to higher costs in enterprise functions from operating on a standalone basis, transition services agreement costs with J&J and an $83 million increase in non-recurring Separation-related costs.
Other Operating Expense (Income), Net
Other operating expense (income), net was $9 million and $(14) million for the fiscal three months ended October 1, 2023 and October 2, 2022, respectively, resulting in an increase in Other operating expense of $23 million. The increase was primarily
driven by the impact of net economic benefit arrangements with J&J in connection with the Deferred Local Businesses during the fiscal three months ended October 1, 2023, partially offset by royalty income. For additional information on the Deferred Local Businesses, see Note 1, “Description of the Company and Summary of Significant Accounting Policies,” to our Condensed Consolidated Financial Statements included herein.
Other Expense, Net
Other expense, net was $25 million compared to Other expense, net of $25 million for the fiscal three months ended October 1, 2023 and October 2, 2022, respectively, which consisted primarily of the impact of changes in foreign currency rates.
Interest Expense, Net
Interest expense, net was $100 million in the fiscal three months ended October 1, 2023 as compared to $0 million in the fiscal three months ended October 2, 2022. The increase was driven by interest expense recognized on senior unsecured notes (the “Senior Notes”) and notes issued under the commercial paper program. See Note 4, “Borrowings,” to our Condensed Consolidated Financial Statements included herein for additional information.
Provision For Taxes
Provision for taxes was $147 million and $152 million for the fiscal three months ended October 1, 2023 and October 2, 2022, respectively, a decrease in income tax expense of $5 million. The decrease was primarily due to lower quarter to date income in comparison to prior year, windfall benefit on stock option exercises and tax benefits related to the completion of the Exchange Offer with J&J offset by higher U.S. tax on foreign income after foreign tax credits.
Segment Results
Segment profit is based on Operating income, excluding depreciation and amortization, non-recurring Separation-related costs, restructuring expense, the impact of the conversion of share-based awards, Other income, net, operating, and unallocated general corporate administrative expenses (referred to herein as “Segment adjusted operating income”) as management excludes these items in assessing segment financial performance. General corporate/unallocated expenses, which includes treasury and legal operations and certain expenses, gains and losses related to the overall management of our company, are not allocated to the segments. In assessing segment performance and managing operations, management does not review segment assets.
For the first quarter of 2023, we adjusted the allocation for certain intangible asset amortization costs within Cost of sales to align with segment financial results as measured by us, including the CODM. Accordingly, we updated our segment disclosures to reflect the updated presentation in all prior periods. Segment adjusted operating income did not change as a result of this update.
See Note 14, “Segments of Business,” to our Condensed Consolidated Financial Statements included herein for additional information.
Fiscal Three Months Ended October 1, 2023 Compared with Fiscal Three Months Ended October 2, 2022
The following table presents Segment net sales and Segment adjusted operating income and the period-over-period changes in Segment adjusted operating income for the fiscal three months ended October 1, 2023 and October 2, 2022. See Note 14, “Segments of Business,” to our Condensed Consolidated Financial Statements included herein for further details regarding Segment net sales and Segment adjusted operating income.
| Fiscal Three Months Ended | |||||||||||||||||||||||||||||||||||
| October 1, 2023 | October 2, 2022 | Change 2022 to 2023 | |||||||||||||||||||||||||||||||||
| (Dollars in Millions) | Amount | Percent | Amount | Percent | Amount | Percent | |||||||||||||||||||||||||||||
| Segment Net Sales | |||||||||||||||||||||||||||||||||||
| Self Care | $ | 1,613 | 41.2 | % | $ | 1,516 | 40.0 | % | $ | 97 | 6.4 | % | |||||||||||||||||||||||
| Skin Health and Beauty | 1,119 | 28.6 | 1,124 | 29.7 | (5) | (0.4) | |||||||||||||||||||||||||||||
| Essential Health | 1,183 | 30.2 | 1,149 | 30.3 | 34 | 3.0 | |||||||||||||||||||||||||||||
| Total segment net sales | $ | 3,915 | 100.0 | % | $ | 3,789 | 100.0 | % | $ | 126 | 3.3 | % | |||||||||||||||||||||||
| Self Care | $ | 583 | $ | 556 | $ | 27 | 4.9 | % | |||||||||||||||||||||||||||
| Skin Health and Beauty | 167 | 246 | (79) | (32.1) | |||||||||||||||||||||||||||||||
| Essential Health | 309 | 261 | 48 | 18.4 | |||||||||||||||||||||||||||||||
| Total segment adjusted operating income | $ | 1,059 | $ | 1,063 | $ | (4) | (0.4) | % | |||||||||||||||||||||||||||
| Reconciliation to Income before taxes: | |||||||||||||||||||||||||||||||||||
| Depreciation | 72 | 69 | |||||||||||||||||||||||||||||||||
| Amortization | 81 | 83 | |||||||||||||||||||||||||||||||||
| Separation-related costs | 133 | 50 | |||||||||||||||||||||||||||||||||
| Restructuring expense(1) | 3 | 31 | |||||||||||||||||||||||||||||||||
| Conversion of share-based awards(2) | (25) | — | |||||||||||||||||||||||||||||||||
| Other operating expense (income), net | 9 | (14) | |||||||||||||||||||||||||||||||||
| General corporate/unallocated expenses | 76 | 81 | |||||||||||||||||||||||||||||||||
| Total operating income | $ | 710 | $ | 763 | |||||||||||||||||||||||||||||||
| Other expense, net | 25 | 25 | |||||||||||||||||||||||||||||||||
| Interest expense, net | 100 | — | |||||||||||||||||||||||||||||||||
| Income before taxes | $ | 585 | $ | 738 |
(1) Exclusive of the restructuring expense included in Other operating expense (income), net on the Company’s Condensed Consolidated Statements of Operations.
(2) As noted above, Segment adjusted operating income excludes the impact of the conversion of share-based awards (see Note 7, Stock-Based Compensation). This adjustment primarily represents the net impact of the gain on reversal of previously recognized stock-based compensation expense of $148 million, offset by stock-based compensation expense recognized in the fiscal third quarter of 2023 relating to employee services provided prior to the Separation of $123 million.
Organic Growth
We assess our Net sales performance by measuring Organic growth, a non-GAAP financial measure, which measures the period-over-period change in Net sales excluding the impact of changes in foreign currency exchange rates and the impact of acquisitions and divestitures. Management believes Organic growth provides investors with additional, supplemental information that they may find useful in assessing our results of operations by excluding the impact of certain items that we believe do not directly reflect our underlying operations.
The following tables present a reconciliation of the change in U.S. GAAP Net sales to Organic growth for the fiscal three months ended October 1, 2023 compared to the fiscal three months ended October 2, 2022:
| Fiscal Three Months Ended October 1, 2023 vs October 2, 2022**(1)** | |||||||||||||||||||||||||||||||||||
| Reported Net sales change | Impact of foreign currency | Organic growth | |||||||||||||||||||||||||||||||||
| (Dollars in Millions) | Amount | Percent | Amount | Amount | Percent | ||||||||||||||||||||||||||||||
| Self Care | $ | 97 | 6.4 | % | $ | (4) | $ | 101 | 6.7 | % | |||||||||||||||||||||||||
| Skin Health and Beauty | (5) | (0.4) | — | (5) | (0.4) | ||||||||||||||||||||||||||||||
| Essential Health | 34 | 3.0 | (9) | 43 | 3.8 | ||||||||||||||||||||||||||||||
| Total | $ | 126 | 3.3 | % | $ | (13) | $ | 139 | 3.6 | % |
| Fiscal Three Months Ended October 1, 2023 vs October 2, 2022**(1)** | |||||||||||||||||||||||||||||
| Reported Net sales change | Impact of foreign currency | Organic growth | |||||||||||||||||||||||||||
| Price/Mix**(2)** | Volume | ||||||||||||||||||||||||||||
| Self Care | 6.4 | % | (0.3) | % | 5.5 | % | 1.2 | % | |||||||||||||||||||||
| Skin Health and Beauty | (0.4) | — | 6.4 | (6.8) | |||||||||||||||||||||||||
| Essential Health | 3.0 | (0.8) | 10.0 | (6.2) | |||||||||||||||||||||||||
| Total | 3.3 | % | (0.3) | % | 7.1 | % | (3.5) | % |
(1) Acquisitions and divestitures did not materially impact Net sales for the fiscal three months ended October 1, 2023 or October 2, 2022.
(2) Also referred to as value realization.
Self Care Segment
Self Care Segment Net Sales
The Self Care Segment Net sales were $1.6 billion and $1.5 billion for the fiscal three months ended October 1, 2023 and October 2, 2022, respectively, an increase of $97 million, or 6.4%. Excluding the unfavorable impact of foreign currency translation, Organic growth was $101 million or 6.7%, primarily driven by value realization of 5.5% and volume related increases of 1.2% driven by innovation-based volume growth, with Organic growth in all Self Care product categories growing mid to high single digits.
Self Care Segment Adjusted Operating Income
The Self Care Segment adjusted operating income increased by $27 million, or 4.9% to $583 million for the fiscal three months ended October 1, 2023, primarily driven by value realization and the realization of benefits associated with our supply chain optimization initiatives, partially offset by the negative impact of transactional foreign currency fluctuation, higher costs of key ingredients and packaging materials due to the impact of inflation, and increased SG&A expenses.
Skin Health and Beauty Segment
Skin Health and Beauty Segment Net Sales
The Skin Health and Beauty Segment Net sales were $1.1 billion for both the fiscal three months ended October 1, 2023 and October 2, 2022, a decrease of $5 million, or 0.4%. Excluding the unfavorable impact of foreign currency translation, Organic growth decreased $5 million, or 0.4%, primarily driven by volume-related declines of 6.8%, offset by value realization of 6.4%. The decrease was driven by the impact of 2022 product discontinuations in the United States and market softness in China. The decrease was partially offset by the impact of a strong finish to the sun season in the United States, and strength across Latin America (“LATAM”) and Europe, Middle East, and Africa (“EMEA”) led by pricing and premiumization supported growth as supply recovery continued in the United States.
Skin Health and Beauty Segment Adjusted Operating Income
The Skin Health and Beauty Segment adjusted operating income decreased by $79 million, or 32.1% to $167 million for the fiscal three months ended October 1, 2023, primarily driven by the phasing and segment mix of marketing expense recognized in the quarter, the negative impact of transactional foreign currency fluctuations, and higher costs of key ingredients and packaging materials due to the impact of inflation. This decrease was partially offset by value realization and the realization of benefits associated with our supply chain optimization initiatives.
Essential Health Segment
Essential Health Segment Net Sales
The Essential Health Segment Net sales were $1.2 billion and $1.1 billion for the fiscal three months ended October 1, 2023 and October 2, 2022, respectively, with an increase of $34 million, or 3.0%. Excluding the unfavorable impact of foreign currency translation, Organic growth was $43 million, or 3.8%, primarily driven by value realization of 10.0%, partially offset by volume declines of 6.2%. Value realization was led by product innovation and premiumization throughout product categories.
Essential Health Segment Adjusted Operating Income
The Essential Health Segment adjusted operating income increased by $48 million, or 18.4% to $309 million for the fiscal three months ended October 1, 2023. The increase was primarily driven by the phasing and segment mix of marketing expense recognized in the quarter, value realization, and the realization of benefits associated with our supply chain optimization initiatives. This increase was partially offset by the higher costs of key ingredients and packaging materials due to the impact of inflation and the negative impact of transactional foreign currency fluctuations.
Results of Operations
Fiscal Nine Months Ended October 1, 2023 Compared with Fiscal Nine Months Ended October 2, 2022
Our results for the fiscal nine months ended October 1, 2023 and October 2, 2022 were as follows:
| Fiscal Nine Months Ended | ||||||||||||||||||||||||||||||||||||||
| October 1, 2023 | October 2, 2022 | Change 2022 to 2023 | ||||||||||||||||||||||||||||||||||||
| (Dollars in Millions) | Amount | Percent | ||||||||||||||||||||||||||||||||||||
| Net sales | $ | 11,778 | $ | 11,183 | $ | 595 | 5.3 | % | ||||||||||||||||||||||||||||||
| Cost of sales | 5,178 | 4,944 | 234 | 4.7 | % | |||||||||||||||||||||||||||||||||
| Gross profit | 6,600 | 6,239 | 361 | 5.8 | % | |||||||||||||||||||||||||||||||||
| Selling, general, and administrative expenses | 4,555 | 4,101 | 454 | 11.1 | % | |||||||||||||||||||||||||||||||||
| Other operating income, net | (7) | (6) | (1) | (16.7) | % | |||||||||||||||||||||||||||||||||
| Operating income | 2,052 | 2,144 | (92) | (4.3) | % | |||||||||||||||||||||||||||||||||
| Other expense, net | 65 | 19 | 46 | * | ||||||||||||||||||||||||||||||||||
| Interest expense, net | 154 | — | 154 | * | ||||||||||||||||||||||||||||||||||
| Income before taxes | 1,833 | 2,125 | (292) | (13.7) | % | |||||||||||||||||||||||||||||||||
| Provision for taxes | 496 | 422 | 74 | 17.5 | % | |||||||||||||||||||||||||||||||||
| Net income | $ | 1,337 | $ | 1,703 | $ | (366) | (21.5) | % |
- Calculation not meaningful.
Net Sales
Net sales were $11.8 billion and $11.2 billion for the fiscal nine months ended October 1, 2023 and October 2, 2022, respectively, an increase of $595 million, or 5.3%. Excluding the impact of unfavorable changes in currency rates of $242 million, Organic growth was $837 million, primarily attributable to value realization, increased demand across our Self Care segment, including Pain Care and Cough, Cold and Allergy product categories, resulting from higher cold and flu incidences
and successful brand activation and innovation. In Skin Health & Beauty, sequential share gains in sun care were fueled by a strong sun season care, strong e-commerce and club channel performance. Momentum in Essential Health continued as value realization and premiumization initiatives took hold.
Cost of Sales
Cost of sales were $5.2 billion and $4.9 billion for the fiscal nine months ended October 1, 2023 and October 2, 2022, respectively, an increase of $234 million, or 4.7% primarily attributable to impact of higher costs of key ingredients and packaging materials due to the impact of inflation. The increase was partially offset by the realization of benefits associated with our supply chain optimization initiatives and $106 million favorable translational currency impacts. Cost of sales as a percentage of Net sales decreased 20 basis points to 44.0% as compared to the prior year due to Net sales growth, which was primarily driven by value realization, partially offset by negative transactional foreign currency fluctuations. Gross profit margin was 56.0% and 55.8% for the fiscal nine months ended October 1, 2023 and October 2, 2022, respectively.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses were $4.6 billion and $4.1 billion for the fiscal nine months ended October 1, 2023 and October 2, 2022, respectively, an increase of $454 million, or 11.1%. SG&A as a percentage of Net sales increased 200 basis points to 38.7%, as compared to the prior year, primarily attributable to higher costs in enterprise functions as we prepared to operate on a standalone basis, transition services agreement costs with J&J, and an $224 million increase in non-recurring Separation-related costs. These cost increases were partially offset by favorable currency impacts of $65 million.
Other Operating Income, Net
Other operating income, net was $7 million compared to other operating income, net of $6 million for the fiscal nine months ended October 1, 2023 and October 2, 2022, respectively, an increase of $1 million. The increase was primarily driven by the reversal of a contingent liability that was no longer considered to be probable and the gain recognized on the sale of a manufacturing facility in Lancaster, Pennsylvania of $9 million, partially offset by litigation expense and the impact of net economic benefit arrangements with J&J in connection with the Deferred Local Business in the fiscal nine months ended October 1, 2023, see Note 1, “Description of the Company and Summary of Significant Accounting Policies,” to our Condensed Consolidated Financial Statements included herein for additional information.
Other Expense, Net
Other expense, net was $65 million compared to other expense, net of $19 million for the fiscal nine months ended October 1, 2023 and October 2, 2022, respectively, an increase in expense of $46 million, primarily driven by higher foreign currency losses and losses on equity securities.
Interest Expense, Net
Interest expense, net was $154 million in the fiscal nine months ended October 1, 2023 as compared to $0 million in the fiscal nine months ended October 2, 2022. The increase was driven by interest expense recognized on the Senior Notes and notes issued under the commercial paper program, offset by interest income earned on the debt proceeds in escrow and the Facility Agreement, resulting in interest income of $33 million. See Note 4, “Borrowings,” to our Condensed Consolidated Financial Statements included herein for additional information.
Provision For Taxes
Provision for taxes was $496 million and $422 million for the fiscal nine months ended October 1, 2023 and October 2, 2022, respectively, an increase income tax expense of $74 million. The issuance of debt in the first quarter of 2023 resulted in an increase in annual interest and reduced our capacity to utilize foreign tax credits against U.S. foreign source income. As a result, we recorded a valuation allowance against a deferred tax asset related to future foreign tax credit benefits thus increasing the reported tax expense in the fiscal nine months ended October 1, 2023 as compared to the fiscal nine months ended October 2, 2022. In addition, the effective tax rate increased as a result of return to provision adjustments, offset by favorable foreign tax benefits.
Segment Results
Fiscal Nine Months Ended October 1, 2023 Compared with Fiscal Nine Months Ended October 2, 2022
The following table presents Segment net sales and Segment adjusted operating income and the period-over-period changes in Segment adjusted operating income for the fiscal nine months ended October 1, 2023 and October 2, 2022. See Note 14, “Segments of Business,” to our Condensed Consolidated Financial Statements included herein for further details regarding Segment net sales and Segment adjusted operating income.
| Fiscal Nine Months Ended | |||||||||||||||||||||||||||||||||||
| October 1, 2023 | October 2, 2022 | Change 2022 to 2023 | |||||||||||||||||||||||||||||||||
| (Dollars in Millions) | Amount | Percent | Amount | Percent | Amount | Percent | |||||||||||||||||||||||||||||
| Segment Net Sales | |||||||||||||||||||||||||||||||||||
| Self Care | $ | 4,914 | 41.7 | % | $ | 4,462 | 39.9 | % | 452 | 10.1 | % | ||||||||||||||||||||||||
| Skin Health and Beauty | 3,377 | 28.7 | 3,262 | 29.2 | 115 | 3.5 | |||||||||||||||||||||||||||||
| Essential Health | 3,487 | 29.6 | 3,459 | 30.9 | 28 | 0.8 | |||||||||||||||||||||||||||||
| Total segment net sales | $ | 11,778 | 100.0 | % | $ | 11,183 | 100.0 | % | $ | 595 | 5.3 | % | |||||||||||||||||||||||
| Self Care | $ | 1,741 | $ | 1,554 | $ | 187 | 12.0 | % | |||||||||||||||||||||||||||
| Skin Health and Beauty | 517 | 616 | (99) | (16.1) | |||||||||||||||||||||||||||||||
| Essential Health | 770 | 821 | (51) | (6.2) | |||||||||||||||||||||||||||||||
| Total segment adjusted operating income | $ | 3,028 | $ | 2,991 | $ | 37 | 1.2 | % | |||||||||||||||||||||||||||
| Reconciliation to Income before taxes: | |||||||||||||||||||||||||||||||||||
| Depreciation | 211 | 213 | |||||||||||||||||||||||||||||||||
| Amortization | 242 | 265 | |||||||||||||||||||||||||||||||||
| Separation-related costs | 333 | 109 | |||||||||||||||||||||||||||||||||
| Restructuring expense(1) | 3 | 69 | |||||||||||||||||||||||||||||||||
| Conversion of share-based awards(2) | (25) | — | |||||||||||||||||||||||||||||||||
| Other operating expense, net | (7) | (6) | |||||||||||||||||||||||||||||||||
| General corporate/unallocated expenses | 219 | 197 | |||||||||||||||||||||||||||||||||
| Total operating income | $ | 2,052 | $ | 2,144 | |||||||||||||||||||||||||||||||
| Other expense, net | 65 | 19 | |||||||||||||||||||||||||||||||||
| Interest expense | 154 | — | |||||||||||||||||||||||||||||||||
| Income before taxes | $ | 1,833 | $ | 2,125 |
(1) Exclusive of the restructuring expense included in Other operating expense, net on the Company’s Condensed Consolidated Statements of Operations.
(2) As noted above, Segment adjusted operating income excludes the impact of the conversion of share-based awards (see Note 7, Stock-Based Compensation). This adjustment primarily represents the net impact of the gain on reversal of previously recognized stock-based compensation expense of $148 million, offset by stock-based compensation expense recognized in the fiscal third quarter of 2023 relating to employee services provided prior to the Separation of $123 million.
The following tables present a reconciliation of the change in U.S. GAAP Net sales to Organic growth for the fiscal nine months ended October 1, 2023 compared to the fiscal nine months ended October 2, 2022:
| Fiscal Nine Months Ended October 1, 2023 vs October 2, 2022**(1)** | |||||||||||||||||||||||||||||||||||
| Reported Net sales change | Impact of foreign currency | Organic growth | |||||||||||||||||||||||||||||||||
| (Dollars in Millions) | Amount | Percent | Amount | Amount | Percent | ||||||||||||||||||||||||||||||
| Self Care | $ | 452 | 10.1 | % | $ | (84) | $ | 536 | 12.0 | % | |||||||||||||||||||||||||
| Skin Health and Beauty | 115 | 3.5 | (52) | 167 | 5.1 | ||||||||||||||||||||||||||||||
| Essential Health | 28 | 0.8 | (106) | 134 | 3.9 | ||||||||||||||||||||||||||||||
| Total | $ | 595 | 5.3 | % | $ | (242) | $ | 837 | 7.5 | % |
| Fiscal Nine Months Ended October 1, 2023 vs October 2, 2022**(1)** | |||||||||||||||||||||||||||||
| Reported Net sales change | Impact of foreign currency | Organic growth | |||||||||||||||||||||||||||
| Price/Mix**(2)** | Volume | ||||||||||||||||||||||||||||
| Self Care | 10.1 | % | (1.9) | % | 8.1 | % | 3.9 | % | |||||||||||||||||||||
| Skin Health and Beauty | 3.5 | (1.6) | 7.2 | (2.1) | |||||||||||||||||||||||||
| Essential Health | 0.8 | (3.1) | 10.0 | (6.1) | |||||||||||||||||||||||||
| Total | 5.3 | % | (2.2) | % | 8.4 | % | (0.9) | % |
(1) Acquisitions and divestitures did not materially impact Net sales for the fiscal nine months ended October 1, 2023 or October 2, 2022.
(2) Also referred to as value realization.
Self Care Segment
Self Care Segment Net Sales
The Self Care Segment Net sales were $4.9 billion and $4.5 billion for the fiscal nine months ended October 1, 2023 and October 2, 2022, respectively, an increase of $452 million, or 10.1%. Excluding the unfavorable impact of foreign currency translation, Organic growth was $536 million or 12.0%, primarily driven by value realization of 8.1% and volume-related increases of 3.9% driven by increased demand for Cough, Cold, and Allergy products due to greater instances of respiratory illness, primarily in Europe and China, one-time supply replenishment, primarily in the United States related to low inventory levels at the start of the year, growth in Digestive Health, and innovation-based volume growth.
Self Care Segment Adjusted Operating Income
The Self Care Segment adjusted operating income increased by $187 million, or 12.0% to $1.7 billion for the fiscal nine months ended October 1, 2023, primarily driven by value realization and volume-related increases, portfolio optimization, and the realization of benefits associated with our supply chain optimization initiatives, partially offset by the negative impact of transactional foreign currency fluctuations, higher costs of key ingredients and packaging materials due to the impact of inflation, and increased SG&A expenses.
Skin Health and Beauty Segment
Skin Health and Beauty Segment Net Sales
The Skin Health and Beauty Segment Net sales were $3.4 billion and $3.3 billion for the fiscal nine months ended October 1, 2023 and October 2, 2022, respectively, an increase of $115 million, or 3.5%. Excluding the unfavorable impact of foreign currency translation, Organic growth was $167 million, or 5.1%, primarily driven by value realization of 7.2%, offset by volume-related decreases of 2.1%. The increase was driven by strong e-commerce and club channel performance, easing of supply chain constraints, one-time supply replenishment, and the impact of a strong sun season, partially offset by portfolio rationalization initiatives in 2022 coupled with market softness in China.
Skin Health and Beauty Segment Adjusted Operating Income
The Skin Health and Beauty Segment adjusted operating income decreased by $99 million, or 16.1% to $517 million for the fiscal nine months ended October 1, 2023, driven by increased SG&A expenses, higher costs of key ingredients and packaging materials due to the impact of inflation, and the negative impact of transactional foreign currency fluctuations, partially offset by value realization and the realization of benefits associated with our supply chain optimization initiatives.
Essential Health Segment
Essential Health Segment Net Sales
The Essential Health Segment Net sales were $3.5 billion and $3.5 billion for the fiscal nine months ended October 1, 2023 and October 2, 2022, respectively, an increase of $28 million, or 0.8%. Excluding the unfavorable impact of foreign currency translation, Organic growth was $134 million, or 3.9%, primarily driven by value realization of 10.0%, most notably in Women’s Health and strong momentum in Oral Care globally, partially offset by volume declines of 6.1%. Overall volume declines were driven by category contractions, as well as our supply suspension of certain personal care products in Russia since March 2022.
Essential Health Segment Adjusted Operating Income
The Essential Health Segment adjusted operating income decreased by $51 million, or 6.2% to $770 million for the fiscal nine months ended October 1, 2023. The decrease was primarily attributable to higher costs of key ingredients and packaging materials due to the impact of inflation on costs, the negative impact of transactional foreign currency fluctuations, and increased SG&A expenses, partially offset by value realization and the realization of benefits associated with our supply chain optimization initiatives.
Liquidity and Capital Resources
Prior to April 4, 2023, our working capital requirements and capital expenditures were satisfied as part of J&J’s corporate-wide cash management and centralized funding programs, and a substantial portion of our cash was transferred to J&J. Cash and cash equivalents held by J&J at the corporate level were not specifically identifiable to us.
Effective April 4, 2023, upon completion of the Consumer Health Business Transfer, we no longer participate in J&J’s corporate-wide cash management and centralized funding programs.
Cash Flows
Summarized cash flow information for the fiscal nine months ended October 1, 2023 and October 2, 2022 were as follows:
| Fiscal Nine Months Ended | Change | |||||||||||||||||||||||||
| (Dollars in Millions) | October 1, 2023 | October 2, 2022 | Amount | Percent | ||||||||||||||||||||||
| Net income | $ | 1,337 | $ | 1,703 | $ | (366) | (21.5) | % | ||||||||||||||||||
| Net changes in assets and liabilities | $ | 492 | $ | (542) | $ | 1,034 | * | |||||||||||||||||||
| Net cash flows from operating activities | $ | 2,218 | $ | 1,881 | $ | 337 | 17.9 | % | ||||||||||||||||||
| Net cash flows used in investing activities | $ | (223) | $ | (223) | $ | — | — | % | ||||||||||||||||||
| Net cash flows used in financing activities | $ | (2,144) | $ | (1,520) | $ | (624) | 41.1 | % |
*Calculation not meaningful.
Operating Activities
Net cash flows from operating activities were $2.2 billion and $1.9 billion for the fiscal nine months ended October 1, 2023 and October 2, 2022, respectively, an increase of $337 million. The increase was primarily attributable to changes in working capital balances driven by increases accounts payable and accrued liabilities due to the timing of payments and a decrease in inventory balances compared to the prior year period due to increased demand and the rebuilding of inventory levels by customers following supply shortages in the prior year.
Investing Activities
Net cash flows used in investing activities were $223 million and $223 million for the fiscal nine months ended October 1, 2023 and October 2, 2022, respectively. Cash used in investing activities in both the fiscal nine months ended October 1, 2023 and October 2, 2022 was primarily driven by purchases of property, plant, and equipment, partially offset by the proceeds from the sale of assets.
Financing Activities
Net cash flows used in financing activities were $2.1 billion and $1.5 billion for the fiscal nine months ended October 1, 2023 and October 2, 2022, respectively. Cash flows used in financing activities for the fiscal nine months ended October 1, 2023 primarily reflect $13.8 billion in distribution to J&J in connection with the Separation, partially offset by $7.7 billion of net proceeds from Senior Notes (as defined below), $0.5 billion of net proceeds from the issuance of commercial paper under the Commercial Paper Program (as defined below), and $4.2 billion of proceeds from the sale of common stock in connection with the Kenvue IPO. In addition, we recognized Net transfers to J&J of $274 million and $1.5 billion for the fiscal nine months ended October 1, 2023 and October 2, 2022, respectively. Net transfers to J&J were driven by cash pooling and general financing activities, indirect corporate cost allocations from J&J, and taxes deemed to be settled with J&J. For further details regarding Net transfer to J&J, see Note 8, “Related Parties,” to our Condensed Consolidated Financial Statements included herein.
Sources of Liquidity
In connection with the Separation, our capital structure and sources of liquidity have changed from our historical capital structure because of our issuances of shares, the Kenvue IPO, and the Debt Financing Transactions. As of April 4, 2023, we no longer participate in J&J’s corporate-wide cash management and centralized funding programs. Our ability to fund our operating needs will depend on our ability to continue to generate positive cash flow from operations, and on our ability to obtain debt financing on acceptable terms or to issue additional equity or equity-linked securities. Based upon our history of generating positive cash flows, we believe our existing cash and cash generated from operations will be sufficient to service our current obligations for at least the next 12 months. Management believes that our cash balances and funds provided by operating activities, along with expected borrowing capacity and access to capital markets, taken as a whole, provide adequate liquidity to meet all of our current and long-term obligations when due, including third-party debt that we incurred in connection with the Separation, adequate liquidity to fund capital expenditures, and flexibility to meet investment opportunities that may arise. However, we cannot assure you that we will be able to obtain additional debt or equity financing on acceptable terms in the future.
On March 22, 2023, we issued eight series of senior unsecured notes (the “Senior Notes”) in an aggregate principal amount of $7.75 billion in a private placement. The net proceeds to us from the Senior Notes offering was $7.7 billion after deductions of discounts and issuance costs of $77 million. The net proceeds were reflected as Restricted cash on our Condensed Consolidated Balance Sheets prior to their release from escrow on April 5, 2023. Upon release from escrow, these funds were loaned to J&J through the Facility Agreement dated April 5, 2023. For further details on the Senior Notes and Facility Agreement, see Note 4. “Borrowings,” to our Condensed Consolidated Financial Statements included herein. The unamortized debt issuance costs related to the Senior Notes as of October 1, 2023 were approximately $73 million. The interest payments are due on March 22 and September 22 of each year, commencing September 22, 2023.
Our Senior Notes are governed by an indenture and supplemental indenture between us and a trustee (collectively, the “indenture”). The indenture contains certain covenants, including limitations on us and certain of our subsidiaries’ ability to incur liens or engage in sale-leaseback transactions. The indenture also contains restrictions on our ability to consolidate, merge or sell substantially all of our assets. In addition, the indenture contains other customary terms, including certain events of default, upon the occurrence of which, the Senior Notes may be declared immediately due and payable.
On April 5, 2023, we entered into the Facility Agreement, allowing us to lend the proceeds from the issuance of debt (including commercial paper) in an aggregate amount of $8.9 billion to J&J. Interest on loans made from the Facility Agreement was charged at an interest rate equal to the Secured Overnight Financing Rate (“SOFR”) less an adjusted margin of 15 basis points, with a floor of 0% (a weighted average interest rate of 4.7%) to be paid monthly in arrears. We recognized interest income of $33 million in the fiscal three and nine months ended October 1, 2023 in relation to the Facility Agreement.
Upon completion of the Kenvue IPO on May 8, 2023, the Facility Agreement was terminated and the balance of the Facility Agreement, and all accrued interest, were repaid by J&J, for a total cash inflow of $9.0 billion. We remitted this cash back to J&J as a part of the distribution to J&J in connection with the Separation.
On March 6, 2023, we entered into a credit agreement providing for a five-year senior unsecured revolving credit facility (the “Revolving Credit Facility”) in an aggregate principal amount of $4.0 billion to be made available in U.S. dollars and Euros. As of October 1, 2023, we had no outstanding balances under its Revolving Credit Facility.
On March 3, 2023, we entered into a commercial paper program (the “Commercial Paper Program”). Our Board of Directors has authorized the issuance of up to $4.0 billion in an aggregate principal amount of commercial paper under the Commercial Paper Program. Any such issuance will mature within 364 days from date of issue. The Commercial Paper Program contains representations and warranties, covenants and default that are customary for this type of financing. The commercial paper notes issued under the Commercial Paper Program are unsecured notes ranking at least pari passu with all of our other senior unsecured indebtedness. Prior to the Kenvue IPO, we issued $1.25 billion under the Commercial Paper Program which, collectively with the Senior Notes, are referred to as the “Debt Financing Transactions”. Inclusive of amounts issued as a part of the Debt Financing Transactions, the Company issued $3.8 billion of commercial paper notes and repaid $3.3 billion in connection with its stated maturities during the fiscal nine months ended October 1, 2023. As of October 1, 2023, the Company had $513 million of outstanding balances under its Commercial Paper Program, net of a related discount of $2 million.
On May 8, 2023, in conjunction with the Consumer Health Business Transfer, we distributed $13.8 billion to J&J from the (1) net proceeds received from the sale of the common stock in the Kenvue IPO and (2) net proceeds received from the Debt Financing Transactions as defined in Note 4, “Borrowings” of our Condensed Consolidated Financial Statements included herein, and (3) any cash and cash equivalents in excess of the $1.17 billion in cash and cash equivalents retained by the Company immediately following the Kenvue IPO.
We accrued interest expenses of $115 million and $244 million for the fiscal three and nine months ended October 1, 2023, respectively and interest income of $15 million and $90 million for the fiscal three and nine months ended October 1, 2023, respectively. The net amount was included in Interest expense, net on our Condensed Consolidated Statements of Operations.
On July 20, 2023, the Company’s Board of Directors declared a $0.20 cash dividend for the third quarter of 2023 to shareholders. The third quarter dividend of $0.20 per share on the outstanding common stock of the Company was paid on September 7, 2023 to shareholders of record as of the close of business on August 28, 2023.
As of October 1, 2023, we were in compliance with all financial covenants and no default or event of default has occurred.
We expect to utilize our cash flows to continue to invest in our brands, digital capabilities, talent and growth strategies, to repay our indebtedness over time, and for general corporate purposes.
Future Cash Requirements
We expect our future cash requirements will relate to working capital, capital expenditures, restructuring and integration, benefit obligations, interest expense and debt service obligations, litigation costs, and the return of capital to shareholders, including through the payment of any dividend. On October 26, 2023, the Company announced that its Board of Directors declared a $0.20 cash dividend for the fourth quarter of 2023 to shareholders. The fourth quarter dividend of $0.20 per share on the outstanding common stock will be payable on November 22, 2023 to shareholders of record as of the close of business on November 8, 2023. In addition, we may use cash to enter into business development transactions, such as licensing arrangements or strategic acquisitions.
In addition to our working capital requirements, as of October 1, 2023, we expect our primary cash requirements for 2023 to include capital expenditures. We have made payments of $246 million for property, plant, and equipment for the fiscal nine months ended October 1, 2023.
Kenvue’s Board of Directors has authorized a share repurchase program, under which we are authorized to repurchase up to 27 million shares of our outstanding common stock in open market or privately negotiated transactions. The program has no expiration date and may be suspended or discontinued at any time. The intent of this repurchase program is to offset dilution from the vesting or exercise of equity awards under Kenvue’s equity incentive plan.
Future Litigation
In the ordinary course of business, we are involved in litigation, claims, government inquiries, investigations, charges, and proceedings. See Note 13, “Commitments and Contingencies,” to our Condensed Consolidated Financial Statements included herein for further details regarding certain matters that are currently pending. Our ability to successfully resolve pending and future litigation may adversely impact our financial condition, results of operations, or cash flows.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements (as defined under the rules and regulations of the SEC) or any relationships with unconsolidated entities that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, net sales or expenses, results of operations, liquidity, cash requirements, or capital resources.
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