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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 entitled “Risk Factors” in our Annual Report on Form 10-K for the fiscal twelve months ended December 31, 2023 filed on March 1, 2024 with the SEC (the “Annual Report”) and the section entitled “Cautionary Note Regarding Forward-Looking Statements” included herein.
This discussion should be read in conjunction with our accompanying Condensed Consolidated Financial Statements as of September 29, 2024 and for the fiscal three and nine months ended September 29, 2024 and October 1, 2023, which have been prepared in accordance with U.S. GAAP and the rules and regulations of the SEC for interim financial statements, and our audited consolidated financial statements for the fiscal twelve months ended December 31, 2023, which are included in the Annual Report. 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 $15.4 billion in Net sales in 2023. 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® Brand, 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 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:
*•*Self Care. Our Self Care product categories include: Pain Care; Cough, Cold, and Allergy; and Other Self Care (Digestive Health, Smoking Cessation, Eye Care, and Other). Major brands in the segment include Tylenol®, Motrin®, Nicorette®, Benadryl®, Zyrtec®, Zarbee’s®, ORSLTM, Rhinocort®, and Calpol®.
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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®, Dr.Ci:Labo®, OGX®, Le Petit Marseillais®, Lubriderm®, and Rogaine®.
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Essential Health. Our Essential Health product categories include: Oral Care; Baby Care; and Other Essential Health (Women’s Health, Wound Care, and Other). Major brands in the segment include Listerine®, Johnson’s®, BAND-AID® Brand, Stayfree®, o.b.® tampons, Carefree®, and Desitin®.
For additional information about our three reportable business segments, see “—Key Factors Affecting Our Results—Our Brands and Product Portfolio” and Note 15, “Segments of Business,” to the 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 an independent publicly traded company (the “Separation”). Kenvue was incorporated in Delaware in February 2022, as a wholly owned subsidiary of J&J, to serve as the ultimate parent company of J&J’s Consumer Health Business. In April 2023, J&J completed the transfer of substantially all of the assets and liabilities of the Consumer Health Business to us and our subsidiaries. In May 2023, we completed an initial public offering (the “Kenvue IPO”) of approximately 10.4% of our outstanding common stock and began trading on the New York Stock Exchange under the ticker symbol “KVUE.” Following the Kenvue IPO, J&J owned approximately 89.6% of our outstanding common stock. In July 2023, J&J announced an exchange offer (the “Exchange Offer”) under which its shareholders could exchange shares of J&J common stock for shares of our common stock owned by J&J. In August 2023, J&J completed the Exchange Offer and exchanged shares representing approximately 80.1% of our common stock, completing the Separation from J&J and transition to being a fully independent public company. In May 2024, J&J completed an additional exchange offer (the “Debt for Equity Exchange”) through which J&J exchanged indebtedness of J&J for shares of our common stock owned by J&J. Following the completion of the Debt for Equity Exchange, J&J no longer owned any shares of our common stock.
See Note 1, “Description of the Company and Summary of Significant Accounting Policies—Description of the Company and Business Segments,” to the Condensed Consolidated Financial Statements for additional information.
We are incurring certain non-recurring separation-related costs in connection with our establishment as a standalone public company (the “Separation-related costs”). We expect the Separation-related costs will continue through the first half of fiscal year 2025. For additional information about the Separation, see Note 1, “Description of the Company and Summary of Significant Accounting Policies,” and Note 9, “Relationship with J&J,” to the Condensed Consolidated Financial Statements included herein.
Relationship with J&J
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 follow the completion of the Kenvue IPO. See Note 9, “Relationship with J&J,” to the Condensed Consolidated Financial Statements included herein for additional information on these agreements.
Kenvue Global Headquarters
On April 20, 2023, we entered into a long-term lease for a newly renovated corporate office building and a newly constructed research and development building in Summit, New Jersey (the “Global Headquarters Lease”). When completed, the campus will encompass approximately 290,000 square feet and serve as our new global corporate headquarters and research and development center. The Global Headquarters Lease collectively includes the lease associated with the corporate office building (the “Corporate Office Lease”), the lease associated with the land where the research and development building will be constructed (the “State-of-the-Art Lab Facility Lease”), and the lease associated with land to be used for amenities (the “Amenities Lease”). The relocation to this campus is expected to occur in 2025 for the corporate office building and continue through 2026 for the new research and development building. We will continue operating from our interim corporate headquarters in Skillman, New Jersey, until that time.
On February 21, 2024, we listed our interim corporate headquarters in Skillman, New Jersey for sale, which met the criteria to be classified as held for sale at that date. For the fiscal three months ended March 31, 2024, an impairment charge of $68 million was recorded on the held for sale asset associated with the interim corporate headquarters in Skillman. See Note 1, “Description of the Company and Summary of Significant Accounting Policies—Assets Held for Sale,” to the Condensed Consolidated Financial Statements included herein for more information.
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 entitled “Risk Factors” in our Annual Report.
Our Brands and Product Portfolio
We have a world-class, global portfolio of iconic and modern brands, and for over 135 years, we have been making and investing in consumer products that are 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 represent 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.
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.
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% of our total Net sales for both the fiscal three and nine months ended September 29, 2024 and approximately 12% and 13% of our total Net sales for the fiscal three and nine months ended October 1, 2023, respectively. Our top 10 customers represented approximately 38% and 41% of our total Net sales for the fiscal three and nine months ended September 29, 2024, respectively, and approximately 40% and 42% of our total Net sales for the fiscal three and nine months ended October 1, 2023, respectively. As a result of these trends, certain large-format retail trade customers have significant bargaining strength and represent a significant portion of our total Net sales.
Macroeconomic Trends
Global economic challenges, including the impact from acts of war, military actions, terrorist attacks, or civil unrest, such as the ongoing military conflict between Russia and Ukraine (the “Russia-Ukraine War”) or the ongoing conflict in the Middle East, may continue to cause economic uncertainty and volatility. The impact of these issues may adversely affect prevailing economic conditions and our business, results of operations, or financial condition.
Russia-Ukraine War
Although the long-term implications of the Russia-Ukraine War are difficult to predict at this time, the financial impact of the conflict during the fiscal nine months ended September 29, 2024 and October 1, 2023 was not significant to our results of operations. For both the fiscal three and nine months ended September 29, 2024 and both the fiscal three and nine months ended October 1, 2023, our Ukrainian business represented 0.2% of our Net sales. As of both September 29, 2024 and December 31, 2023, our Ukrainian business represented 0.1% of our assets. For both the fiscal three and nine months ended September 29, 2024 and both the fiscal three and nine months ended October 1, 2023, our Russian business represented 1.0% of our Net sales. As of both September 29, 2024 and December 31, 2023, our Russian business represented 0.7% of our assets.
In the fiscal three months ended April 3, 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 fiscal three months ended July 3, 2022. We also suspended all advertising, all clinical trials, and any additional investment in Russia. We will continue to monitor the geopolitical situation in Russia and evaluate our activities and future operations in Russia.
Acquisitions and Divestitures
We did not complete any significant acquisitions or divestitures during the fiscal three and nine months ended September 29, 2024 and October 1, 2023.
Legal Proceedings
See Note 14, “Commitments and Contingencies,” to the Condensed Consolidated Financial Statements included herein for additional information regarding our current legal proceedings.
Restructuring
On May 6, 2024, our Board of Directors (our “Board”) approved a multi-year initiative (the “2024 Multi-Year Restructuring Initiative”) to build on our strengths and optimize our cost structure by rebalancing resources to better position us for future growth. These initiatives primarily include global workforce reductions, changes in management structure, and the transition to centralized shared-service functions in lower-cost locations. See Note 16, “Restructuring Expenses and Operating Model Optimization Initiatives,” to the Condensed Consolidated Financial Statements included herein for further information.
Results of Operations
Fiscal Three Months Ended September 29, 2024 Compared with Fiscal Three Months Ended October 1, 2023
Our results for the fiscal three months ended September 29, 2024 and October 1, 2023 were as follows:
| Fiscal Three Months Ended | Change In Fiscal Period | ||||||||||||||||||||||||||||||||||
| September 29, 2024 | October 1, 2023 | Change 2023 to 2024 | |||||||||||||||||||||||||||||||||
| (Dollars in Millions) | Amount | Percent | |||||||||||||||||||||||||||||||||
| Net sales | $ | 3,899 | $ | 3,915 | $ | (16) | (0.4) | % | |||||||||||||||||||||||||||
| Cost of sales | 1,617 | 1,665 | (48) | (2.9) | |||||||||||||||||||||||||||||||
| Gross profit | 2,282 | 2,250 | 32 | 1.4 | |||||||||||||||||||||||||||||||
| Selling, general, and administrative expenses | 1,590 | 1,531 | 59 | 3.9 | |||||||||||||||||||||||||||||||
| Restructuring expenses | 31 | — | 31 | * | |||||||||||||||||||||||||||||||
| Other operating expense, net | 7 | 9 | (2) | (22.2) | |||||||||||||||||||||||||||||||
| Operating income | 654 | 710 | (56) | (7.9) | |||||||||||||||||||||||||||||||
| Other (income) expense, net | (19) | 25 | (44) | * | |||||||||||||||||||||||||||||||
| Interest expense, net | 96 | 100 | (4) | (4.0) | |||||||||||||||||||||||||||||||
| Income before taxes | 577 | 585 | (8) | (1.4) | |||||||||||||||||||||||||||||||
| Provision for taxes | 194 | 147 | 47 | 32.0 | |||||||||||||||||||||||||||||||
| Net income | $ | 383 | $ | 438 | $ | (55) | (12.6) | % |
- Calculation not meaningful.
Net Sales
Net sales were $3.9 billion for both the fiscal three months ended September 29, 2024 and October 1, 2023. For the fiscal three months ended September 29, 2024, Net sales decreased $16 million, or 0.4%, as compared to the fiscal three months ended October 1, 2023. Excluding the impact of unfavorable changes in foreign currency exchange rates of $50 million, or 1.3%, Organic growth was $34 million, or 0.9%. Changes in both Net sales and Organic growth were primarily attributable to value realization (defined as price, including mix) of 2.5%, partially offset by volume-related decreases of 1.6%. The increase in year-over-year value realization was primarily due to carryover price increases from the prior fiscal year as well as new pricing actions, while the volume-related decrease was primarily due to results in Skin Health and Beauty and Self Care, partially offset by growth in Essential Health. Net sales and Organic growth were primarily driven by growth in Essential Health across all product categories, led by Oral Care, and growth in Self Care primarily driven by Smoking Cessation and Cough and Cold. This was partially offset by sales declines in Skin Health and Beauty due to competitive pressures and slower than anticipated recovery from prior fiscal year execution challenges. For additional information about the Net sales of our three reportable business segments, see “—Segment Results” below.
Cost of Sales
Cost of sales were $1.6 billion and $1.7 billion for the fiscal three months ended September 29, 2024 and October 1, 2023, respectively, a decrease of $48 million, or 2.9%. Gross profit margin expanded 100 basis points to 58.5% for the fiscal three months ended September 29, 2024 as compared to 57.5% for the fiscal three months ended October 1, 2023. Changes in both Cost of sales and gross profit margin were primarily due to gains attributable to the realization of benefits associated with our supply chain optimization initiatives, and gross profit margin was also impacted by value realization.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses were $1.6 billion and $1.5 billion for the fiscal three months ended September 29, 2024 and October 1, 2023, respectively, an increase of $59 million, or 3.9%. Selling, general, and administrative expenses as a percentage of Net sales increased 170 basis points to 40.8% for the fiscal three months ended September 29, 2024 as compared to 39.1% for the fiscal three months ended October 1, 2023, primarily attributable to higher brand marketing expenses, driven by increased investment to support sales across segments and geographies. These cost increases were partially offset by initial savings from the 2024 Multi-Year Restructuring Initiative and a $59 million decrease in Separation-related costs.
Restructuring Expenses
Restructuring expenses were $31 million for the fiscal three months ended September 29, 2024, driven by costs incurred under the 2024 Multi-Year Restructuring Initiative related to global workforce reductions, changes in management structure, and the transition to centralized shared-service functions in lower-cost locations, as we take steps intended to enhance organizational efficiencies and better position Kenvue for future growth. See Note 16, “Restructuring Expenses and Operating Model Optimization Initiatives,” to the Condensed Consolidated Financial Statements included herein for additional information.
Other Operating Expense, Net
Other operating expense, net was $7 million and $9 million for the fiscal three months ended September 29, 2024 and October 1, 2023, respectively, a decrease of $2 million. See Note 10, “Other Operating Expense (Income), Net and Other (Income) Expense, Net,” to the Condensed Consolidated Financial Statements included herein for additional information.
Other (Income) Expense, Net
Other (income) expense, net was $(19) million and $25 million for the fiscal three months ended September 29, 2024 and October 1, 2023, respectively, a change of $44 million. The decrease in expense was primarily driven by a $22 million decrease in currency losses on transactions and a $21 million gain recognized on the release of tax indemnification reserves that were no longer considered to be probable. See Note 10, “Other Operating Expense (Income), Net and Other (Income) Expense, Net,” to the Condensed Consolidated Financial Statements included herein for additional information.
Interest Expense, Net
Interest expense, net was $96 million and $100 million for the fiscal three months ended September 29, 2024 and October 1, 2023 respectively, a decrease of $4 million. Interest expense in both fiscal periods was primarily comprised of interest expense recognized on the Senior Notes and notes issued under the Commercial Paper Program (as defined in Note 4, “Borrowings,” to the Condensed Consolidated Financial Statements included herein; see Note 4 for additional information).
Provision For Taxes
Provision for taxes was $194 million and $147 million for the fiscal three months ended September 29, 2024 and October 1, 2023, respectively, an increase of $47 million. The increase in provision for taxes was primarily due to changes to the jurisdictional mix of income and shortfall on stock-based compensation recorded during the fiscal three months ended September 29, 2024, as well as fewer releases of tax reserves due to the expiration of certain statutes of limitations and reduced tax benefits derived from the Separation as compared to the fiscal three months ended October 1, 2023. In addition, the worldwide effective income tax rates for the fiscal three months ended September 29, 2024 and October 1, 2023 were 33.6% and 25.1%, respectively. See Note 11, “Income Taxes,” to the Condensed Consolidated Financial Statements included herein for additional information.
Segment Results
Segment profit is based on Operating income, excluding depreciation, amortization of intangible assets, Separation-related costs, restructuring and operating model optimization initiatives, impairment charges, the impact of the conversion of stock-based awards, issuance of Founder Shares (as defined below), Other operating expense (income), net, 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 include expenses related to treasury, legal operations, and certain other expenses, along with 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.
See Note 15, “Segments of Business,” to the Condensed Consolidated Financial Statements included herein for additional information.
Fiscal Three Months Ended September 29, 2024 Compared with Fiscal Three Months Ended October 1, 2023
The following table presents Segment net sales and Segment adjusted operating income and the period-over-period changes in Segment net sales and Segment adjusted operating income for the fiscal three months ended September 29, 2024 and October 1, 2023. See Note 15, “Segments of Business,” to the Condensed Consolidated Financial Statements included herein for further details regarding Segment net sales and Segment adjusted operating income.
| Fiscal Three Months Ended | Change In Fiscal Period | |||||||||||||||||||||||||||||||||||||
| September 29, 2024 | October 1, 2023 | Change 2023 to 2024 | ||||||||||||||||||||||||||||||||||||
| (Dollars in Millions) | Amount | Percent | Amount | Percent | Amount | Percent | ||||||||||||||||||||||||||||||||
| Segment Net Sales | ||||||||||||||||||||||||||||||||||||||
| Self Care | $ | 1,625 | 41.7 | % | $ | 1,613 | 41.2 | % | $ | 12 | 0.7 | % | ||||||||||||||||||||||||||
| Skin Health and Beauty | 1,072 | 27.5 | 1,119 | 28.6 | (47) | (4.2) | ||||||||||||||||||||||||||||||||
| Essential Health | 1,202 | 30.8 | 1,183 | 30.2 | 19 | 1.6 | ||||||||||||||||||||||||||||||||
| Segment net sales | $ | 3,899 | 100.0 | % | $ | 3,915 | 100.0 | % | $ | (16) | (0.4) | % | ||||||||||||||||||||||||||
| Self Care | $ | 557 | $ | 604 | $ | (47) | (7.8) | % | ||||||||||||||||||||||||||||||
| Skin Health and Beauty | 191 | 180 | 11 | 6.1 | ||||||||||||||||||||||||||||||||||
| Essential Health | 291 | 275 | 16 | 5.8 | ||||||||||||||||||||||||||||||||||
| Segment adjusted operating income**(1)(2)** | $ | 1,039 | $ | 1,059 | $ | (20) | (1.9) | % | ||||||||||||||||||||||||||||||
| Reconciliation to Income before taxes: | ||||||||||||||||||||||||||||||||||||||
| Less: | ||||||||||||||||||||||||||||||||||||||
| Depreciation(3) | 94 | 72 | ||||||||||||||||||||||||||||||||||||
| Amortization of intangible assets | 66 | 81 | ||||||||||||||||||||||||||||||||||||
| Separation-related costs | 85 | 133 | ||||||||||||||||||||||||||||||||||||
| Restructuring and operating model optimization initiatives | 38 | 3 | ||||||||||||||||||||||||||||||||||||
| Conversion of stock-based awards(4) | 6 | (25) | ||||||||||||||||||||||||||||||||||||
| Founder Shares(5) | 7 | — | ||||||||||||||||||||||||||||||||||||
| Other operating expense, net | 7 | 9 | ||||||||||||||||||||||||||||||||||||
| General corporate/unallocated expenses | 82 | 76 | ||||||||||||||||||||||||||||||||||||
| Operating income | $ | 654 | $ | 710 | ||||||||||||||||||||||||||||||||||
| Other (income) expense, net | (19) | 25 | ||||||||||||||||||||||||||||||||||||
| Interest expense, net | 96 | 100 | ||||||||||||||||||||||||||||||||||||
| Income before taxes | $ | 577 | $ | 585 |
(1) Effective in the fiscal three months ended September 29, 2024, we adjusted the allocation for certain brand marketing expenses within Selling, general, and administrative expenses to align with segment financial results as measured by the Company, including the chief operating decision maker (the “CODM”). Accordingly, we have updated the segment disclosures to reflect the updated presentation in all prior periods. Total Adjusted operating income did not change as a result of this update.
(2) Effective in the fiscal three months ended June 30, 2024, we adjusted the allocation for certain Research and development costs within Selling, general, and administrative expenses to align with segment financial results as measured by the Company, including the CODM. Accordingly, we have updated the segment disclosures to reflect the updated presentation in all prior periods. Total Adjusted operating income did not change as a result of this update.
(3) Depreciation includes the amortization of integration and development costs capitalized in connection with cloud computing arrangements.
(4) Segment adjusted operating income excludes the impact of the conversion of stock-based awards that occurred on August 23, 2023. The adjustment represents the net impact of the gain on reversal of previously recognized stock-based compensation expense, offset by stock-based compensation expense recognized in the fiscal three months ended September 29, 2024 relating to employee services provided prior to the Separation.
(5) On August 25, 2023, our Compensation & Human Capital Committee approved equity grants to individuals employed by Kenvue as of October 2, 2023 (the “Founder Shares”). On October 2, 2023, the Founder Shares were granted to all Kenvue employees in the form of stock options and PSUs to executive officers and either stock options and PSUs or RSUs to non-executive individuals.
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 September 29, 2024 as compared to the fiscal three months ended October 1, 2023:
| Fiscal Three Months Ended September 29, 2024 vs October 1, 2023**(1)** | ||||||||||||||||||||||||||||||||||||||
| Reported Net sales change | Impact of foreign currency | Organic growth | ||||||||||||||||||||||||||||||||||||
| (Dollars in Millions) | Amount | Percent | Amount | Amount | Percent | |||||||||||||||||||||||||||||||||
| Self Care | $ | 12 | 0.7 | % | $ | 1 | $ | 11 | 0.7 | % | ||||||||||||||||||||||||||||
| Skin Health and Beauty | (47) | (4.2) | (17) | (30) | (2.7) | |||||||||||||||||||||||||||||||||
| Essential Health | 19 | 1.6 | (34) | 53 | 4.5 | |||||||||||||||||||||||||||||||||
| Total | $ | (16) | (0.4) | % | $ | (50) | $ | 34 | 0.9 | % |
| Fiscal Three Months Ended September 29, 2024 vs October 1, 2023**(1)** | ||||||||||||||||||||||||||||||||
| Reported Net sales change | Impact of foreign currency | Organic growth | ||||||||||||||||||||||||||||||
| Price/Mix**(2)** | Volume | |||||||||||||||||||||||||||||||
| Self Care | 0.7 | % | — | % | 1.8 | % | (1.1) | % | ||||||||||||||||||||||||
| Skin Health and Beauty | (4.2) | (1.5) | 2.0 | (4.7) | ||||||||||||||||||||||||||||
| Essential Health | 1.6 | (2.9) | 3.7 | 0.8 | ||||||||||||||||||||||||||||
| Total | (0.4) | % | (1.3) | % | 2.5 | % | (1.6) | % |
(1) Acquisitions and divestitures did not materially impact Net sales for the fiscal three months ended September 29, 2024 or October 1, 2023.
(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 for both the fiscal three months ended September 29, 2024 and October 1, 2023. For the fiscal three months ended September 29, 2024, Net sales increased $12 million, or 0.7%, as compared to the fiscal three months ended October 1, 2023. Excluding the impact of favorable changes in foreign currency exchange rates of $1 million, Organic growth was $11 million, or 0.7%. Changes in both Net sales and Organic growth were primarily driven by value realization of 1.8%, partially offset by volume-related decreases of 1.1%. The increase was primarily driven by performance in Smoking Cessation and Cough and Cold attributable to effective promotional strategies. The increase was partially offset by declines in antifungal products in Asia Pacific due to trade inventory fluctuations.
Self Care Segment Adjusted Operating Income
The Self Care Segment adjusted operating income decreased by $47 million, or 7.8%, to $557 million for the fiscal three months ended September 29, 2024 as compared to the fiscal three months ended October 1, 2023. The decrease was primarily driven by increased investment in our brands and volume-related decreases, partially offset by value realization and the realization of benefits associated with our supply chain optimization initiatives.
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 September 29, 2024 and October 1, 2023. For the fiscal three months ended September 29, 2024, Net sales decreased $47 million, or 4.2%, as compared to the fiscal three months ended October 1, 2023. Excluding the impact of unfavorable changes in foreign currency exchange rates of $17 million, or 1.5%, Organic growth decreased $30 million, or 2.7%. Changes in both Net sales and Organic growth were primarily driven by volume-related decreases of 4.7%, partially offset by value realization of 2.0%. The decrease was driven by underperformance in the United States attributable to competitive pressures and slower than expected recovery from prior fiscal year execution challenges. The decrease was partially offset by growth outside of the United States.
Skin Health and Beauty Segment Adjusted Operating Income
The Skin Health and Beauty Segment adjusted operating income increased by $11 million, or 6.1%, to $191 million for the fiscal three months ended September 29, 2024 as compared to the fiscal three months ended October 1, 2023. The increase was primarily driven by value realization and the realization of benefits associated with our supply chain optimization initiatives, partially offset by volume-related decreases.
Essential Health Segment
Essential Health Segment Net Sales
The Essential Health Segment Net sales were $1.2 billion for both the fiscal three months ended September 29, 2024 and October 1, 2023. For the fiscal three months ended September 29, 2024, Net sales increased $19 million, or 1.6%, as compared to the fiscal three months ended October 1, 2023. Excluding the impact of unfavorable changes in foreign currency exchange rates of $34 million, or 2.9%, Organic growth was $53 million, or 4.5%. Changes in both Net sales and Organic growth were primarily driven by value realization of 3.7% and volume-related increases of 0.8%. Momentum in Essential Health continued across all product categories and was led by strong performance in Oral Care attributable to product innovation and effective promotional strategies.
Essential Health Segment Adjusted Operating Income
The Essential Health Segment adjusted operating income increased by $16 million, or 5.8%, to $291 million for the fiscal three months ended September 29, 2024 as compared to the fiscal three months ended October 1, 2023. The increase was primarily driven by value realization, volume-related increases, and the realization of benefits associated with our supply chain optimization initiatives, partially offset by increased investment in our brands.
Results of Operations
Fiscal Nine Months Ended September 29, 2024 Compared with Fiscal Nine Months Ended October 1, 2023
Our results for the fiscal nine months ended September 29, 2024 and October 1, 2023 were as follows:
| Fiscal Nine Months Ended | Change In Fiscal Period | |||||||||||||||||||||||||||||||||||||
| September 29, 2024 | October 1, 2023 | Change 2023 to 2024 | ||||||||||||||||||||||||||||||||||||
| (Dollars in Millions) | Amount | Percent | ||||||||||||||||||||||||||||||||||||
| Net sales | $ | 11,793 | $ | 11,778 | $ | 15 | 0.1 | % | ||||||||||||||||||||||||||||||
| Cost of sales | 4,904 | 5,178 | (274) | (5.3) | ||||||||||||||||||||||||||||||||||
| Gross profit | 6,889 | 6,600 | 289 | 4.4 | ||||||||||||||||||||||||||||||||||
| Selling, general, and administrative expenses | 4,804 | 4,555 | 249 | 5.5 | ||||||||||||||||||||||||||||||||||
| Restructuring expenses | 120 | — | 120 | * | ||||||||||||||||||||||||||||||||||
| Impairment charges | 578 | — | 578 | * | ||||||||||||||||||||||||||||||||||
| Other operating expense (income), net | 29 | (7) | 36 | * | ||||||||||||||||||||||||||||||||||
| Operating income | 1,358 | 2,052 | (694) | (33.8) | ||||||||||||||||||||||||||||||||||
| Other expense, net | 6 | 65 | (59) | (90.8) | ||||||||||||||||||||||||||||||||||
| Interest expense, net | 283 | 154 | 129 | 83.8 | ||||||||||||||||||||||||||||||||||
| Income before taxes | 1,069 | 1,833 | (764) | (41.7) | ||||||||||||||||||||||||||||||||||
| Provision for taxes | 332 | 496 | (164) | (33.1) | ||||||||||||||||||||||||||||||||||
| Net income | $ | 737 | $ | 1,337 | $ | (600) | (44.9) | % |
- Calculation not meaningful.
Net Sales
Net sales were $11.8 billion for both the fiscal nine months ended September 29, 2024 and October 1, 2023. For the fiscal nine months ended September 29, 2024, Net sales increased $15 million, or 0.1%, as compared to the fiscal nine months ended October 1, 2023. Excluding the impact of unfavorable changes in foreign currency exchange rates of $153 million, or 1.3%, Organic growth was $168 million, or 1.4%. Changes in both Net sales and Organic growth were primarily attributable to value realization of 3.1%, partially offset by volume-related decreases of 1.7%. The increase in year-over-year value realization was primarily due to carryover price increases from the prior fiscal year as well as new pricing actions, while the volume-related decrease was primarily due to results in Skin Health and Beauty and Self Care, partially offset by growth in Essential Health. Net sales and Organic growth were primarily driven by growth in Essential Health across all product categories, led by Oral Care. This was partially offset by sales declines in Skin Health and Beauty due to volume-related decreases in the United States attributable to the carryover effects from prior fiscal year execution challenges and current fiscal year competitive pressures. For additional information about the Net sales of our three reportable business segments, see “—Segment Results” below.
Cost of Sales
Cost of sales were $4.9 billion and $5.2 billion for the fiscal nine months ended September 29, 2024 and October 1, 2023, respectively, a decrease of $274 million, or 5.3%. Gross profit margin expanded 240 basis points to 58.4% for the fiscal nine months ended September 29, 2024 as compared to 56.0% for the fiscal nine months ended October 1, 2023. Changes in both Cost of sales and gross profit margin were primarily due to gains attributable to the realization of benefits associated with our supply chain optimization initiatives, and gross profit margin was also impacted by value realization.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses were $4.8 billion and $4.6 billion for the fiscal nine months ended September 29, 2024 and October 1, 2023, respectively, an increase of $249 million, or 5.5%. Selling, general, and administrative expenses as a percentage of Net sales increased 200 basis points to 40.7% for the fiscal nine months ended September 29, 2024, as compared to 38.7% for the fiscal nine months ended October 1, 2023, primarily attributable to higher brand marketing expenses, driven by increased investment to support sales across segments and geographies, and an additional quarter of incremental ongoing public
company costs not incurred last year. These cost increases were partially offset by initial savings from the 2024 Multi-Year Restructuring Initiative and a $134 million decrease in Separation-related costs.
Restructuring Expenses
Restructuring expenses were $120 million for the fiscal nine months ended September 29, 2024, driven by costs incurred under the 2024 Multi-Year Restructuring Initiative related to global workforce reductions, changes in management structure, and the transition to centralized shared-service functions in lower-cost locations, as we take steps intended to enhance organizational efficiencies and better position Kenvue for future growth. See Note 16, “Restructuring Expenses and Operating Model Optimization Initiatives,” to the Condensed Consolidated Financial Statements included herein for additional information.
Impairment Charges
Impairment charges were $578 million for the fiscal nine months ended September 29, 2024, which primarily included a non-cash charge of $488 million ($337 million after-tax) to adjust the carrying value of intangible assets and property, plant, and equipment related to the Dr.Ci:Labo® skin health business. The impairment was due primarily to revisions to internal forecasts for the business as a result of updates in our strategy to reach more consumers and appropriately address evolving market dynamics, including shifts in consumer sentiment in China as well as changing shopping patterns in the region. The increase also included the impact of a $68 million non-cash impairment charge related to our interim corporate headquarters in Skillman, New Jersey, which was classified as held for sale on February 21, 2024. Additionally, we recognized a non-cash impairment charge of $22 million related to certain software development assets. See Note 1, “Description of the Company and Summary of Significant Accounting Policies—Impairment Charges,” to the Condensed Consolidated Financial Statements included herein for additional information. There were no impairment charges recognized in the fiscal three months ended September 29, 2024.
Other Operating Expense (Income), Net
Other operating expense (income), net was $29 million and $(7) million for the fiscal nine months ended September 29, 2024 and October 1, 2023, respectively, a change of $36 million. The increase in expense was driven by the prior period reversal of a $45 million contingent liability that was no longer considered to be probable, the accounting impact of net economic benefit arrangements with J&J in connection with the Deferred Local Businesses (see Note 1, “Description of the Company and Summary of Significant Accounting Policies,” to the Condensed Consolidated Financial Statements included herein for additional information), and a $9 million gain recognized on the sale of a manufacturing facility in Lancaster, Pennsylvania in the fiscal nine months ended October 1, 2023, partially offset by lower litigation expense. See Note 10, “Other Operating Expense (Income), Net and Other (Income) Expense, Net,” to the Condensed Consolidated Financial Statements included herein for additional information.
Other Expense, Net
Other expense, net was $6 million and $65 million for the fiscal nine months ended September 29, 2024 and October 1, 2023, respectively, a decrease of $59 million. The decrease in expense was primarily driven by a $54 million decrease in currency losses on transactions and a $21 million gain recognized on the release of tax indemnification reserves that were no longer considered to be probable, partially offset by a $24 million increase in losses on investments. See Note 10, “Other Operating Expense (Income), Net and Other (Income) Expense, Net,” to the Condensed Consolidated Financial Statements included herein for additional information.
Interest Expense, Net
Interest expense, net was $283 million and $154 million for the fiscal nine months ended September 29, 2024 and October 1, 2023, respectively, an increase of $129 million. The increase in expense was driven by interest expense recognized on the Senior Notes and notes issued under the Commercial Paper Program, along with $33 million of interest income recognized in the fiscal three months ended July 2, 2023 in relation to the Facility Agreement (as defined in Note 4, “Borrowings,” to the Condensed Consolidated Financial Statements included herein) as well as interest income earned in the fiscal three months ended July 2, 2023 on debt proceeds in escrow. See Note 4, “Borrowings,” to the Condensed Consolidated Financial Statements included herein for additional information.
Provision For Taxes
Provision for taxes was $332 million and $496 million for the fiscal nine months ended September 29, 2024 and October 1, 2023, respectively, a decrease of $164 million. The decrease in provision for taxes was primarily due to lower year-to-date income in comparison to the prior fiscal period as a result of the Dr.Ci:Labo® skin health business impairment and the recording of a valuation allowance against a deferred tax asset related to future foreign tax benefits in the fiscal nine months ended October 1, 2023. The decrease is offset by fewer releases of tax reserves due to the expiration of certain statutes of limitations and reduced tax benefits derived from the Separation as compared to the fiscal nine months ended October 1, 2023 and shortfall on stock-based compensation recorded during the fiscal nine months ended September 29, 2024. In addition, the worldwide effective income tax rates for the fiscal nine months ended September 29, 2024 and October 1, 2023 were 31.1% and 27.1%, respectively. See Note 11, “Income Taxes,” to the Condensed Consolidated Financial Statements included herein for additional information.
Segment Results
Fiscal Nine Months Ended September 29, 2024 Compared with Fiscal Nine Months Ended October 1, 2023
The following table presents Segment net sales and Segment adjusted operating income and the period-over-period changes in Segment net sales and Segment adjusted operating income for the fiscal nine months ended September 29, 2024 and October 1, 2023. See Note 15, “Segments of Business,” to the Condensed Consolidated Financial Statements included herein for further details regarding Segment net sales and Segment adjusted operating income.
| Fiscal Nine Months Ended | Change In Fiscal Period | |||||||||||||||||||||||||||||||||||||
| September 29, 2024 | October 1, 2023 | Change 2023 to 2024 | ||||||||||||||||||||||||||||||||||||
| (Dollars in Millions) | Amount | Percent | Amount | Percent | Amount | Percent | ||||||||||||||||||||||||||||||||
| Segment Net Sales | ||||||||||||||||||||||||||||||||||||||
| Self Care | $ | 4,958 | 42.0 | % | $ | 4,914 | 41.7 | % | $ | 44 | 0.9 | % | ||||||||||||||||||||||||||
| Skin Health and Beauty | 3,229 | 27.4 | 3,377 | 28.7 | (148) | (4.4) | ||||||||||||||||||||||||||||||||
| Essential Health | 3,606 | 30.6 | 3,487 | 29.6 | 119 | 3.4 | ||||||||||||||||||||||||||||||||
| Segment net sales | $ | 11,793 | 100.0 | % | $ | 11,778 | 100.0 | % | $ | 15 | 0.1 | % | ||||||||||||||||||||||||||
| Self Care | $ | 1,692 | $ | 1,762 | $ | (70) | (4.0) | % | ||||||||||||||||||||||||||||||
| Skin Health and Beauty | 502 | 530 | (28) | (5.3) | ||||||||||||||||||||||||||||||||||
| Essential Health | 914 | 736 | 178 | 24.2 | ||||||||||||||||||||||||||||||||||
| Segment adjusted operating income**(1)(2)** | $ | 3,108 | $ | 3,028 | $ | 80 | 2.6 | % | ||||||||||||||||||||||||||||||
| Reconciliation to Income before taxes: | ||||||||||||||||||||||||||||||||||||||
| Less: | ||||||||||||||||||||||||||||||||||||||
| Depreciation(3) | 238 | 211 | ||||||||||||||||||||||||||||||||||||
| Amortization of intangible assets | 212 | 242 | ||||||||||||||||||||||||||||||||||||
| Separation-related costs | 231 | 333 | ||||||||||||||||||||||||||||||||||||
| Restructuring and operating model optimization initiatives | 146 | 3 | ||||||||||||||||||||||||||||||||||||
| Impairment charges | 578 | — | ||||||||||||||||||||||||||||||||||||
| Conversion of stock-based awards(4) | 34 | (25) | ||||||||||||||||||||||||||||||||||||
| Founder Shares(5) | 24 | — | ||||||||||||||||||||||||||||||||||||
| Other operating expense (income), net | 29 | (7) | ||||||||||||||||||||||||||||||||||||
| General corporate/unallocated expenses | 258 | 219 | ||||||||||||||||||||||||||||||||||||
| Operating income | $ | 1,358 | $ | 2,052 | ||||||||||||||||||||||||||||||||||
| Other expense, net | 6 | 65 | ||||||||||||||||||||||||||||||||||||
| Interest expense, net | 283 | 154 | ||||||||||||||||||||||||||||||||||||
| Income before taxes | $ | 1,069 | $ | 1,833 |
(1) Effective in the fiscal three months ended September 29, 2024, we adjusted the allocation for certain brand marketing expenses within Selling, general, and administrative expenses to align with segment financial results as measured by the Company, including the CODM. Accordingly, we have updated the segment disclosures to reflect the updated presentation in all prior periods. Total Adjusted operating income did not change as a result of this update.
(2) Effective in the fiscal three months ended June 30, 2024, we adjusted the allocation for certain Research and development costs within Selling, general, and administrative expenses to align with segment financial results as measured by the Company, including the CODM. Accordingly, we have updated the segment disclosures to reflect the updated presentation in all prior periods. Total Adjusted operating income did not change as a result of this update.
(3) Depreciation includes the amortization of integration and development costs capitalized in connection with cloud computing arrangements.
(4) Segment adjusted operating income excludes the impact of the conversion of stock-based awards that occurred on August 23, 2023. The adjustment represents the net impact of the gain on reversal of previously recognized stock-based compensation expense, offset by stock-based compensation expense recognized in the fiscal nine months ended September 29, 2024 relating to employee services provided prior to the Separation.
(5) On August 25, 2023, our Compensation & Human Capital Committee approved the Founder Shares. On October 2, 2023, the Founder Shares were granted to all Kenvue employees in the form of stock options and PSUs to executive officers and either stock options and PSUs or RSUs to non-executive individuals.
Organic Growth
The following tables present a reconciliation of the change in U.S. GAAP Net sales to Organic growth for the fiscal nine months ended September 29, 2024 as compared to the fiscal nine months ended October 1, 2023:
| Fiscal Nine Months Ended September 29, 2024 vs October 1, 2023**(1)** | ||||||||||||||||||||||||||||||||||||||
| Reported Net sales change | Impact of foreign currency | Organic growth | ||||||||||||||||||||||||||||||||||||
| (Dollars in Millions) | Amount | Percent | Amount | Amount | Percent | |||||||||||||||||||||||||||||||||
| Self Care | $ | 44 | 0.9 | % | $ | (32) | $ | 76 | 1.5 | % | ||||||||||||||||||||||||||||
| Skin Health and Beauty | (148) | (4.4) | (41) | (107) | (3.2) | |||||||||||||||||||||||||||||||||
| Essential Health | 119 | 3.4 | (80) | 199 | 5.7 | |||||||||||||||||||||||||||||||||
| Total | $ | 15 | 0.1 | % | $ | (153) | $ | 168 | 1.4 | % |
| Fiscal Nine Months Ended September 29, 2024 vs October 1, 2023**(1)** | ||||||||||||||||||||||||||||||||
| Reported Net sales change | Impact of foreign currency | Organic growth | ||||||||||||||||||||||||||||||
| Price/Mix**(2)** | Volume | |||||||||||||||||||||||||||||||
| Self Care | 0.9 | % | (0.6) | % | 2.8 | % | (1.3) | % | ||||||||||||||||||||||||
| Skin Health and Beauty | (4.4) | (1.2) | 2.0 | (5.2) | ||||||||||||||||||||||||||||
| Essential Health | 3.4 | (2.3) | 4.8 | 0.9 | ||||||||||||||||||||||||||||
| Total | 0.1 | % | (1.3) | % | 3.1 | % | (1.7) | % |
(1) Acquisitions and divestitures did not materially impact Net sales for the fiscal nine months ended September 29, 2024 or October 1, 2023.
(2) Also referred to as value realization.
Self Care Segment
Self Care Segment Net Sales
The Self Care Segment Net sales were $5.0 billion and $4.9 billion for the fiscal nine months ended September 29, 2024 and October 1, 2023, respectively, an increase of $44 million, or 0.9%. Excluding the impact of unfavorable changes in foreign currency exchange rates of $32 million, or 0.6%, Organic growth was $76 million, or 1.5%. Changes in both Net sales and Organic growth were primarily driven by value realization of 2.8%, partially offset by volume-related decreases of 1.3%. The increase was primarily driven by our performance in Other Self Care primarily in Smoking Cessation due to effective promotional strategies and product innovation, as well as Allergy Care and Digestive Health. The increase was partially offset by declines in Pain Care resulting from trade inventory fluctuations primarily in the United States.
Self Care Segment Adjusted Operating Income
The Self Care Segment adjusted operating income decreased by $70 million, or 4.0%, to $1,692 million for the fiscal nine months ended September 29, 2024 as compared to the fiscal nine months ended October 1, 2023. The decrease was primarily driven by increased investment in our brands and volume-related decreases, partially offset by value realization and the realization of benefits associated with our supply chain optimization initiatives.
Skin Health and Beauty Segment
Skin Health and Beauty Segment Net Sales
The Skin Health and Beauty Segment Net sales were $3.2 billion and $3.4 billion for the fiscal nine months ended September 29, 2024 and October 1, 2023, respectively, a decrease of $148 million, or 4.4%. Excluding the impact of unfavorable changes in foreign currency exchange rates of $41 million, or 1.2%, Organic growth decreased $107 million, or 3.2%. Changes in both Net sales and Organic growth were primarily driven by volume-related decreases of 5.2%, partially offset by value realization of 2.0%. The decrease was driven by volume-related decreases in the United States attributable to the carryover effects from prior fiscal year execution challenges, as well as current fiscal year competitive pressures, coupled with market softness in
China primarily impacting the first half of the fiscal year. The decrease was partially offset by growth outside of the United States.
Skin Health and Beauty Segment Adjusted Operating Income
The Skin Health and Beauty Segment adjusted operating income decreased by $28 million, or 5.3%, to $502 million for the fiscal nine months ended September 29, 2024 as compared to the fiscal nine months ended October 1, 2023. The decrease was primarily driven by increased investment in our brands and volume-related decreases, 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 $3.6 billion and $3.5 billion for the fiscal nine months ended September 29, 2024 and October 1, 2023, respectively, an increase of $119 million, or 3.4%. Excluding the impact of unfavorable changes in foreign currency exchange rates of $80 million, or 2.3%, Organic growth was $199 million, or 5.7%. Changes in both Net sales and Organic growth were primarily driven by value realization of 4.8% and volume-related increases of 0.9%. Momentum in Essential Heath continued across all product categories and was led by strong performance in Oral Care, attributable to product innovation and effective promotional strategies, and growth in Women’s Health.
Essential Health Segment Adjusted Operating Income
The Essential Health Segment adjusted operating income increased by $178 million, or 24.2%, to $914 million for the fiscal nine months ended September 29, 2024 as compared to the fiscal nine months ended October 1, 2023. The increase was primarily driven by value realization, volume-related increases, and the realization of benefits associated with our supply chain optimization initiatives, partially offset by increased investment in our brands.
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 (as defined in Note 1, “Description of the Company and Summary of Significant Accounting Policies—Description of the Company and Business Segments,” to the Condensed Consolidated Financial Statements included herein), 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 September 29, 2024 and October 1, 2023 were as follows:
| Change In Fiscal Period | ||||||||||||||||||||||||||
| Fiscal Nine Months Ended | Change 2023 to 2024 | |||||||||||||||||||||||||
| (Dollars in Millions) | September 29, 2024 | October 1, 2023 | Amount | Percent | ||||||||||||||||||||||
| Net income | $ | 737 | $ | 1,337 | $ | (600) | (44.9) | % | ||||||||||||||||||
| Net changes in assets and liabilities | $ | (833) | $ | 492 | $ | (1,325) | * | |||||||||||||||||||
| Net cash flows from operating activities | $ | 976 | $ | 2,218 | $ | (1,242) | (56.0) | % | ||||||||||||||||||
| Net cash flows used in investing activities | $ | (293) | $ | (223) | $ | (70) | 31.4 | % | ||||||||||||||||||
| Net cash flows used in financing activities | $ | (978) | $ | (2,144) | $ | 1,166 | (54.4) | % |
- Calculation not meaningful.
Operating Activities
Net cash flows from operating activities were $976 million and $2,218 million for the fiscal nine months ended September 29, 2024 and October 1, 2023, respectively, a decrease of $1,242 million. The decrease was primarily attributable to changes in
working capital balances driven by a net decrease in Accounts payable and Accrued liabilities due to the timing of payments and an increase in Trade receivables due to the timing of sales and collections.
Investing Activities
Net cash flows used in investing activities were $293 million and $223 million for the fiscal nine months ended September 29, 2024 and October 1, 2023, respectively, an increase of $70 million. Net cash flows used in investing activities were primarily driven by purchases of property, plant, and equipment in both the fiscal nine months ended September 29, 2024 and October 1, 2023, partially offset by proceeds from the sale of assets in the fiscal nine months ended October 1, 2023.
Financing Activities
Net cash flows used in financing activities were $978 million and $2,144 million for the fiscal nine months ended September 29, 2024 and October 1, 2023, respectively, a decrease of $1,166 million. Net cash flows used in financing activities for the fiscal nine months ended September 29, 2024 were primarily driven by $1,159 million of dividends paid and $114 million of payments made to purchase treasury shares, partially offset by $258 million of net proceeds from the issuance of commercial paper under the Commercial Paper Program (as defined below). Net cash flows used in financing activities for the fiscal nine months ended October 1, 2023 were primarily driven by $13.8 billion in distributions to J&J in connection with the Separation, $383 million of dividends paid, and Net transfers to J&J of $274 million, partially offset by approximately $7.7 billion of net proceeds from Senior Notes (as defined below), $4.2 billion of proceeds from the sale of common stock in connection with the Kenvue IPO, and $497 million of net proceeds from the issuance of commercial paper under the Commercial Paper Program. 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 transfers to J&J, see Note 9, “Relationship with J&J—Net Transfers to J&J,” to the Condensed Consolidated Financial Statements included herein.
Sources of Liquidity
Our primary sources of liquidity are cash on hand, which consisted of cash and cash equivalents of $1,057 million as of September 29, 2024, cash flows from operations, borrowing capacity under our Revolving Credit Facility (as defined below) of $4.0 billion, and authorized Commercial Paper Program issuance of $4.0 billion. As of September 29, 2024, we had no amounts outstanding under the Revolving Credit Facility and $887 million of outstanding balances under our Commercial Paper Program, net of a related discount of $3 million.
Our ability to fund our operating needs will depend on our ability to continue to generate positive cash flows 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 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.
Cash and cash equivalents decreased by $325 million during the fiscal nine months ended September 29, 2024 to $1,057 million as of September 29, 2024, as compared to $1,382 million as of December 31, 2023. Cash and cash equivalents held by our foreign subsidiaries was $1,047 million and $1,336 million as of September 29, 2024 and December 31, 2023, respectively.
Restructuring
On May 6, 2024, our Board approved the 2024 Multi-Year Restructuring Initiative to build on our strengths and optimize our cost structure by rebalancing resources to better position us for future growth. The initiative is expected to result in pre-tax restructuring expenses and other charges totaling approximately $550 million. We planned to incur approximately $275 million in pre-tax restructuring expenses and other charges in each of fiscal year 2024 and fiscal year 2025. We currently anticipate lower than expected spend in fiscal year 2024 due to the shift in timing of certain IT and project-related costs to fiscal year 2025 and lower than expected employee-related costs relating to severance spend due to employee redeployment and voluntary exits. Over the life of the initiative, a majority of the pre-tax expenses and other charges are expected to be paid in cash. These charges are expected to be funded primarily through cash flows generated from operations. We expect to reinvest all or a portion of the benefits associated with the 2024 Multi-Year Restructuring Initiative in future growth opportunities, including
immediate reinvestment behind advertising, product promotion, and healthcare professional engagement. Our estimates of the costs of the initiative and the expected benefits are preliminary estimates and are subject to a number of assumptions, including local law requirements in various jurisdictions. Actual charges may differ, possibly materially, from the estimates provided above. See Note 16, “Restructuring Expenses and Operating Model Optimization Initiatives,” to the Condensed Consolidated Financial Statements included herein for further information.
Supplier Finance Program
As a part of our ongoing efforts to maximize working capital and manage liquidity, we work with suppliers to optimize payment terms and conditions on accounts payable through a voluntary supplier finance program. The program provides some of our suppliers with the opportunity to sell receivables due from us (our accounts payables) to participating financial institutions at the sole discretion of both the suppliers and the financial institutions. We are not a party to the arrangements between the suppliers and the third-party financial institutions. Our obligations to the suppliers, including amounts due, and scheduled payment dates (which have general payment terms of 90 days), are not affected by a participating supplier’s decision to participate in the program. See Note 1, “Description of the Company and Summary of Significant Accounting Policies—Supplier Finance Program,” to the Condensed Consolidated Financial Statements included herein.
Senior Notes
On March 22, 2023, we issued eight series of senior unsecured notes (the “Senior Notes”) in an aggregate principal amount of $7.75 billion. The net proceeds to us from the Senior Notes were approximately $7.7 billion after deductions of discounts and issuance costs of $77 million. The net proceeds were reflected as Restricted cash on the Condensed Consolidated Balance Sheet prior to their release from escrow on April 5, 2023. Upon release from escrow, these funds were loaned to J&J through a facility agreement (the “Facility Agreement”) dated April 5, 2023. For further details on the Senior Notes, see Note 4, “Borrowings—Senior Notes,” to the Condensed Consolidated Financial Statements included herein.
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 certain 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.
Commercial Paper Program
On March 3, 2023, we entered into a commercial paper program (the “Commercial Paper Program”). Our Board 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 defaults 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. For further details on the Commercial Paper Program, see Note 4, “Borrowings—Commercial Paper Program,” to the Condensed Consolidated Financial Statements included herein.
Prior to the Kenvue IPO, we issued $1.25 billion under the Commercial Paper Program which, collectively with the Senior Notes as further described above, are referred to as the “Debt Financing Transactions.”
Revolving Credit Facility
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. For further details on the Revolving Credit Facility, see Note 4, “Borrowings—Revolving Credit Facility,” to the Condensed Consolidated Financial Statements included herein.
Facility Agreement
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.
Upon completion of the Kenvue IPO on May 8, 2023, the Facility Agreement was terminated and the balance of the loans, 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 distribution in connection with the Separation.
Distribution to J&J
On May 8, 2023, in conjunction with the Consumer Health Business Transfer (as defined in Note 1, “Description of the Company and Summary of Significant Accounting Policies—Description of the Company and Business Segments,” to the Condensed Consolidated Financial Statements included herein), we distributed $13.8 billion to J&J from 1) the net proceeds received from the sale of the common stock in the Kenvue IPO, 2) the net proceeds received from the Debt Financing Transactions, and 3) any cash and cash equivalents in excess of the $1.17 billion retained by us immediately following the Kenvue IPO.
Interest Expense, Net
We recognized Interest expense, net of $283 million in the Condensed Consolidated Statement of Operations during the fiscal nine months ended September 29, 2024 which primarily includes interest expense, including amortization of discounts and debt issuance costs, recognized on the Senior Notes and interest expense recognized on notes issued under the Commercial Paper Program.
Compliance with Covenants
As of September 29, 2024, we were in compliance with all debt covenants, and no default or event of default has occurred.
Dividends
Quarterly dividends have been paid to our shareholders since the Kenvue IPO. A summary of cash dividends per share on the outstanding Kenvue common stock declared to shareholders by our Board and paid during the fiscal nine months ended September 29, 2024 is presented below:
| Declaration Date | Record Date | Payment Date | Per Share Amount | |||||||||||||||||
| January 25, 2024 | February 14, 2024 | February 28, 2024 | $0.20 | |||||||||||||||||
| April 25, 2024 | May 8, 2024 | May 22, 2024 | $0.20 | |||||||||||||||||
| July 25, 2024 | August 14, 2024 | August 28, 2024 | $0.205 |
On October 17, 2024, we announced that our Board declared a dividend of $0.205 per share on our common stock. The dividend is payable on November 27, 2024 to shareholders of record as of the close of business on November 13, 2024.
Future Cash Requirements
We expect our future cash requirements will relate to working capital, capital expenditures, restructuring and integration, compensation and benefit-related obligations, interest expense and debt service obligations, litigation costs, the return of capital to shareholders, including through the payment of any dividend, and other contractual obligations that arise in the normal course of business. We may also use cash to enter into business development transactions, such as licensing arrangements or strategic acquisitions.
As of September 29, 2024, we expect our primary cash requirements for fiscal year 2024 to include capital expenditures. We have made payments of $302 million for property, plant, and equipment during the fiscal nine months ended September 29, 2024.
Share Repurchase Program
Our Board has authorized a share repurchase program, under which we are authorized to repurchase up to 27,000,000 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 the Kenvue 2023 Plan (as defined in Note 8, “Stock-Based Compensation,” to the Condensed
Consolidated Financial Statements included herein). We repurchased 5,700,000 shares of our outstanding common stock for $114 million during the fiscal nine months ended September 29, 2024.
Future Litigation
In the ordinary course of business, we are involved in litigation, claims, government inquiries, investigations, charges, and proceedings. See Note 14, “Commitments and Contingencies,” to the 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.
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 was 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 have a significant impact on our results of operations.
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 (as defined in Note 1, “Description of the Company and Summary of Significant Accounting Policies,” to the Condensed Consolidated Financial Statements included herein) to the Company that previously had been consolidated as Variable Interest Entities in the Condensed Consolidated Financial Statements. The Condensed Consolidated Financial Statements included herein include businesses in all jurisdictions in which we operate following the completion of the Separation, including any Deferred Local Business (as defined in Note 1, “Description of the Company and Summary of Significant Accounting Policies,” to the Condensed Consolidated Financial Statements included herein). For more information regarding Deferred Local Businesses, see “Risk Factors—Risks Related to Our Relationship with J&J—The transfer of certain assets and liabilities from J&J to us contemplated by the Separation has not been completed and may be significantly delayed or not occur at all” in our Annual Report and Note 1, “Description of the Company and Summary of Significant Accounting Policies,” to the Condensed Consolidated Financial Statements included herein.
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 Inclusive Framework that was supported by over 130 countries worldwide. The EU 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. The OECD continues to release additional guidance, including guidance on safe harbors for which we may qualify, and many countries have already implemented legislation consistent with the OECD Pillar Two Framework. Due to these new rules, our provision for taxes could be unfavorably impacted as the legislation becomes effective in countries in which we conduct business. However, based on our current analysis, currently enacted laws for Pillar Two do not have a significant impact on the Condensed Consolidated Financial Statements. We are continuing to evaluate the Model Global Anti-Base Erosion Rules for Pillar Two and related legislation, and their potential impact on future periods.
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