NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Description of the Company and Summary of Significant Accounting Policies
Description of the Company and Business Segments
Kenvue Inc. (“Kenvue” or the “Company”) was formed as a wholly owned subsidiary of Johnson & Johnson (“J&J” or the “Former Parent”) and sells a broad range of products used in the baby care, oral care, skin health and beauty, over-the-counter pharmaceutical, sanitary protection, and wound care markets. These products are marketed to the general public through e-commerce, direct-to-consumer channels, and to retail outlets and distributors throughout the world.
The Company is organized into three business segments: Self Care, Skin Health and Beauty, and Essential Health. The Self Care segment includes a broad product range such as cough, cold and allergy, pain care, as well as digestive health, smoking cessation, and other products. The Skin Health and Beauty segment is focused on face and body care, and hair, sun, and other products. The Essential Health segment includes oral care, baby care, as well as women’s health, wound care, and other products.
In November 2021, J&J announced its intention to separate its Consumer Health segment (the “Consumer Health Business”) into a new, publicly traded company (the “Separation”). Prior to the Kenvue IPO (as defined below), the Company was wholly owned by J&J and primarily represented J&J’s Consumer Health Business. The Company 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 the Company and its subsidiaries (such transfer, the “Consumer Health Business Transfer”), other than the transfer of certain Deferred Local Business (as defined below in “—Variable Interest Entities and Net Economic Benefit Arrangements”).
On May 3, 2023, the registration statement related to the initial public offering of Kenvue’s common stock was declared effective, and on May 4, 2023, Kenvue’s common stock began trading on the New York Stock Exchange under the ticker symbol “KVUE” (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, the Company 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”, 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.
Basis of Presentation
Effective April 4, 2023, the Company’s financial statements are presented on a consolidated basis, as J&J completed the Consumer Health Business Transfer on such date. The unaudited financial statements for all periods presented, including the historical results of the Company prior to April 4, 2023, are now referred to as the “Condensed Consolidated Financial Statements”. Prior to April 4, 2023, the Company operated as a segment of J&J and not as a separate entity. The Company’s financial statements prior to April 4, 2023 were prepared on a combined basis and were derived from J&J’s historical consolidated financial statements for interim financial reporting, which do not conform in all respects to the requirements of accounting principles generally accepted in the United States of America (“U.S. GAAP”) for annual financial statements. The
Condensed Consolidated Balance Sheet as of January 1, 2023 was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. Accordingly, the accompanying Condensed Consolidated Financial Statements and related notes should be read in conjunction with the audited combined financial statements and related notes as contained in the Company’s final prospectus (the “Split-Off Prospectus”) filed on August 14, 2023 with the U.S. Securities and Exchange Commission (“SEC”) pursuant to Rule 424(b)(3) under the Securities Act of 1933, as amended (the “Securities Act”), relating to the Company’s Registration Statement on Form S-4. The Condensed Consolidated Financial Statements include all adjustments (consisting only of normal recurring adjustments) and accruals necessary in the judgment of management for a fair statement of the results for the periods presented. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year.
Prior to the Kenvue IPO, the Company relied on J&J’s corporate and other support functions. Therefore, certain corporate and shared costs were allocated to the Company including the assets, liabilities, revenues, and expenses that J&J’s management determined were specifically or primarily identifiable to the Company, as well as direct and indirect costs that were attributable to the operations of the Company. Indirect costs are the costs of support functions that were provided on a centralized or geographic basis by J&J and its affiliates, which included, but were not limited to, facilities, insurance, logistics, quality, compliance, finance, human resources, benefits administration, procurement support, information technology, legal, corporate strategy, corporate governance, other professional services, and general commercial support functions.
Indirect costs were allocated to the Company for the purposes of preparing condensed combined financial statements prior to the Kenvue IPO, based on a specific identification basis or, when specific identification was not practicable, a proportional cost allocation method, primarily net sales, headcount, or other allocation methodologies that were considered to be a reasonable reflection of the utilization of services provided or benefit received by the Company during the periods presented, depending on the nature of the services received. Management considers that such allocations were made on a reasonable basis consistent with benefits received but may not necessarily be indicative of the costs that would have been incurred if the Company had been operated on a standalone basis for the periods presented.
Kenvue’s practice is to establish actual quarterly closing dates using a predetermined fiscal calendar, which allows the business to close its books on Sunday at the end of the period.
The Company and J&J incurred certain non-recurring Separation-related costs in the establishment of Kenvue as a standalone public company. Costs incurred by the Company and those costs incurred by J&J determined to be for the benefit of the Company are included in the Condensed Consolidated Financial Statements. These non-recurring Separation-related costs were $133 million and $50 million for the fiscal three months ended October 1, 2023 and October 2, 2022, respectively, and $333 million and $109 million for the fiscal nine months ended October 1, 2023 and October 2, 2022, respectively. The non-recurring Separation-related costs are included within Selling, general, and administrative expenses.
The Condensed Consolidated Financial Statements include the accounts of the Company and entities consolidated under the variable interest and voting models. Intercompany balances and transactions have been eliminated.
Use of Estimates
The preparation of the Condensed Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported. Estimates are used when accounting for sales discounts, trade promotions, rebates, allowances and incentives, product liabilities, income taxes and related valuation allowance, withholding taxes, depreciation, amortization, employee benefits, contingencies, allocations of cost and expenses from J&J and its affiliates, and intangible asset and liability valuations. Actual results may or may not differ from those estimates.
Debt Discounts and Premiums, Issuance Costs, and Deferred Financing Costs
Debt issuance costs and discounts are presented as a reduction of Long-term debt and are amortized as a component within Interest expense, net on the Company’s Condensed Consolidated Statements of Operations over the term on the related debt using the effective interest method.
Research and Development
Research and development expenses are expensed as incurred and included within Selling, general, and administrative expenses. Research and development costs were $78 million and $90 million for the fiscal three months ended October 1, 2023 and October 2, 2022, respectively, and $266 million and $272 million for the fiscal nine months ended October 1, 2023 and October 2, 2022, respectively.
Leases
Global Corporate Headquarters Lease
On April 20, 2023, the Company entered into a long-term lease for a newly renovated office building and a newly constructed research and development building in Summit, New Jersey that, when completed, will encompass a total of approximately 290,000 square feet and serve as the Company’s new global corporate headquarters. The lease is expected to commence in January 2024. The expected lease expense is approximately $10 million per year with an initial term of 15 years. In addition to corporate office space, this campus will house laboratory space to principally support research and development. The relocation to this campus is expected to commence in 2025 for the office building and continue through 2026 for the new research and development building. The Company will continue to operate from its interim corporate headquarters in Skillman, New Jersey until that time.
Lease Assets and Liabilities
Right of Use assets (“ROU assets”) and lease liabilities associated with the Company's operating leases are included in the Condensed Consolidated Balance Sheets as of October 1, 2023 and January 1, 2023 as follows:
| | | | | | | | | | | | | | |
| (Dollars in Millions) | | October 1, 2023(1) | | January 1, 2023 |
ROU assets included in: | | | | |
| Other non-current assets | | $ | 149 | | | $ | 110 | |
| Lease liabilities included in: | | | | |
| Accrued and other current liabilities | | 46 | | | 35 | |
| Other non-current liabilities | | 106 | | | 81 | |
| Total lease liabilities | | $ | 152 | | | $ | 116 | |
(1) Includes related party leases of $52 million of ROU assets, $11 million of current lease liabilities, and $41 million of non-current lease liabilities.
Variable Interest Entities and Net Economic Benefit Arrangements
When the Company makes an initial investment in or establishes other variable interests in an entity, the entity is first evaluated to determine if it is a Variable Interest Entity (“VIE”) and if the Company is the primary beneficiary of the VIE, and therefore subject to consolidation regardless of percentage ownership. The primary beneficiary of a VIE is a party that meets both of the following criteria: (1) it has the power to direct the activities that most significantly impact the economic performance of the VIE; and (2) it has the obligation to absorb losses or the right to receive benefits that could be potentially significant to the VIE. Periodically, the Company assesses whether any change in its interest in or relationship with the entity affects the determination as to whether the entity is a VIE, and, if so, whether the Company is the primary beneficiary.
In connection with the Kenvue IPO, J&J and Kenvue entered into a separation agreement (the “Separation Agreement”) on May 3, 2023. Under the Separation Agreement, transfer of certain assets and liabilities of the Consumer Health Business in certain jurisdictions (each, a “Deferred Local Business”) was not completed prior to the Kenvue IPO and was deferred due to certain precedent conditions, which include ensuring compliance with applicable law and obtaining necessary governmental approvals and other consents, and for other business reasons. At Kenvue IPO and until the Deferred Local Business transfers to the Company, J&J (1) holds and operates the Deferred Local Businesses on behalf of and for the benefit of the Company, and (2) will use reasonable best efforts to treat and operate, insofar as reasonably practicable and to the extent permitted by applicable law, each such Deferred Local Business in the ordinary course of business in all material respects consistent with past practice. The benefits and costs related to these Deferred Local Businesses will be assumed by the Company (see below “—Net Economic Benefit Arrangements”). In addition, the Company and J&J will use reasonable best efforts to take all actions to transfer each Deferred Local Business as promptly as reasonably practicable. When the precedent conditions are met, the Deferred Local Businesses will be transferred to the Company as per the terms of the arrangement with J&J.
The Company determined that certain Deferred Local Businesses that are legal entities (“Deferred Legal Entities”) are VIEs for which Kenvue is the primary beneficiary, since Kenvue has the power to direct the activities that most significantly impact such Deferred Legal Entities’ economic performance as well as to obtain all of the economic benefits and losses of such entities.
These significant activities include, but are not limited to, product pricing, marketing and sales strategy, supply chain strategy, material supply and vendor management, budget planning, and labor and overhead management. Accordingly, the assets and liabilities of these entities are recognized on the Company’s Condensed Consolidated Balance Sheet at their historical carrying amounts as of the date when the Company entered into the arrangement, since the primary beneficiary of the VIEs and the VIEs themselves were under common control. Additionally, the results of the operations and cash flows are included within the Company’s Condensed Consolidated Financial Statements.
In the fiscal three months ended October 1, 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.
Net Economic Benefit Arrangements
With respect to certain Deferred Local Businesses that are legal entities, as described above, and the Deferred Local Businesses that are not legal entities (“Deferred Markets”), the Company and J&J entered into net economic benefit arrangements effective on April 4, 2023, pursuant to which, among other things, J&J will transfer to the Company the net profits from the operations of each of the Deferred Markets (or, in the event the operations of any such Deferred Markets result in net losses to J&J, the Company will reimburse J&J for the amount of such net losses).
The Company recognized a net payable to J&J of $23 million in relation to the net economic benefit arrangements as of October 1, 2023 in the Company’s Condensed Consolidated Balance Sheet. The Company recognized $15 million and $31 million of net income in relation to the net economic benefit arrangements for the fiscal three and nine months ended October 1, 2023, respectively, in the Company’s Condensed Consolidated Statements of Operations.
Reclassifications
Certain prior period amounts have been reclassified to conform to current year presentation. For additional information on the realignment of certain allocations in segment financial results, see Note 14, “Segments of Business”.
Change in Accounting Principle
Global Intangible Low-Taxed Income (“GILTI”) Accounting Method Change
Effective as of the three and nine months ended October 1, 2023, the Company changed the accounting principle for GILTI from the deferred approach to the period cost approach. In 2018, the Financial Accounting Standards Board provided companies with an accounting policy choice in determining whether to measure the deferred tax effects of GILTI or to treat GILTI as a period cost. The Company’s Former Parent, Johnson & Johnson, elected to account for the deferred effects of GILTI in 2018. However, as a standalone company that operates in a different industry with different peers than J&J, treating GILTI as a period cost is the prevailing accounting policy that the Company’s peers have elected. Therefore, management believes that the change in accounting is preferable as it does not believe that the impact of deferred taxes on GILTI provides a meaningful measure of future GILTI tax costs.
The effects of the change in accounting principle to the Company's Condensed Consolidated Financial Statements were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | October 1, 2023 | | January 1, 2023 |
| | Prior to Change | | Effect of Change | | As Reported | | Prior to Change | | Effect of Change | | As Adjusted |
Condensed Consolidated Balance Sheets: | | | | | | | | | | | | |
| Assets | | | | | | | | | | | | |
| Deferred taxes on income | | $ | 156 | | | $ | — | | | $ | 156 | | | $ | 147 | | | $ | — | | | $ | 147 | |
| Liabilities | | | | | | | | | | | | |
| Accrued taxes on income | | $ | 383 | | | $ | — | | | $ | 383 | | | $ | 329 | | | $ | — | | | $ | 329 | |
| Deferred taxes on income | | $ | 2,589 | | | $ | (74) | | | $ | 2,515 | | | $ | 2,428 | | | $ | 51 | | | $ | 2,479 | |
| Equity | | | | | | | | | | | | |
| Additional paid-in capital | | $ | 16,052 | | | $ | 79 | | | $ | 16,131 | | | $ | — | | | $ | — | | | $ | — | |
| Retained Earnings | | $ | 497 | | | $ | (12) | | | $ | 485 | | | $ | — | | | $ | — | | | $ | — | |
Net investment from Johnson & Johnson | | $ | — | | | $ | — | | | $ | — | | | $ | 25,474 | | | $ | (49) | | | $ | 25,425 | |
Accumulated other comprehensive loss | | $ | (5,749) | | | $ | 7 | | | $ | (5,742) | | | $ | (5,453) | | | $ | (2) | | | $ | (5,455) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Three Months Ended |
| | October 1, 2023 | | October 2, 2022 |
| | Prior to Change | | Effect of Change | | As Reported | | Prior to Change | | Effect of Change | | As Adjusted |
Condensed Consolidated Statements of Operations: | | | | | | | | | | | | |
Income before taxes | | $ | 585 | | | $ | — | | | $ | 585 | | | $ | 738 | | | $ | — | | | $ | 738 | |
| Provision for income taxes | | 135 | | | 12 | | | 147 | | | 153 | | | (1) | | | 152 | |
| Net income | | $ | 450 | | | $ | (12) | | | $ | 438 | | | $ | 585 | | | $ | 1 | | | $ | 586 | |
| | | | | | | | | | | | |
| Basic net income per share | | $ | 0.23 | | | $ | — | | | $ | 0.23 | | | $ | 0.34 | | | $ | — | | | $ | 0.34 | |
| Diluted net income per share | | $ | 0.23 | | | $ | — | | | $ | 0.23 | | | $ | 0.34 | | | $ | — | | | $ | 0.34 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Nine Months Ended |
| | October 1, 2023 | | October 2, 2022 |
| | Prior to Change | | Effect of Change | | As Reported | | Prior to Change | | Effect of Change | | As Adjusted |
Condensed Consolidated Statements of Operations: | | | | | | | | | | | | |
Income before taxes | | $ | 1,833 | | | $ | — | | | $ | 1,833 | | | $ | 2,125 | | | $ | — | | | $ | 2,125 | |
| Provision for income taxes | | 623 | | (127) | | | 496 | | 408 | | | 14 | | | 422 | |
| Net income | | $ | 1,210 | | | $ | 127 | | | $ | 1,337 | | | $ | 1,717 | | | $ | (14) | | | $ | 1,703 | |
| | | | | | | | | | | | |
| Basic net income per share | | $ | 0.66 | | | $ | 0.07 | | | $ | 0.73 | | | $ | 1.00 | | | $ | (0.01) | | | $ | 0.99 | |
| Diluted net income per share | | $ | 0.66 | | | $ | 0.07 | | | $ | 0.73 | | | $ | 1.00 | | | $ | (0.01) | | | $ | 0.99 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Three Months Ended |
| | October 1, 2023 | | October 2, 2022 |
| | Prior to Change | | Effect of Change | | As Reported | | Prior to Change | | Effect of Change | | As Adjusted |
Condensed Consolidated Statements of Comprehensive Income (Loss): | | | | | | | | | | | | |
| Other comprehensive income (loss) | | $ | (242) | | | $ | 2 | | | $ | (240) | | | $ | (639) | | | $ | 9 | | | $ | (630) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Nine Months Ended |
| | October 1, 2023 | | October 2, 2022 |
| | Prior to Change | | Effect of Change | | As Reported | | Prior to Change | | Effect of Change | | As Adjusted |
Condensed Consolidated Statements of Comprehensive Income (Loss): | | | | | | | | | | | | |
| Other comprehensive income (loss) | | $ | (224) | | | $ | 10 | | | $ | (214) | | | $ | (1,753) | | | $ | 32 | | | $ | (1,721) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Three Months Ended |
| | October 1, 2023 | | October 2, 2022 |
| | Prior to Change | | Effect of Change | | As Reported | | Prior to Change | | Effect of Change | | As Adjusted |
Condensed Consolidated Statements of Equity: | | | | | | | | | | | | |
| Cumulative effect adjustment to beginning balance | | $ | 11,040 | | | $ | 91 | | | $ | 11,131 | | | $ | 19,601 | | | $ | (32) | | | $ | 19,569 | |
| Net income | | $ | 450 | | | $ | (12) | | | $ | 438 | | | $ | 585 | | | $ | 1 | | | $ | 586 | |
Other comprehensive loss | | $ | (242) | | | $ | 2 | | | $ | (240) | | | $ | (639) | | | $ | 9 | | | $ | (630) | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Separation-related adjustments | | $ | (48) | | | $ | (7) | | | $ | (55) | | | $ | — | | | $ | — | | | $ | — | |
Ending balance | | $ | 10,819 | | | $ | 74 | | | $ | 10,893 | | | $ | 18,927 | | | $ | (22) | | | $ | 18,905 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Nine Months Ended |
| | October 1, 2023 | | October 2, 2022 |
| | Prior to Change | | Effect of Change | | As Reported | | Prior to Change | | Effect of Change | | As Adjusted |
Condensed Consolidated Statements of Equity: | | | | | | | | | | | | |
| Cumulative effect adjustment to beginning balance | | $ | 20,021 | | | $ | (51) | | | $ | 19,970 | | | $ | 20,399 | | | $ | 92 | | | $ | 20,491 | |
| Net income | | $ | 1,210 | | | $ | 127 | | | $ | 1,337 | | | $ | 1,717 | | | $ | (14) | | | $ | 1,703 | |
Other comprehensive loss | | $ | (224) | | | $ | 10 | | | $ | (214) | | | $ | (1,753) | | | $ | 32 | | | $ | (1,721) | |
| | | | | | | | | | | | |
| Net transfers to Johnson & Johnson | | $ | (308) | | | $ | — | | | $ | (308) | | | $ | (1,436) | | | $ | (132) | | | $ | (1,568) | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Reclassification of Net Investment from Johnson & Johnson (Additional paid-in capital) | | $ | 25,626 | | | $ | 86 | | | $ | 25,712 | | | $ | — | | | $ | — | | | $ | — | |
Reclassification of Net Investment from Johnson & Johnson (Net Investment from Parent) | | $ | (25,626) | | | $ | (86) | | | $ | (25,712) | | | $ | — | | | $ | — | | | $ | — | |
| Separation-related adjustments | | $ | (48) | | | $ | (7) | | | $ | (55) | | | $ | — | | | $ | — | | | $ | — | |
| Separation from Johnson & Johnson | | $ | 23 | | | $ | (5) | | | $ | 18 | | | $ | — | | | $ | — | | | $ | — | |
| Ending balance | | $ | 10,819 | | | $ | 74 | | | $ | 10,893 | | | $ | 18,927 | | | $ | (22) | | | $ | 18,905 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Nine Months Ended |
| | October 1, 2023 | | October 2, 2022 |
| | Prior to Change | | Effect of Change | | As Reported | | Prior to Change | | Effect of Change | | As Adjusted |
Condensed Consolidated Statements of Cash Flows: | | | | | | | | | | | | |
| Net income | | $ | 1,210 | | | $ | 127 | | | $ | 1,337 | | | $ | 1,717 | | | $ | (14) | | | $ | 1,703 | |
| Deferred income taxes | | $ | (1) | | | $ | (127) | | | $ | (128) | | | $ | 114 | | | $ | 14 | | | $ | 128 | |
Recently Adopted Accounting Standards
Accounting Standards Update 2022-04: Liabilities-Supplier Finance Programs (Topic 405-50) – Disclosure of Supplier Finance Program Obligations
The Company adopted the standard as of the beginning of fiscal year 2023, which requires that a buyer in a supplier finance program disclose additional information about the program for financial statement users.
The Company has facilitated a voluntary supply chain financing program to provide some of its suppliers with the opportunity to sell receivables due from the Company (the Company’s accounts payables) to participating financial institutions at the sole discretion of both the suppliers and the financial institutions. The Company is not a party to the arrangements between the suppliers and the third-party financial institutions. The Company’s obligations to its 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. Prior to the establishment of the Company’s supplier financing program in the second quarter of 2023, the Company participated in J&J’s supplier financing program. The terms of the Company’s supplier financing program are substantially the same as J&J’s program.
As of October 1, 2023 and January 1, 2023, the Company’s accounts payable balances included $194 million and $293 million, respectively, related to invoices from suppliers participating in the supplier finance program.
Recently Issued Accounting Standards Not Yet Adopted
There were no new accounting standards issued during the fiscal nine months ended October 1, 2023 that are expected to have a material impact on the Company’s Condensed Consolidated Financial Statements.
2. Inventories
As of October 1, 2023 and January 1, 2023, inventories were comprised of:
| | | | | | | | | | | | | | |
| (Dollars in Millions) | | October 1, 2023 | | January 1, 2023 |
| Raw materials and supplies | | $ | 325 | | | $ | 351 | |
| Goods in process | | 103 | | | 123 | |
| Finished goods | | 1,457 | | | 1,752 | |
| Total inventories | | $ | 1,885 | | | $ | 2,226 | |
3. Intangible Assets and Goodwill
As of October 1, 2023 and January 1, 2023, the gross and net amounts of intangible assets were:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | October 1, 2023 | | January 1, 2023 |
| (Dollars in Millions) | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| Definite-lived intangible assets: | | | | | | | | | | | | |
| Patents and trademarks | | $ | 4,258 | | | $ | (1,588) | | | $ | 2,670 | | | $ | 4,400 | | | $ | (1,485) | | | $ | 2,915 | |
| Customer relationships | | 2,072 | | (1,093) | | 979 | | 2,127 | | (1,063) | | 1,064 |
| Other intangibles | | 1,359 | | (683) | | 676 | | 1,343 | | (650) | | 693 |
| Total definite-lived intangible assets | | $ | 7,689 | | | $ | (3,364) | | | $ | 4,325 | | | $ | 7,870 | | | $ | (3,198) | | | $ | 4,672 | |
| Indefinite-lived intangible assets: | | | | | | | | | | | | |
| Trademarks | | $ | 5,102 | | | $ | — | | | $ | 5,102 | | | $ | 5,122 | | | $ | — | | | $ | 5,122 | |
| Other | | 60 | | — | | 60 | | 59 | | — | | 59 |
| Total intangible assets, net | | $ | 12,851 | | | $ | (3,364) | | | $ | 9,487 | | | $ | 13,051 | | | $ | (3,198) | | | $ | 9,853 | |
The weighted average amortization period for patents and trademarks is 19 years. The weighted average amortization period for customer relationships is 31 years and is driven by large established distributors in various regional markets. These customers have been operating in these markets for many years and are expected to continue to operate in these markets for the foreseeable future. The weighted average amortization period for other intangible assets is 34 years. A majority of the other intangible assets relates to the acquisition of Pfizer Consumer Health in 2006. Carrying amount changes for the fiscal three and nine months ended October 1, 2023 and October 2, 2022 were driven by currency translations. The Company recognized an intangible impairment of $0 million and $12 million related to certain definite-lived trademarks deemed as irrecoverable in Other operating expense (income), net for the fiscal three and nine months ended October 2, 2022, respectively.
Amortization expense, which was included in Cost of Sales, for the Company’s amortizable assets was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Three Months Ended | | Fiscal Nine Months Ended |
| (Dollars in Millions) | | October 1, 2023 | | October 2, 2022 | | October 1, 2023 | | October 2, 2022 |
| Trademarks | | $ | 48 | | | $ | 44 | | | $ | 142 | | | $ | 142 | |
Customer relationships and Other intangibles | | 34 | | | 39 | | | 100 | | | 123 | |
| Total Amortization expense | | $ | 82 | | | $ | 83 | | | $ | 242 | | | $ | 265 | |
The estimated amortization expense before tax for the remainder of 2023 and the five succeeding years is approximately:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in Millions) | | | | | | | | | | |
Remainder of 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | 2028 |
| $ | 79 | | | $ | 306 | | | $ | 279 | | | $ | 273 | | | $ | 274 | | | $ | 270 | |
Goodwill by reportable segment was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in Millions) | | Self Care | | Skin Health and Beauty | | Essential Health | | Total |
Goodwill at January 1, 2023 | | $ | 5,194 | | | $ | 2,365 | | | $ | 1,626 | | | $ | 9,185 | |
| Currency translation/other | | (86) | | | (119) | | | (6) | | | (211) | |
Goodwill at October 1, 2023 | | $ | 5,108 | | | $ | 2,246 | | | $ | 1,620 | | | $ | 8,974 | |
The majority of the Goodwill balance relates to the acquisition of Pfizer Consumer Health in 2006.
4. Borrowings
The components of the Company’s debt as of October 1, 2023 and January 1, 2023 were as follows:
| | | | | | | | | | | | | | |
| (Dollars in Millions) | | October 1, 2023 | | January 1, 2023 |
| Senior Notes | | | | |
5.50% Senior Notes due 2025 | | $ | 750 | | | $ | — | |
5.35% Senior Notes due 2026 | | 750 | | | — | |
5.05% Senior Notes due 2028 | | 1,000 | | | — | |
5.00% Senior Notes due 2030 | | 1,000 | | | — | |
4.90% Senior Notes due 2033 | | 1,250 | | | — | |
5.10% Senior Notes due 2043 | | 750 | | | — | |
5.05% Senior Notes due 2053 | | 1,500 | | | — | |
5.20% Senior Notes due 2063 | | 750 | | | — | |
| Other | | 8 | | | — | |
| Discounts and debt issuance costs | | (73) | | | — | |
| Total long-term debt | | $ | 7,685 | | | $ | — | |
| | | | |
| | | | |
| Commercial paper | | 515 | | | — | |
| | | | |
| Discounts and debt issuance costs | | (2) | | | — | |
| Total loans and notes payable | | 513 | | | — | |
| | | | |
| Total debt | | $ | 8,198 | | | $ | — | |
Senior Notes
On March 22, 2023, the Company 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 the Company from the Senior Notes were approximately $7.7 billion after deductions of discounts and issuance costs of $77 million. Upon release from escrow, these funds were loaned to J&J through a facility agreement (the “Facility Agreement”) dated April 5, 2023. See “—Facility Agreement” below for additional details.
In connection with the issuance of the Senior Notes, the Company entered into a registration rights agreement with the initial purchasers, pursuant to which the Company was obligated to use commercially reasonable efforts to file with the SEC and cause to become effective a registration statement with respect to an offer to exchange each series of Senior Notes for registered notes with terms that are substantially identical in all material respects to the notes of such series. On October 19, 2023 the Company completed an exchange offer of its outstanding unregistered Senior Notes (“the Original Senior Notes”) for new notes registered pursuant to the Securities Act (the “Exchange Senior Notes”). The terms of each series of the Exchange Senior Notes are substantially identical to the terms of the applicable series of Original Senior Notes, except the Exchange Senior Notes are registered under the Securities Act, and certain transfer restrictions, registration rights and provisions relating to additional interest relating to the Company’s registrations do not apply to the Exchange Senior Notes. As a result of this exchange we incurred immaterial filing and legal fees during the fiscal three months ended October 1, 2023, which we have capitalized as debt issuance costs.
The unamortized debt issuance costs related to the Senior Notes at October 1, 2023 were approximately $73 million. Amortization of debt issuance costs related to the Senior Notes for the fiscal three and nine months ended October 1, 2023 were $1 million and $4 million, respectively. The weighted average effective interest rate of the Company’s long-term debt as of October 1, 2023 was 5.1%.
The interest payments are due on March 22 and September 22 of each year and commenced on September 22, 2023.
The Senior Notes were initially fully and unconditionally guaranteed on a senior unsecured basis by J&J. Such guarantees of the Senior Notes were automatically and unconditionally terminated upon the completion of the Consumer Health Business Transfer and the Kenvue IPO. The Company may redeem any series of the Senior Notes at its option, in whole or in part, at any time and from time to time by paying a “make whole” premium, plus accrued and unpaid interest to, but excluding, the applicable redemption date. On and after the applicable par call date (between zero and six months prior to maturity, based on
the series), the Company may redeem any series of the Senior Notes in whole or in part, at a redemption price equal to 100% of the principal amount of the notes of such series being redeemed plus accrued and unpaid interest thereon to, but excluding, the applicable redemption date.
The Company’s Senior Notes are governed by an indenture and supplemental indenture between the Company and a trustee (collectively, the “indenture”). The indenture contains certain covenants, including limitations on the Company and certain of its subsidiaries’ ability to incur liens or engage in certain sale leaseback transactions. The indenture also contains restrictions on the Company’s ability to consolidate, merge, or sell substantially all of its 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.
Facility Agreement
On April 5, 2023, the Company and J&J entered into the Facility Agreement, allowing the Company 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. The Company recognized interest income of $33 million for the fiscal 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 loans, and all accrued interest, were repaid by J&J, for a total cash inflow of $9.0 billion. The Company remitted this cash back to J&J as a distribution back to J&J in connection with the Separation. The cash flows for the lending, and repayment, of the principal balance of the Facility Agreement are presented within cash flows from investing activities within the Statement of Cash Flows. Cash inflows from the interest earned on the Facility Agreement are presented within Interest expense, net on the Company’s Condensed Consolidated Statements of Operations and are presented as cash inflows from operations within the Statement of Cash Flows.
Revolving Credit Facility
On March 6, 2023, the Company 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. Interest is payable on the loans under the Revolving Credit Facility at (1) in the case of borrowings denominated in U.S. dollars, adjusted Term Secured Overnight Financing Rate (“Term SOFR”) (or, at the Company’s option, the adjusted base rate), (2) in the case of borrowings denominated in Euros, adjusted Euro Interbank Offered Rate (“EURIBOR”) and (3) in the case of swingline borrowings, the daily simple Euro Short-Term Rate, plus, in each case, a margin determined pursuant to a pricing grid based on the Company’s credit ratings. The Revolving Credit Facility fees and letter of credit fees are determined based upon the same grid. Interest payments are due (1) in the case of Term SOFR or EURIBOR borrowings, on the last day of each interest period applicable to the borrowing (or, in the case of any borrowing with an interest period of more than three months’ duration, every three months), (2) in the case of an adjusted base rate borrowing, on the last day of each March, June, September, and December and (3) in the case of swingline borrowings, on the fifth business day after the borrowing. In connection with entering the Revolving Credit Facility, the Company paid an immaterial amount of debt issuance costs. These costs related to securing the Revolving Credit Facility are presented within Prepaid expenses and other receivables on the Condensed Consolidated Balance Sheets.
The Revolving Credit Facility contains representations and warranties, covenants and events of default that are customary for this type of financing, including covenants restricting the incurrence of liens and the entry into certain merger transactions.
J&J initially unconditionally guaranteed all of the obligations of the borrowers under the Revolving Credit Facility on an unsecured basis. Such guarantees of the Revolving Credit Facility were automatically terminated upon the completion of the Consumer Health Business Transfer and the Kenvue IPO. Kenvue unconditionally guarantees all of the obligations of the borrowers (other than itself) under the Revolving Credit Facility on an unsecured basis.
As of October 1, 2023, the Company had no outstanding balances under its Revolving Credit Facility.
Commercial Paper Program
On March 3, 2023, the Company entered into a commercial paper program (the “Commercial Paper Program”). The Company’s 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 the Company’s other senior unsecured indebtedness.
Prior to the Kenvue IPO, the Company issued $1.25 billion under its 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.
Interest expense incurred as a result of the Commercial Paper Program for both of the fiscal three and nine months ended October 1, 2023 were $7 million and $16 million, respectively. The weighted average effective interest rate of the Company’s commercial paper as of October 1, 2023 was 5.2% and the weighted average maturities as of October 1, 2023 were less than 90 days.
Interest Expense, Net
The amount included in Interest expense, net on the Company’s Condensed Consolidated Statements of Operations consists of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Three Months Ended | | Fiscal Nine Months Ended |
| (Dollars in Millions) | | October 1, 2023 | | October 2, 2022 | | October 1, 2023 | | October 2, 2022 |
| Interest expense | | $ | 115 | | | $ | — | | | $ | 244 | | | $ | — | |
Interest income(1) | | (15) | | | — | | | (90) | | | — | |
| Interest expense, net | | $ | 100 | | | $ | — | | | $ | 154 | | | $ | — | |
(1) Includes interest income of $33 million for the fiscal nine months ended October 1, 2023 recognized in relation to the Facility Agreement.
Scheduled Maturities of Long-Term Debt
The schedule of principal payments required on the Company’s long-term debt for the next five years, including 2023 and thereafter, is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in Millions) | | | | | | | | | | |
Remainder of 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | Thereafter |
| $ | — | | | $ | — | | | $ | 750 | | | $ | 750 | | | $ | — | | | $ | 6,250 | |
Fair Value of Debt
The Company’s debt was recorded at the carrying amount. The estimated fair value of the Company’s Senior Notes was $7.4 billion as of October 1, 2023. Fair value was estimated using market prices using quoted prices in active markets which would be considered Level 2 in the fair value hierarchy. The carrying value of the commercial paper notes approximated the fair value as of October 1, 2023 due to the nature and short term duration of the instrument.
Compliance with Covenants
As of October 1, 2023, the Company was in compliance with all financial and non-financial covenants and no default or event of default has occurred.
5. Pensions
Single Employer Plans
Net periodic benefit costs for the Company’s defined benefit retirement plans sponsored by the Company for the fiscal three and nine months ended October 1, 2023 and October 2, 2022, included the following components:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Three Months Ended | | Fiscal Nine Months Ended |
| (Dollars in Millions) | | October 1, 2023 | | October 2, 2022 | | October 1, 2023 | | October 2, 2022 |
| Service cost | | $ | 6 | | | $ | — | | | $ | 16 | | | $ | 4 | |
| Interest cost | | 8 | | | — | | | 18 | | | 2 | |
| Amortization of (gain) loss | | (1) | | | 1 | | | (1) | | | 3 | |
Special events | | 8 | | | — | | | 8 | | | — | |
| Expected return on plan assets | | (8) | | | — | | | (18) | | | — | |
| Net periodic benefit cost | | $ | 13 | | | $ | 1 | | | $ | 23 | | | $ | 9 | |
The service cost component of net periodic benefit cost is presented in the same line items on the Company’s Condensed Consolidated Statements of Operations where other employee compensation costs are reported, including Cost of sales and Selling, general, and administrative expenses. All other components of net periodic benefit costs are presented as part of Other expense, net on the Company’s Condensed Consolidated Statements of Operations. During the fiscal three months ended October 1, 2023, the Company converted a defined benefit plan to a defined contribution plan, which resulted in a settlement loss of $10 million, partially offset by a curtailment gain of $2 million. The net balance is disclosed in “Special events” within Net periodic benefit cost.
Separated Plans
J&J has defined benefit pension plans covering eligible employees in the United States and in certain of its international subsidiaries. J&J also provides medical benefits, principally to its U.S. retirees and their dependents through its other postretirement benefit plans. Prior to the Separation, the Company’s employees participated in J&J’s defined benefit pension plans, which were accounted for as multiemployer plans, and assets and liabilities associated with these plans were not reflected in the Company's Condensed Consolidated Balance Sheets. As of October 1, 2023, the Company no longer has any multiemployer plans as they have all converted to a multiple employer pension plan or a single-employer plan. The Condensed Consolidated Statements of Operations include expense allocations for these benefits, which were determined using a proportional allocation method. Total benefit plan expense allocated to the Company amounted to $0 million and $11 million for the fiscal three months ended October 1, 2023 and October 2, 2022, respectively, and $17 million and $38 million for the fiscal nine months ended October 1, 2023 and October 2, 2022, respectively.
In connection with the completion of the Separation, J&J transferred certain pension plans to the Company during the fiscal nine months ended October 1, 2023, resulting in the transfer of net pension assets of $162 million and net pension liabilities of $21 million inclusive of transfers to multiple employer pension plans.
6. Accumulated Other Comprehensive Loss
Components of other comprehensive loss consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in Millions) | | Foreign Currency Translation(1) | | Employee Benefit Plans(2) | | Gain (Loss) On Cash Flow Hedges(3) | | Total Accumulated Other Comprehensive Loss |
| July 2, 2023 | | $ | (5,487) | | | $ | (55) | | | $ | 40 | | | $ | (5,502) | |
| Net change | | (249) | | | 13 | | | (4) | | | (240) | |
| October 1, 2023 | | $ | (5,736) | | | $ | (42) | | | $ | 36 | | | $ | (5,742) | |
| | | | | | | | |
| July 3, 2022 | | $ | (5,523) | | | $ | (47) | | | $ | (4) | | | $ | (5,574) | |
| Net change | | (642) | | | 1 | | | 11 | | | (630) | |
| October 2, 2022 | | $ | (6,165) | | | $ | (46) | | | $ | 7 | | | $ | (6,204) | |
(1) Foreign currency translation adjustments for the fiscal three months ended October 1, 2023 and October 2, 2022 were net of benefit from taxes of $9 million and $88 million, respectively. Income taxes on foreign currency translation relate to tax impact on prior earnings that are not permanently reinvested and will be repatriated in the future.
(2) Employee benefit plans for the fiscal three months ended October 1, 2023 and October 2, 2022 were net of provision (benefit) from taxes of $1 million and $2 million, respectively.
(3) Gain on derivatives and hedges for the fiscal three months ended October 1, 2023 and October 2, 2022 were net of benefit from taxes of $2 million and $0 million, respectively.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in Millions) | | Foreign Currency Translation(1) | | Employee Benefit Plans(2) | | Gain (Loss) On Cash Flow Hedges(3) | | Total Accumulated Other Comprehensive Loss |
| January 1, 2023 | | $ | (5,476) | | | $ | 12 | | | $ | 9 | | | $ | (5,455) | |
| Net change | | (260) | | | (54) | | | 27 | | | (287) | |
| October 1, 2023 | | $ | (5,736) | | | $ | (42) | | | $ | 36 | | | $ | (5,742) | |
| | | | | | | | |
| January 2, 2022 | | $ | (4,431) | | | $ | (51) | | | $ | (1) | | | $ | (4,483) | |
| Net change | | (1,734) | | 5 | | 8 | | | (1,721) | |
| October 2, 2022 | | $ | (6,165) | | | $ | (46) | | | $ | 7 | | | $ | (6,204) | |
(1) Foreign currency translation adjustments for the fiscal nine months ended October 1, 2023 and October 2, 2022 were net of benefit from taxes of $24 million and $188 million, respectively. Income taxes on foreign currency translation relate to tax impact on prior earnings that are not permanently reinvested and will be repatriated in the future.
(2) Employee benefit plans for the fiscal nine months ended October 1, 2023 and October 2, 2022 were net of benefit from taxes of $16 million and $3 million, respectively. Net change for the fiscal nine months ended October 1, 2023 includes Separation adjustments of $73 million in connection with transfers of certain pensions plans by J&J to the Company.
(3) Gain on derivatives and hedges for the fiscal nine months ended October 1, 2023 and October 2, 2022 were net of provision for taxes of $7 million and $0 million, respectively.
Amounts in Accumulated other comprehensive loss are presented net of the related tax impact. Foreign currency translation is not adjusted for income taxes where it relates to permanent investments in international operations. For additional details on comprehensive income, see the Condensed Consolidated Statements of Comprehensive Income (Loss).
7. Stock-Based Compensation
J&J’s 2012 Long-Term Incentive Plan (the “J&J 2012 Plan”) expired on April 26, 2022. Prior to that expiration, on March 7, 2022, J&J’s Board of Directors approved the 2022 Long-Term Incentive Plan (the “J&J 2022 Plan”, together with the J&J 2012 Plan, the “J&J Plans”). The J&J Plans provide the grant of non-qualified stock options, incentive stock options, stock appreciation rights, Restricted Stock Units (“RSUs”), performance shares, Performance Stock Units (“PSUs”), other stock-based awards, and cash awards to employees and directors including the Company’s personnel. Stock-based compensation
granted pursuant to the J&J Plans were based on J&J’s common stock. The J&J 2022 Plan became effective in April 2022. As such, all options and restricted shares granted subsequent to that date and prior to the completion of the Exchange Offer were issued under the J&J 2022 Plan.
In March 2023, the Company’s Board of Directors approved the 2023 Long-Term Incentive Plan (the “Kenvue 2023 Plan”) providing for the grant of non-qualified stock options, incentive stock options, stock appreciation rights, RSUs, performance shares, PSUs, other stock-based awards, and cash awards to eligible employees, non-employee directors, independent contractors, and consultants of the Company and its subsidiaries and affiliated entities. Stock-based compensation granted pursuant to the Kenvue 2023 Plan is based on the Company’s common stock. The Kenvue 2023 Plan was approved by J&J, as sole stockholder of the Company, prior to the Kenvue IPO and became effective in May 2023. The maximum aggregate number of shares of Common Stock that may be issued under the Plan is 188,897,256.
During the fiscal three months ended October 1, 2023, awards were first issued pursuant to the Kenvue 2023 Plan related to the conversion of J&J awards.
On August 25, 2023, the Company’s Compensation & Human Capital Committee approved equity grants to individuals employed by Kenvue as of October 2, 2023 (the “Founder Grants”). On October 2, 2023, the Founder Grants were awarded to Kenvue employees in the form of stock options and PSUs to executive officers and either stock options and PSUs or PSUs to non-executive individuals. The Company expects to recognize approximately $81 million in stock-based compensation expense related to the Founder Grants, which will be amortized over the requisite service period of the awards, which ranges from one to three years.
Conversion of J&J Awards
On August 23, 2023, J&J equity awards held by Kenvue employees were accounted for as if they were forfeited by J&J and generally replaced by Kenvue equity awards under the Kenvue 2023 Plan with terms consistent with the those applicable to the J&J awards, subject to adjustments to the number of awards and option exercise prices to preserve the award’s value, except for certain performance-based awards that were replaced with Kenvue RSU awards. The awards were converted using the conversion ratio that was determined in accordance with the Employee Matters Agreement (as defined within Note 8, “Related Parties”). This change in the awards was considered to be a modification for accounting purposes. As part of the deemed forfeiture of the J&J awards, the J&J performance criteria applicable to any outstanding performance-based awards was deemed satisfied at the target level, unless two years have been completed in the performance period, in which case performance was deemed satisfied at the level of actual performance for such years. All other vesting terms and conditions were not affected by the conversion. The terms of the Kenvue awards are as follows:
RSUs
On August 23, 2023, the Company was deemed to have issued 12.5 million RSUs with a modification incremental cost of $268 million. These awards have vesting dates extending through August 2026. These RSUs provide for accelerated vesting in certain change in control scenarios.
The incremental cost of each RSU replaced is estimated based on the fair value of the Company’s shares at the deemed modification date, adjusted to reflect that the RSUs do not participate in dividends through the vesting date (using a dividend rate assumption consistent with the assumption disclosed within the table below). Compensation costs related to these awards are recognized within the Condensed Consolidated Statements of Operations over the vesting period, and are non-cash activities within the Condensed Consolidated Statements of Cash Flows.
Stock Options
On August 23, 2023, the Company was deemed to have issued 57 million of non-qualified stock options and incentive stock options with a modification date incremental cost of $191 million. These stock option awards were deemed granted with an exercise price equal to the original exercise price provided within the original J&J awards, as modified by the conversion ratio described above and will all be vested by January 2027. These stock options provide for accelerated vesting in certain change in control scenarios. Compensation costs related to these awards are recognized within the Condensed Consolidated Statements of Operations over the vesting period, and are non-cash activities within the Condensed Consolidated Statements of Cash Flows.
The fair value of each stock option award is estimated using the Black-Scholes option valuation model that uses the assumptions noted in the following table, and carry a weighted average exercise price of approximately $20.62.
| | | | | | | | |
Assumption | | August 2023 Converted Stock Options |
| Expected Volatility | | 16.2% - 21.4% |
| Expected Dividends | | 3.2% |
| Risk-Free Rate | | 4.2% - 5.4% |
| Expected Term | | 0.5 years - 6.5 years |
Expected volatilities are based on the historical volatility of a selected group of the Company’s peers, and other factors. Kenvue uses historical data to estimate stock option exercises and employee termination within the valuation model; separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The expected term of stock options granted is consistent with the historical experiences of J&J for similar awards to the Kenvue population. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant.
As noted above, the conversion of J&J awards to Kenvue awards was accounted for as a modification. As a result, the J&J awards were deemed to be canceled and replaced by Kenvue awards, resulting in incremental stock-based compensation expense of $25 million recognized in the fiscal three months ended October 1, 2023 in relation to J&J denominated stock options which had vested. With respect to the deemed cancellation of J&J stock options, PSUs, and RSUs that had not yet vested, the Company reversed $148 million of previously recognized stock-based compensation costs. From August 23, 2023 through the end of the fiscal three months ended October 1, 2023, the Company recognized $110 million of compensation costs attributable to the RSUs and stock options described above. In total, the Company recognized incremental stock-based compensation expense of $135 million in the fiscal three months ended October 1, 2023, of which, $123 million related to employee services provided prior to the Separation.
In total, the Company recognized $2 million of stock-based compensation expense in the fiscal three months ended October 1, 2023, as compared to $30 million in the fiscal three months ended October 2, 2022. For the fiscal nine months ended October 1, 2023, the Company recognized $75 million of stock-based compensation, as compared with $106 million fiscal nine months ended October 2, 2022.
The components and classification of stock-based compensation expense directly attributable to those employees specifically identified as employees of the Company and allocations from J&J for the fiscal three and nine months ended October 1, 2023 and October 2, 2022, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Three Months Ended | | Fiscal Nine Months Ended |
| (Dollars in Millions) | | October 1, 2023 | October 2, 2022 | | October 1, 2023 | October 2, 2022 |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Cost of sales | | $ | 2 | | | $ | 6 | | | $ | 18 | | | $ | 24 | |
| Selling, general, and administrative expenses | | — | | | 24 | | | 57 | | | 82 | |
| Stock-based compensation expense | | $ | 2 | | | $ | 30 | | | $ | 75 | | | $ | 106 | |
Stock-based compensation expense includes $6 million for the fiscal three months ended October 2, 2022 and $2 million and $24 million for the fiscal nine months ended October 1, 2023 and October 2, 2022, respectively, of allocated charges from J&J, based on percentage attribution related to J&J employees providing services to the Company. As a result of the Company’s Separation from J&J, the Company will no longer have allocation charges of this nature.
With respect to the RSUs described above, as of October 1, 2023, the Company had unrecognized compensation cost of $199 million, expected to be recognized over a weighted average period of 1.1 years. With respect to the stock options described above, as of October 1, 2023, the Company had unrecognized compensation cost of $124 million, expected to be recognized over a weighted average period of 1.1 years.
8. Related Parties
On August 23, 2023, Kenvue became a fully independent company (see Note 1, “Description of the Company and Summary of Significant Accounting Policies). The Company continues to have material agreements with J&J and considers J&J to be a
related party – see “Related Party Transactions, including Separation Agreement, with J&J” section within this footnote for additional details of these material agreements that govern the Company’s relationship with J&J.
Cost Allocations from J&J Prior to Kenvue IPO
Prior to the Kenvue IPO, J&J provided significant support functions to the Company. The Condensed Consolidated Financial Statements reflect an allocation of these costs. Similarly, certain of the Company’s operations provided support to J&J’s affiliates and related costs for support are charged to J&J’s affiliates. Allocated costs included in Cost of sales on the Company’s Condensed Consolidated Statements of Operations relate to enterprise-wide support primarily consisting of facilities, insurance, logistics, quality, and compliance which are predominantly allocated based on Net sales. Allocated costs included in Selling, general, and administrative expenses primarily relate to finance, human resources, benefits administration, procurement support, information technology, legal, corporate strategy, corporate governance, other professional services, and general commercial support functions and are predominantly allocated based on Net sales or headcount. See Note 1, “Description of the Company and Summary of Significant Accounting Policies”.
Prior to Kenvue becoming a fully independent company, the allocations (excluding stock-based compensation expense), net of costs charged to J&J’s affiliates reflected on the Company’s Condensed Consolidated Statements of Operations for the fiscal nine months ended October 1, 2023 and three and nine months ended October 2, 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | | | |
| | | | Fiscal Three Months Ended | | Fiscal Nine Months Ended |
| (Dollars in Millions) | | | | October 2, 2022 | | October 1, 2023 | | October 2, 2022 |
| Cost of sales | | | | $ | 66 | | | $ | 25 | | | $ | 142 | |
| Selling, general, and administrative expenses | | | | 174 | | | 120 | | | 504 | |
| Total | | | | $ | 240 | | | $ | 145 | | | $ | 646 | |
Management believes these cost allocations are a reasonable reflection of the utilization of services provided to, or the benefit derived by, the Company during the periods presented. The allocations may not, however, be indicative of the actual expenses that would have been incurred had the Company operated as a standalone public company. Actual costs that may have been incurred if the Company had been a standalone public company would depend on a number of factors, including the chosen organizational structure, whether functions were outsourced or performed by Company’s employees, and strategic decisions made in areas such as manufacturing, selling and marketing, research and development, information technology, and infrastructure. No allocations were made during the fiscal three months ended October 1, 2023 as Kenvue became a fully independent company.
Net Transfers to Johnson & Johnson
Net transfers to Johnson & Johnson are included within Net investment from Johnson & Johnson on the Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Equity and within financing activities on the Condensed Consolidated Statements of Cash Flows and represent the net effect of transactions between the Company and J&J. No transactions were recorded in the Net transfers to Johnson & Johnson account during the fiscal three months ended October 1, 2023.
The components of Net transfers to Johnson & Johnson for the fiscal nine months ended October 1, 2023 and three and nine months ended October 2, 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | | | |
| | | | Fiscal Three Months Ended | | Fiscal Nine Months Ended |
| (Dollars in Millions) | | | | October 2, 2022 | | October 1, 2023 | | October 2, 2022 |
| Cash pooling and general financing activities | | | | $ | (929) | | | $ | (446) | | | $ | (2,253) | |
| Corporate cost allocations | | | | 240 | | | 145 | | | 646 | |
Taxes deemed settled with J&J | | | | 24 | | | 27 | | | 25 | |
| Allocated derivative and hedging gains | | | | 15 | | | — | | | 40 | |
Net transfers to Johnson & Johnson as reflected in the Condensed Consolidated Statements of Cash Flows | | | | $ | (650) | | | $ | (274) | | | $ | (1,542) | |
Stock-based compensation expense(1) | | | | 30 | | | — | | | 106 | |
Other(2) | | | | — | | | (34) | | | (132) | |
Net transfers to Johnson & Johnson as reflected in the Condensed Consolidated Statements of Equity | | | | $ | (620) | | | $ | (308) | | | $ | (1,568) | |
(1) Stock-based compensation expense is separately shown within the Condensed Consolidated Statements of Equity in fiscal year 2023, and therefore no longer a reconciling item between the Condensed Consolidated Statements of Equity and the Condensed Consolidated Statements of Cash Flows.
(2) Other primarily relates to the impact of the change in accounting principle for GILTI in the fiscal nine months ended October 2, 2022. Please see Note 1, “Description of the Company and Summary of Significant Accounting Policies—Change in Accounting Principle” for more information.
Related Party Transactions, including Separation Agreement, with J&J
In connection with the Separation, Kenvue entered into various agreements with J&J, including the Separation Agreement. In connection with the terms of the Separation Agreement, certain assets and liabilities included in the pre-Separation balance sheet were retained by J&J and certain assets and liabilities not included in the pre-Separation balance sheet were transferred to Kenvue. Separation related adjustments have been recognized in Net investment from Johnson & Johnson, net impact of which resulted in an increase in net assets and total equity by $91 million. The impact on net assets primarily represent (i) recognition of balances with J&J including indemnification matters, (ii) changes to income tax assets and liabilities as a result of change in the basis of presentation, (iii) contribution of certain liabilities including pension and employee related obligations from J&J, (iv) the retention of assets and liabilities by J&J of certain Deferred Local Businesses (as defined in Note 1, “Description of the Company and Summary of Significant Accounting Policies”), and (v) other assets and liability transfers between Kenvue and J&J in connection with the Separation.
The Separation Agreement sets forth certain agreements between J&J and Kenvue regarding, among other matters:
•the principal corporate actions and internal reorganization pursuant to which J&J transferred the Consumer Health Business to Kenvue;
•the allocation of assets and liabilities to J&J and Kenvue;
•J&J’s and Kenvue’s respective rights and obligations with respect to the Kenvue IPO;
•certain matters with respect to any subsequent distribution or other disposition by J&J of the shares of Kenvue Common Stock owned by J&J following the Kenvue IPO (the “Distribution”); and
•other agreements governing aspects of Kenvue’s relationship with J&J following the Kenvue IPO.
In connection with the Kenvue IPO, J&J and Kenvue also entered into various other material agreements. These agreements were entered into on May 3, 2023, unless otherwise indicated, and consist of the following:
•a tax matters agreement (the “Tax Matters Agreement”), which governs J&J’s and Kenvue’s respective rights, responsibilities and obligations with respect to all tax matters, including tax liabilities, tax attributes, tax contests, and tax returns (See “Tax Indemnification” below);
•an employee matters agreement (the “Employee Matters Agreement”), which addresses certain employment, compensation, and benefits matters, including the allocation and treatment of certain assets and liabilities relating to
Kenvue’s employees and compensation and benefit plans and programs in which Kenvue’s employees participate prior to the date of the Distribution, if pursued;
•an intellectual property agreement, which governs J&J’s and Kenvue’s respective rights, responsibilities and obligations with respect to intellectual property matters, excluding certain intellectual property matters with respect to trademarks;
•a trademark phase-out license agreement, dated as of April 3, 2023, and pursuant to which J&J granted to Kenvue a license to use certain trademarks owned by J&J on a transitional basis following the completion of the Kenvue IPO;
•a transition services agreement (the “Transition Services Agreement”), pursuant to which J&J will provide to Kenvue certain services for terms of varying duration following the Kenvue IPO;
•a transition manufacturing agreement (the “Transition Manufacturing Agreement”), pursuant to which J&J will provide to Kenvue certain manufacturing services for terms of varying duration following the Kenvue IPO; and
•a registration rights agreement, pursuant to which Kenvue granted to J&J certain registration rights with respect to the shares of Kenvue common stock owned by J&J following the completion of the Kenvue IPO.
In connection with the Kenvue IPO, J&J and Kenvue also entered into various related party lease agreements, in which the Company subleased properties from J&J. See Note 1, “Description of the Company and Summary of Significant Accounting Policies—Leases” for more information.
Related Party Transactions
The Company had the following balances and transactions with J&J and its affiliates, primarily in connection with the Tax Matters Agreement, Transition Services Agreement, and the Transition Manufacturing Agreement, reported on the Company’s Condensed Consolidated Financial Statements:
| | | | | | | | |
| (Dollars in Millions) | | October 1, 2023 |
Accounts payable and accrued liabilities | | $ | 483 | |
| Prepaid expenses and other receivables | | $ | 324 | |
| Other assets | | $ | 80 | |
| Other liabilities | | $ | 190 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Three Months Ended | | Fiscal Nine Months Ended | |
| (Dollars in Millions) | | October 1, 2023 | | October 2, 2022 | | October 1, 2023 | | October 2, 2022 | |
| Cost of sales | | $ | 56 | | | $ | — | | | $ | 95 | | | $ | — | | |
| Selling, general, and administrative expenses | | $ | 47 | | | $ | — | | | $ | 94 | | | $ | — | | |
| | | | | | | | | |
Tax Indemnification
The Company entered into the Tax Matters Agreement with J&J on May 3, 2023 that governs the parties’ respective rights, responsibilities, and obligations with respect to tax liabilities and benefits, tax attributes, the preparation and filing of tax returns, the control of audits and other tax proceedings, and other matters regarding taxes.
Allocation of Taxes
With respect to taxes other than those incurred in connection with the Separation and the Distribution, the Tax Matters Agreement provides that Kenvue will generally indemnify J&J for (1) any taxes of Kenvue for all periods after the Distribution and (2) any taxes of Kenvue or J&J for periods prior to the Distribution to the extent attributable to the Consumer Health Business. J&J will generally indemnify Kenvue for (1) any taxes of J&J for all periods after the Distribution and (2) any taxes of Kenvue or J&J for periods prior to the Distribution to the extent attributable to the business and operations conducted by J&J other than the Consumer Health Business. Furthermore, subject to certain exceptions, the Company is required to reimburse J&J for certain tax refunds it receives with respect to taxes paid prior to the effective date of the Tax Matters Agreement.
Preservation of the Intended Tax Treatment of Certain Steps of the Separation and the Distribution
With respect to taxes incurred in connection with the Separation and the Distribution, Kenvue will generally be required to indemnify J&J for any taxes resulting from the failure of certain steps of the Separation and the Distribution to qualify for their intended tax treatment, where such taxes are attributable to actions or omissions by Kenvue. In addition, during the time period ending two years after the date of the Distribution, covenants will be in place that will limit or restrict certain actions, including share issuances, business combinations, sales of assets, and similar transactions by Kenvue. The Company does not believe that the above covenants have a material impact on the Company to date.
The Company recorded approximately $186 million of income tax payables and refunds, unrecognized tax benefits and associated interest due to the Company’s Former Parent as indemnifications to Prepaid expenses and other receivables and Accounts payable for current assets and current liabilities, respectively, and to Other assets and Other liabilities for noncurrent assets and noncurrent liabilities, respectively, in the Condensed Consolidated Balance Sheet as of October 1, 2023.
Debt Financing Transactions and IPO Consideration
During the second quarter of 2023, the Company received debt proceeds of $7.7 billion from the issuance of the Senior Notes, earned $13 million of interest on the proceeds of these bonds from investments in money market accounts, and received initial proceeds from its Commercial Paper Program of $1.2 billion. The Company loaned the total proceeds to J&J through the Facility Agreement. Upon the completion of the Kenvue IPO on May 8, 2023, the balance of the loans and all accrued interest were repaid by J&J for a total cash inflow of $9.0 billion. The Company remitted this cash back to J&J as a distribution in connection with the Separation.
9. Other Operating Expense (Income), Net and Other Expense, Net
Other operating expense (income), net for the fiscal three and nine months ended October 1, 2023 and October 2, 2022 consisted of:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Three Months Ended | | Fiscal Nine Months Ended |
| (Dollars in Millions) | | October 1, 2023 | | October 2, 2022 | | October 1, 2023 | | October 2, 2022 |
| Litigation expense | | $ | — | | | $ | (6) | | | $ | 20 | | | $ | 1 | |
| Royalty income | | (15) | | | (7) | | | (23) | | | (27) | |
| (Gain)/loss on disposal of fixed assets | | — | | | (1) | | | (9) | | | 1 | |
Impact of Deferred Markets(1) (Note 1) | | 10 | | | — | | | 34 | | | — | |
Contingent liability reversal(2) | | (2) | | | — | | | (45) | | | — | |
Other(3) | | 16 | | | — | | | 16 | | | 19 | |
| Total Other operating expense (income), net | | $ | 9 | | | $ | (14) | | | $ | (7) | | | $ | (6) | |
(1) Includes income taxes and service fees to be paid to J&J under the net economic benefit arrangements.
(2) Includes the reversal of a contingent liability that was no longer considered to be probable.
(3) Includes intangible asset impairment, pension related and other miscellaneous operating (income) expenses.
Other expense, net for the fiscal three and nine months ended October 1, 2023 and October 2, 2022 consisted of:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Three Months Ended | | Fiscal Nine Months Ended |
| (Dollars in Millions) | | October 1, 2023 | | October 2, 2022 | | October 1, 2023 | | October 2, 2022 |
| Currency losses on transactions | | $ | 23 | | | $ | 25 | | | $ | 51 | | | $ | 23 | |
Other(1) | | 2 | | | — | | | 14 | | | (4) | |
| Total Other expense, net | | $ | 25 | | | $ | 25 | | | $ | 65 | | | $ | 19 | |
(1) Other consists primarily of gains and losses on investments, other than service cost components of net periodic benefit costs, and miscellaneous non-operating (income) expenses.
10. Income Taxes
For interim financial statement purposes, U.S. GAAP income tax expense/benefit related to ordinary income is determined by applying an estimated annual effective income tax rate against a company’s ordinary income, subject to certain limitations on the benefit of losses. Income tax expense/benefit related to items not characterized as ordinary income is recognized as a discrete item when incurred. The estimation of the Company’s income tax provision requires the use of management forecasts and other estimates, application of statutory income tax rates, and an evaluation of valuation allowances. The Company’s estimated annual effective income tax rate may be revised, if necessary, in each interim period. Effective as of the fiscal three and nine months ended October 1, 2023, the Company changed the accounting principle for GILTI from the deferred approach to the period cost approach. See Note 1, “Description of the Company and Summary of Significant Accounting Policies.
During the periods presented in the Condensed Consolidated Financial Statements, the Company operated as part of J&J until the completion of the Exchange Offer and therefore will be included in J&J’s U.S. Federal income tax return until that date. The Company will then file a standalone U.S. Federal income tax return for the remainder of 2023. The Company expects to file income tax returns on a standalone basis in most other jurisdictions in which it operates for 2023. However, for the purposes of the Condensed Consolidated Financial Statements, the income taxes and related income tax accounts have been calculated using the separate return method as if the Company filed income tax returns on a standalone basis for all of 2023. Prior to the Kenvue IPO, the Company’s operations were calculated on a carve-out basis and included certain hypothetical foreign tax credit benefits. Post-Kenvue IPO, these hypothetical foreign tax credit benefits are not available for future utilization by the Company and were removed from the tax provision. Now as a standalone independent company, the income taxes and related income tax accounts of the Company may differ from the Condensed Consolidated Financial Statements which include year-to-date results prior to the Exchange Offer.
The worldwide effective income tax rates for the fiscal three months ended October 1, 2023 and October 2, 2022 were 25.1% and 20.6%, respectively, and for the fiscal nine months ended October 1, 2023 and October 2, 2022 were 27.1% and 19.9%, respectively. The increase for the fiscal three months ended October 1, 2023 as compared to the fiscal three months ended October 2, 2022 was primarily the result of higher U.S. taxes on foreign income, reduced benefits for foreign tax credits and higher tax expense related to prior year return to provision adjustments offset by windfall benefit on stock option exercises and tax benefits related to the completion of the Exchange Offer with J&J. The increase for the fiscal nine months ended October 1, 2023 as compared to the fiscal nine months ended October 2, 2022 was primarily the result of higher U.S. taxes on foreign income and less favorable return to provision adjustments offset by discrete foreign tax benefits. With the issuance of debt in the first quarter of 2023, the resulting increase in annual interest reduced the Company’s capacity to utilize foreign tax credits against U.S. foreign source income. As a result, the Company recorded a $51 million valuation allowance against a deferred tax asset related to future foreign tax credit benefits thus increasing the reported rate for the fiscal nine months ended October 1, 2023 as compared to the fiscal nine months ended October 2, 2022.
As of October 1, 2023, the Company had approximately $226 million of liabilities from unrecognized tax benefits. The Company conducts business and will file tax returns in numerous countries. The Company and J&J currently have tax audits in progress in several jurisdictions. With respect to the United States, the Internal Revenue Services is currently auditing the 2013-2016 fiscal periods of J&J. We currently expect J&J to complete this audit and settlement of the related tax liabilities in the next 12 months. Per the Tax Matters Agreement between J&J and the Company, J&J remains liable for all liabilities related to the final settlement of this audit and any U.S. federal income tax audits in which the Company is part of J&J’s federal consolidated tax return. During the fiscal nine months ended October 1, 2023, J&J made a payment to the U.S. Treasury for the estimated liability related to the 2013-2016 IRS Audit, which included $200 million related to the Consumer Health Business. In other major jurisdictions where the Company conducts business, the years that remain open to tax audit go back to the year 2008. The Company believes it is possible that tax audits may be completed over the next 12 months by taxing authorities in some jurisdictions outside of the United States. However, the Company is not able to provide a reasonably reliable estimate of the timing of any future tax payments or the amount of possible changes to the total unrecognized tax benefits associated with any audit closures or other events. The Company classifies liabilities for unrecognized tax benefits and related interest and penalties as long-term liabilities on the Condensed Consolidated Balance Sheets. Interest expense and penalties related to unrecognized tax benefits are classified as income tax expense on the Company’s Condensed Consolidated Statements of Operations.
On August 16, 2022, the United States enacted the Inflation Reduction Act of 2022 (“IRA”), which, among other things, introduces a 15% corporate alternative minimum tax based on adjusted financial statement income of certain large corporations with a three-year average adjusted financial statement income in excess of $1.0 billion, an excise tax on corporate stock buybacks, and several tax incentives to promote clean energy. Based on the Company’s preliminary analysis, the IRA is not
expected to have a material impact on the Company’s Condensed Consolidated Financial Statements. The Company will continue to evaluate the impact of this law as additional guidance and clarification becomes available.
11. Earnings Per Share
Prior to the completion of the Kenvue IPO, the Company had 1,716,160,000 of common stock outstanding, of which 1,716,159,990 shares were issued to Johnson & Johnson through a subscription agreement in May 2023. On May 8, 2023, the Kenvue IPO was completed through the sale of 198,734,444 shares of common stock including the underwriters’ full exercise of their option to purchase 25,921,884 shares to cover over-allotments. As of October 1, 2023, the Company had 1,914,909,765 shares of common stock issued and outstanding. For the purposes of the Company’s earnings per share calculations, the shares issued through the subscription agreement are being treated akin to shares attributable to a stock split and, as a result, are being retrospectively presented for all of the periods.
Diluted earnings per share is computed by giving effect to all potentially dilutive equity instruments or equity awards that are outstanding during the period. There were no equity awards of the Company outstanding prior to the Kenvue IPO and no dilutive equity instruments of the Company outstanding prior to the Exchange Offer. During both the three and nine ended October 1, 2023, 38,386,962 shares were determined to be anti-dilutive under the treasury stock method and therefore were excluded from the diluted earnings per share calculation.
Net income per share for the fiscal three and nine months ended October 1, 2023 and October 2, 2022 was calculated as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Three Months Ended | | Fiscal Nine Months Ended |
| (In Millions, Except Per Share Data) | | October 1, 2023 | | October 2, 2022 | | October 1, 2023 | | October 2, 2022 |
| Net income | | $ | 438 | | | $ | 586 | | | $ | 1,337 | | | $ | 1,703 | |
| | | | | | | | |
| Basic weighted average number of shares outstanding | | 1,916 | | | 1,716 | | | 1,823 | | | 1,716 | |
| Diluted effects of stock based awards | | 4 | | | — | | | 4 | | | — | |
| Diluted weighted average number of shares outstanding | | 1,920 | | | 1,716 | | | 1,827 | | | 1,716 | |
| | | | | | | | |
| EPS: | | | | | | | | |
| Basic | | $ | 0.23 | | | $ | 0.34 | | | $ | 0.73 | | | $ | 0.99 | |
| Diluted | | $ | 0.23 | | | $ | 0.34 | | | $ | 0.73 | | | $ | 0.99 | |
Share Repurchase Program
The Company’s Board of Directors has authorized a share repurchase program, under which the Company is authorized to repurchase up to 27 million shares of its 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.
12. Fair Value Measurements
Fair value measurements are estimated based on valuations techniques and inputs categorized as follows:
•Level 1 – Quoted prices in active markets for identical assets or liabilities
•Level 2 – Significant other observable inputs
•Level 3 – Significant unobservable inputs
If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.
The following fair value hierarchy table presents the components and classification of the Company’s financial assets and liabilities measured at fair value on a recurring basis:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | October 1, 2023 | | January 1, 2023 |
| (Dollars in Millions) | | Carrying Value | | Level 1 | | Level 2 | | Level 3 | | Carrying Value | | Level 1 | | Level 2 | | Level 3 |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Assets: | | | | | | | | | | | | | | | | |
| Forward foreign exchange contracts | | $ | 82 | | | $ | — | | | $ | 82 | | | $ | — | | | $ | 39 | | | $ | — | | | $ | 39 | | | $ | — | |
| | | | | | | | | | | | | | | | |
| Interest rate swaps | | — | | | — | | | — | | | — | | | 29 | | | — | | | 29 | | | — | |
| Total | | $ | 82 | | | $ | — | | | $ | 82 | | | $ | — | | | $ | 68 | | | $ | — | | | $ | 68 | | | $ | — | |
| Liabilities: | | | | | | | | | | | | | | | | |
| Forward foreign exchange contracts | | $ | (73) | | | $ | — | | | $ | (73) | | | $ | — | | | $ | (15) | | | $ | — | | | $ | (15) | | | $ | — | |
| | | | | | | | | | | | | | | | |
| Interest rate swaps | | — | | | — | | | — | | | — | | | (39) | | | — | | | (39) | | | — | |
| Total | | $ | (73) | | | $ | — | | | $ | (73) | | | $ | — | | | $ | (54) | | | $ | — | | | $ | (54) | | | $ | — | |
| Net amount presented in Prepaid expenses and other receivables: | | $ | 33 | | | $ | — | | | $ | 33 | | | $ | — | | | $ | 14 | | | $ | — | | | $ | 14 | | | $ | — | |
Net amount presented in Accounts payable | | $ | (23) | | | $ | — | | | $ | (23) | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
The carrying amount of Cash and cash equivalents, Trade receivables, Prepaid expenses and other receivables, and Loans and notes payable approximated fair value as of October 1, 2023 and January 1, 2023. The fair value of forward foreign exchange contracts is the aggregation by currency of all future cash flows discounted to its present value at the prevailing market interest rates and subsequently converted to the U.S. dollar at the current spot foreign exchange rate. The interest rate swaps are recorded at fair value that is derived from observable market data, including yield curves. All derivative instruments are classified as Level 2 securities.
There were no transfers between Level 1, Level 2, or Level 3 during the fiscal three and nine months ended October 1, 2023 and fiscal year ended January 1, 2023.
The following table sets forth the notional amounts of the Company’s outstanding derivative instruments:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | October 1, 2023 | | January 1, 2023 |
| (Dollars in Millions) | | Forward foreign exchange contracts | | Interest rate swaps | | Total | | Forward foreign exchange contracts | | Interest rate swaps | | Total |
Cash flow hedges | | $ | 3,810 | | | $ | — | | | $ | 3,810 | | | $ | 1,768 | | | $ | 2,400 | | | $ | 4,168 | |
Undesignated forward foreign exchange contracts | | $ | 586 | | | $ | — | | | $ | 586 | | | $ | — | | | $ | — | | | $ | — | |
| Net investment hedges | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
For the three and nine months ended October 1, 2023, the Company recorded a total after-tax change in Accumulated other comprehensive loss of $(4) million and $27 million, respectively, related to its cash flow hedge portfolio. For the three and nine months ended October 2, 2022, the Company recorded a total after-tax change in Accumulated other comprehensive loss of $11 million and $8 million, respectively, related to its cash flow hedge portfolio.
Forward Foreign Exchange Contracts
In certain jurisdictions, the Company uses forward foreign exchange contracts to manage its exposures to the variability of foreign exchange rates. Changes in the fair value of derivatives are recorded each period in earnings or Other comprehensive loss, depending on whether the derivative is designated as part of a hedge transaction, and if so, the type of hedge transaction.
Since 2022, the Company has entered into forward foreign exchange contracts to hedge a portion of forecasted cash flows denominated in foreign currency. The terms of these contracts are generally 12 months to 18 months. These contracts are designated as cash flow hedging relationships at the date of contract inception, in accordance with the appropriate accounting guidance. At inception, all designated hedging relationships are expected to be highly effective. These contracts are accounted for using the forward method and all gains/losses associated with these contracts are recorded in Other comprehensive loss. The Company reclassifies the gains and losses related to these contracts at the time the inventory is sold to the customer into Net sales or Cost of sales and Other expense (income), net on the Company’s Condensed Consolidated Statements of Operations, as applicable.
The following table is a summary of gains and losses on forward foreign exchange contracts designated as cash flow hedges within Other comprehensive loss and amount reclassified into earnings:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Three Months Ended | | Fiscal Nine Months Ended | |
| | October 1, 2023 | | October 2, 2022 | | October 1, 2023 | | October 2, 2022 | |
| Gain recognized in Other comprehensive loss | | $ | 7 | | | $ | 11 | | | $ | 7 | | | $ | 9 | | |
| Gain (loss) reclassified from Other comprehensive loss to earnings | | $ | 11 | | | $ | (2) | | | $ | 16 | | | $ | (2) | | |
The following tables are a summary of the reclassifications to Net Income related to the Company’s forward foreign exchange contracts for the fiscal three and nine months ended October 1, 2023 and October 2, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Three Months Ended |
| | October 1, 2023 | | October 2, 2022 |
| (Dollars in Millions) | | Net Sales | | Cost of Sales | | Other expense, net | | Net Sales | | Cost of Sales | | Other expense, net |
| Gain on cash flow hedges | | $ | — | | | $ | 11 | | | $ | — | | | $ | 7 | | | $ | 2 | | | $ | 4 | |
| Gain (loss) on forward currency exchange contracts not designated as hedges | | $ | — | | | $ | — | | | $ | (3) | | | $ | — | | | $ | — | | | $ | 7 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Nine Months Ended |
| | October 1, 2023 | | October 2, 2022 |
| (Dollars in Millions) | | Net Sales | | Cost of Sales | | Other expense, net | | Net Sales | | Cost of Sales | | Other expense, net |
| Gain (loss) on cash flow hedges | | $ | — | | | $ | 18 | | | $ | (2) | | | $ | 18 | | | $ | 5 | | | $ | 14 | |
| Gain on forward currency exchange contracts not designated as hedges | | $ | — | | | $ | — | | | $ | 1 | | | $ | — | | | $ | — | | | $ | 14 | |
The fair value of the Company’s foreign currency exchange contracts as of October 1, 2023 was included in Prepaid expenses and other receivables on the Company’s Condensed Consolidated Balance Sheets.
Since 2022, the Company has entered into forward currency exchange contracts to offset the foreign currency exposure related to the settlement of payables and receivables of the Company. These contracts are not designated as cash flow hedging relationships, and the net allocated gains and losses related to these contracts were recognized within Other expense, net on the Company’s Condensed Consolidated Statements of Operations. As of October 1, 2023 and January 1, 2023, respectively, the Company held forward foreign exchange contracts that were not designated in cash flow hedging relationships of $(2) million and $0 million, respectively.
Forward Starting Interest Rate Swaps
Beginning in the fourth quarter of 2022, the Company entered into forward starting interest rate swaps in contemplation of securing long-term financing for the Separation or for other long-term financing purposes in the event the Separation did not occur. The Company designated these derivatives as cash flow hedges to reduce future interest rate exposure related to changes in the benchmark interest rate on forecasted 5-year, 10-year, and 30-year bonds that the Company issued in 2023. During the fiscal nine months ended October 1, 2023, the Company recorded a gain of approximately $48 million in Accumulated other comprehensive loss. Upon the issuance of the forecasted debt, the Company settled its forward starting interest rate swaps and received $38 million in cash. The gain in Accumulated other comprehensive loss will be amortized and recorded in Other expense, net on the Company’s Condensed Consolidated Statements of Operations over the life of the 5-year, 10-year, and 30-year bonds. For the fiscal three and nine months ended October 1, 2023, we reclassified $1 million and $3 million, respectively, from Other comprehensive loss to the Condensed Consolidated Statements of Operations.
Net Investment Hedges
The Company designated certain forward currency exchange contracts as net investment hedges to mitigate foreign exchange exposure related to non-U.S. dollar net investments in certain foreign subsidiaries against changes in foreign exchange rates. During the fiscal three and nine months ended October 1, 2023 and October 2, 2022, the Company designated as a net investment hedge a forward currency exchange contract to sell foreign currency (denominated in the local currency of the affiliate) at specified forward rates. These contracts were accounted for using the spot method with changes in the fair value of the contracts attributable to changes in spot rates recorded in Other comprehensive loss (CTA). Changes in the fair value attributable to time value (“excluded components”) were initially recorded to Other comprehensive loss (CTA) and were recognized within Other expense, net on the Company’s Condensed Consolidated Statements of Operations ratably over the life of the contract. The forward currency exchange contracts designated as net investment hedges were settled during the fiscal three months ended October 1, 2023.
Effectiveness
On an ongoing basis, the Company assesses whether each derivative continues to be highly effective in offsetting changes of hedged items. When a derivative is no longer expected to be highly effective, hedge accounting is discontinued.
Statement of Cash Flows
Cash flows from derivatives designated in hedging relationships are reflected in the Condensed Consolidated Statements of Cash Flows consistent with the presentation of the hedged item. Cash flows from derivatives that were not accounted for as designated hedging relationships reflect the classification of the cash flows associated with the activities being economically hedged.
Credit Risk
The Company is exposed to the risk of credit loss in the event of nonperformance by counterparties to financial instrument contracts; however, nonperformance is considered unlikely and any nonperformance is unlikely to be material as it is the Company’s policy to contract with diverse, creditworthy counterparties based upon both strong credit ratings and other credit considerations. The Company has negotiated International Swaps and Derivatives Association, Inc. master agreements with its counterparties, which contain master netting provisions providing the legal right and ability to offset exposures across trades with each counterparty. Given the rights provided by these contracts, the Company presents derivative balances based on its “net” counterparty exposure. These agreements do not require the posting of collateral.
Investments in Equity Securities
The Company measures equity investments without readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. As of October 1, 2023 and January 1, 2023, such investments totaled $76 million and $56 million, respectively, and were included in Other assets on the Condensed Consolidated Balance Sheets.
13. Commitments and Contingencies
The Company and/or certain of its 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 their business.
The Company records accruals for loss contingencies associated with these legal matters when it is probable that a liability has been incurred, and the amount of the loss can be reasonably estimated. As of October 1, 2023, the Company has determined that the liabilities associated with certain litigation matters are probable and can be reasonably estimated. The Company has accordingly accrued for those contingent liabilities that are material and will continue to monitor each related legal issue and adjust accruals as might be warranted based on new information and further developments in accordance with Accounting Standards Codification 450-20-25. Accrued liabilities related to litigation matters are included in Accrued liabilities and Other liabilities on the Condensed Consolidated Balance Sheets. For these and other litigation and regulatory matters discussed below for which a loss is probable or reasonably possible, the Company is unable to estimate the possible loss or range of loss beyond the amounts accrued. Amounts accrued for legal contingencies often result from a complex series of judgments about future events and uncertainties that rely heavily on estimates and assumptions including timing of related payments. The ability to make such estimates and judgments can be affected by various factors including whether, among other things, damages sought in the proceedings are unsubstantiated or indeterminate; scientific and legal discovery has commenced or is complete; proceedings are in early stages; matters present legal uncertainties; significant facts are in dispute; procedural or jurisdictional issues exist; the number of potential claims is certain or predictable; comprehensive multi-party settlements are achievable; there are complex related cross-claims and counterclaims; and/or there are numerous parties involved.
In the Company’s opinion, based on its examination of these matters, its experience to date and discussions with counsel, the ultimate outcome of legal proceedings, net of liabilities accrued in the Company’s Condensed Consolidated Balance Sheets, is not expected to have a material adverse effect on the Company’s financial position. However, the resolution of, or increase in accruals for, one or more of these matters in any reporting period may have a material adverse effect on the Company’s results of operations and cash flows for that period.
Product Liability
The Company and/or certain of its subsidiaries are involved in numerous product liability claims and lawsuits involving multiple products. Claimants in these cases seek substantial compensatory and, where available, punitive damages. While the Company believes it has substantial defenses, it is not feasible to predict the ultimate outcome of litigation. From time to time, even if it has substantial defenses, the Company considers isolated settlements based on a variety of circumstances. The Company may accrue an estimate of the legal defense costs needed to defend each matter when those costs are probable and can be reasonably estimated. For certain of these matters, the Company may accrue additional amounts such as estimated costs associated with settlements, damages, and other losses. Product liability accruals can represent projected product liability for thousands of claims around the world, each in different litigation environments and with different fact patterns. Changes to the accruals may be required in the future as additional information becomes available.
Claims for personal injury have been made against our subsidiary Johnson & Johnson Consumer Inc. (“JJCI”), along with other sellers of acetaminophen-containing products, in federal court alleging that in utero exposure to acetaminophen (the active ingredient in Tylenol, an over-the-counter pain medication) is associated with the development of autism spectrum disorder and/or attention-deficit/hyperactivity disorder in children. In October 2022, lawsuits filed in federal courts in the United States were organized as a multi-district litigation in the U.S. District Court for the Southern District of New York. No trial dates have been set in these actions. Product liability lawsuits continue to be filed, and the Company continues to receive information with respect to potential costs and the anticipated number of cases. In addition, a lawsuit has been filed in state court against JJCI, the Company and J&J, and lawsuits have been filed in Canada against our subsidiary Johnson & Johnson Inc. (Canadian affiliate) (“JJI”) and J&J. At this stage in these proceedings, the Company is unable to reasonably estimate either the likelihood or the magnitude of its potential liability arising out these claims and lawsuits.
General Litigation
In 2006, J&J acquired Pfizer’s over-the-counter (“OTC”) business including the U.S. rights to OTC Zantac, which were on-sold to Boehringer Ingelheim (“BI”) as a condition to merger control approval such that BI assumed product liability risk for U.S. sales from and after December 2006. J&J received indemnification from BI and gave Pfizer indemnification in connection with the transfer of the Zantac business to BI from Pfizer, through J&J. In November 2019, J&J received a demand for indemnification from Pfizer, pursuant to the 2006 Stock and Asset Purchase Agreement between J&J and Pfizer. In January 2020, J&J received a demand for indemnification from BI, pursuant to the 2006 Asset Purchase Agreement among J&J, Pfizer and BI. Pursuant to the agreements, Pfizer and BI have asserted indemnification claims against J&J ostensibly related to Zantac sales by Pfizer. In November 2022, J&J received a demand for indemnification from GlaxoSmithKline LLC (“GSK”), pursuant to the 2006 Stock and Asset Purchase Agreement between J&J and Pfizer, and certain 1993, 1998, and 2002 agreements
between Glaxo Wellcome and Warner-Lambert entities. The notices seek indemnification for legal claims related to over-the-counter Zantac (ranitidine) products. Plaintiffs in the underlying actions allege that Zantac and other over-the-counter medications that contain ranitidine may degrade and result in unsafe levels of NDMA (N-nitrosodimethylamine) and can cause or have caused various cancers in patients using the products and seek declaratory and monetary relief. J&J has rejected all the demands for indemnification relating to the underlying actions. No J&J entity sold Zantac in the United States.
In 2016, JJI sold the Canadian Zantac business to Sanofi Consumer Health, Inc. (“Sanofi”). Under the 2016 Asset Purchase Agreement between JJI and Sanofi (the “2016 Purchase Agreement”), Sanofi assumed certain liabilities including those pertaining to Zantac (ranitidine) product sold by Sanofi after closing and losses arising from or relating to recalls, withdrawals, replacements or related market actions or post-sale warning in respect of products sold by Sanofi after the closing, and JJI is required to indemnify Sanofi for certain other excluded liabilities. In November 2019, JJI received a notice reserving rights to claim indemnification from Sanofi pursuant to the 2016 Purchase Agreement. The notice refers to indemnification for legal claims in class actions and various individual personal injury actions with similar allegations to the U.S. litigation related to over-the-counter Zantac (ranitidine) products.
J&J and/or JJI have also been named in four of the seven putative class actions filed in Canada with similar allegations regarding Zantac or ranitidine use. Of the four putative class actions naming J&J and/or JJI, the British Columbia action has been stayed, the Alberta action has been discontinued, and the Quebec action has been stayed. The Ontario action is pending, but not currently active. JJI was also named as a defendant, along with other manufacturers, in various personal injury actions in Canada related to Zantac products. JJI has provided Sanofi notice reserving rights to claim indemnification pursuant to the 2016 Purchase Agreement related to the class actions and personal injury actions. At this stage in these proceedings, the Company is unable to reasonably estimate either the likelihood or the magnitude of its potential liability arising out these claims and lawsuits.
Beginning in May 2021, multiple putative class actions were filed in state and federal courts (California, Florida, New York, and New Jersey) against various J&J entities alleging violations of state consumer fraud statutes based on nondisclosure of alleged benzene contamination of certain Neutrogena and Aveeno sunscreen products and the affirmative promotion of those products as “safe”; and, in at least one case, alleging strict liability manufacturing defect and failure to warn claims, asserting that the named plaintiffs suffered unspecified injuries as a result of alleged exposure to benzene. The Judicial Panel on Multi-District Litigation consolidated all pending actions, except one case pending in New Jersey state court, in the U.S. District Court for the Southern District of Florida, Fort Lauderdale Division. In October 2021, an affiliate of the Company reached an agreement in principle for the settlement of a nationwide class, encompassing the claims of the consolidated actions, subject to approval by the Florida federal Court. In December 2021, plaintiffs in the consolidated actions filed a motion for preliminary approval of a nationwide class settlement. In February 2023, an order granting final approval of the settlement, certifying the settlement class and awarding attorney’s fees was entered. A Notice of Appeal was filed in April 2023.
In September 2023, the Nonprescription Drugs Advisory Committee (the “NDAC”) of the U.S. Food and Drug Administration (“FDA”) met to discuss new data on the effectiveness of orally administered phenylephrine (“PE”) and concluded that the current scientific data do not support that the recommended dosage of orally administered PE is effective as a nasal decongestant. Neither FDA nor the NDAC raised concerns about safety issues with use of oral PE at the recommended dose. FDA has stated it will consider the input of the NDAC, and the evidence, before taking any action on the status of oral PE. Beginning in September 2023, following the NDAC vote, putative class actions were filed against the Company and its affiliates, along with other sellers and manufacturers of PE-containing products, asserting various causes of action including violation of consumer protection statutes, negligence and unjust enrichment. The complaints seek damages and injunctive relief. A petition for a multi-district litigation has been filed. Separately, putative Canadian class actions were filed in September 2023 against the Company’s affiliates, along with other sellers and manufacturers of PE-containing products, alleging false, misleading representations, and seeking damages and declaratory relief based on similar causes of action. Additionally, in October 2023, a putative securities class action was filed in the U.S. District Court for the District of New Jersey against the Company and certain of its officers, among other defendants. The complaint alleges that the Company made false or misleading statements, and omitted material facts, about PE and the efficacy of certain PE-containing products, and seeks damages for all shareholders who acquired shares pursuant to the registration statement and the IPO Prospectus for the Kenvue IPO. At this stage in these proceedings, the Company is unable to reasonably estimate either the likelihood or the magnitude of its potential liability arising out these claims and lawsuits.
JJCI along with more than 120 other companies, is a defendant in a cost recovery and action brought by Occidental Chemical Corporation in June 2018 in the U.S. District Court for the District of New Jersey, related to the clean-up of a section of the Lower Passaic River in New Jersey. Certain defendants (not including JJCI) have executed a settlement with the U.S. Environmental Protection Agency and U.S. Department of Justice, which is subject to public comment. The settlement, if
judicially approved, will be confirmed through a judicial Consent Decree. The case has been administratively closed but can be re-opened upon request, following a decision on the Consent Decree.
The Company or its subsidiaries are also parties to various proceedings brought under the Comprehensive Environmental Response, Compensation, and Liability Act, commonly known as Superfund, and comparable state, local or foreign laws in which the primary relief sought is the Company’s agreement to implement remediation activities at designated hazardous waste sites or to reimburse the government or third parties for the costs they have incurred in performing remediation at such sites.
Other
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 the Company for the Talc-Related Liabilities and any costs associated with resolving such claims. The Company 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.
14. Segments of Business
The Company historically operated as part of J&J, reported under J&J’s segment structure and historically the Chief Operating Decision Maker (“CODM”) was J&J’s Consumer Health Segment Operating Committee. As the Company transitioned into an independent, publicly traded company, the Company’s CODM was determined to be the Kenvue Leadership Team as they are responsible for allocating resources and assessing performance. Based on how the CODM assesses operating performance on a regular basis, makes resource allocation decisions, and designates responsibilities of their direct reports, the Company is organized as three operating segments, which are also its reportable segments: (i) Self Care, (ii) Skin Health and Beauty, and (iii) Essential Health. Prior period presentations conform to the current segment reporting structure.
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 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 treasury and legal operations and certain expenses, gains and losses related to the overall management of the Company, are not allocated to the segments. In assessing segment performance and managing operations, management does not review segment assets.
The Company operates the business through the following three reportable business segments:
| | | | | |
| Reportable Segments | Product Categories |
| Self Care | Cough, Cold, and Allergy |
| Pain Care |
| Other Self Care (Digestive Health, Smoking Cessation, and Other) |
| Skin Health and Beauty | Face and Body Care |
| Hair, Sun, and Other |
| Essential Health | Oral Care |
| Baby Care |
| Other Essential Health (Women’s Health and Wound Care) |
The Company’s product categories as a percentage of Net sales for the fiscal three and nine months ended October 1, 2023 and October 2, 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Three Months Ended | | Fiscal Nine Months Ended |
| Product Categories | | October 1, 2023 | | October 2, 2022 | | October 1, 2023 | | October 2, 2022 |
| Cough, Cold and Allergy | | 13 | % | | 13 | % | | 14 | % | | 13 | % |
| Pain Care | | 14 | | | 14 | | | 13 | | | 12 | |
| Other Self Care | | 14 | | | 14 | | | 15 | | | 15 | |
| Face and Body Care | | 21 | | | 21 | | | 20 | | | 21 | |
| Hair, Sun and Other | | 8 | | | 8 | | | 9 | | | 8 | |
| Oral Care | | 10 | | | 10 | | | 10 | | | 10 | |
| Baby Care | | 9 | | | 10 | | | 9 | | | 10 | |
| Other Essential Health | | 11 | | | 10 | | | 10 | | | 11 | |
| Total | | 100 | % | | 100 | % | | 100 | % | | 100 | % |
Segment Net Sales and Segment Adjusted Operating Income
Segment net sales and Segment adjusted operating income for the fiscal three and nine months ended October 1, 2023 and October 2, 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Segment Net Sales |
| | Fiscal Three Months Ended | | Fiscal Nine Months Ended |
| (Dollars in Millions) | | October 1, 2023 | | October 2, 2022 | | October 1, 2023 | | October 2, 2022 |
| Self Care | | $ | 1,613 | | | $ | 1,516 | | | $ | 4,914 | | | $ | 4,462 | |
| Skin Health and Beauty | | 1,119 | | | 1,124 | | | 3,377 | | | 3,262 | |
| Essential Health | | 1,183 | | | 1,149 | | | 3,487 | | | 3,459 | |
Total segment net sales | | $ | 3,915 | | | $ | 3,789 | | | $ | 11,778 | | | $ | 11,183 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Segment Adjusted Operating Income |
| | Fiscal Three Months Ended | | Fiscal Nine Months Ended |
| (Dollars in Millions) | | October 1, 2023 | | October 2, 2022 | | October 1, 2023 | | October 2, 2022 |
| Self Care | | $ | 583 | | | $ | 556 | | | $ | 1,741 | | | $ | 1,554 | |
| Skin Health and Beauty | | 167 | | | 246 | | | 517 | | | 616 | |
| Essential Health | | 309 | | | 261 | | | 770 | | | 821 | |
Total segment adjusted operating income(1)(2) | | $ | 1,059 | | | $ | 1,063 | | | $ | 3,028 | | | $ | 2,991 | |
Reconciliation to Income before taxes: | | | | | | | | |
Depreciation | | 72 | | | 69 | | | 211 | | | 213 | |
Amortization | | 81 | | | 83 | | | 242 | | | 265 | |
Separation-related costs | | 133 | | | 50 | | | 333 | | | 109 | |
Restructuring expense(3) | | 3 | | | 31 | | | 3 | | | 69 | |
Conversion of share-based awards(4) | | (25) | | | — | | | (25) | | | — | |
| Other operating expense (income), net | | 9 | | | (14) | | | (7) | | | (6) | |
| General corporate/unallocated expenses | | 76 | | | 81 | | | 219 | | | 197 | |
| Total operating income | | $ | 710 | | | $ | 763 | | | $ | 2,052 | | | $ | 2,144 | |
| Other expense, net | | 25 | | | 25 | | | 65 | | | 19 | |
Interest expense, net | | 100 | | | — | | | 154 | | | — | |
| Income before taxes | | $ | 585 | | | $ | 738 | | | $ | 1,833 | | | $ | 2,125 | |
(1) In the first quarter of 2023, the Company adjusted the allocation for certain intangible asset amortization costs within Cost of Sales to align with segment financial results as measured by the Company, including the CODM. Accordingly, the Company has updated its segment
disclosures to reflect the updated presentation in all prior periods. Segment adjusted operating income did not change as a result of this update.
(2) The Company defines Segment adjusted operating income as U.S. GAAP Operating income excluding depreciation and amortization, Separation-related costs, restructuring expense, the impact of the conversion of share-based awards, Other operating expense (income), net, and general corporate unallocated expenses that are not part of our measurement of segment performance. Management uses Segment adjusted operating income to assess segment financial performance.
(3) Exclusive of the restructuring expense included in Other operating expense (income), net on the Company’s Condensed Consolidated Statements of Operations.
(4) 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 add-back of 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 three months ended October 1, 2023 relating to employee services provided prior to the Separation of $123 million.
15. Accrued and Other Liabilities
Accrued liabilities consisted of:
| | | | | | | | | | | | | | |
| (Dollars in Millions) | | October 1, 2023 | | January 1, 2023 |
| Accrued expenses | | $ | 545 | | | $ | 447 | |
| Accrued compensation and benefits | | 326 | | 272 |
| Lease liability | | 46 | | 35 |
Other accrued liabilities(1) | | 371 | | 152 |
| Accrued liabilities | | $ | 1,288 | | | $ | 906 | |
Other liabilities consisted of:
| | | | | | | | | | | | | | |
| (Dollars in Millions) | | October 1, 2023 | | January 1, 2023 |
| Accrued income taxes - noncurrent | | $ | 226 | | | $ | 584 | |
| Noncurrent lease liability | | 106 | | 81 |
Other noncurrent accrued liabilities(1) | | 237 | | 62 |
| Other liabilities | | $ | 569 | | | $ | 727 | |
(1) The increase in Other current and noncurrent accrued liabilities relates primarily to the agreements entered into with J&J in connection with the Separation Agreement, which went into effect in the second quarter of 2023. See Note 8, “Related Parties” for more information.
16. Subsequent Events
Dividend Declaration
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.