Item 7. Management’s Discussion and Analysis
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Company Overview
At Kenvue, our purpose is to realize the extraordinary power of everyday care. As a global leader at the intersection of healthcare and consumer goods, we are the world’s largest pure-play consumer health company by revenue with $15.4 billion in Net sales in 2023. By combining the power of science with meaningful human insights and digital-first approach, we empower consumers to live healthier lives every day. Trusted by generations, our differentiated portfolio of iconic brands—including Tylenol ® , Neutrogena ® , Listerine ® , Johnson’s ® , BAND-AID ® Brand Adhesive Bandages, Aveeno ® , Zyrtec ® , and Nicorette ® —is backed by science and recommended by healthcare professionals, which further reinforces our consumers’ connections to our brands.
Our portfolio includes Self Care, Skin Health and Beauty, and Essential Health products, allowing us to connect with consumers globally—in their daily rituals and the moments that matter most.
Our global scale and the breadth of our brand portfolio are complemented by our well-developed capabilities and accelerated through our digital-first approach, allowing us to dynamically capitalize on and respond to current trends impacting our categories and geographic markets.
With a sole focus on consumer health, our marketing organization operates efficiently by leveraging our precision marketing, e-commerce, and broader digital capabilities to develop unique consumer insights and further enhance the relevance of our brands. Similarly, our research and development organization combines these consumer insights with deep, multi-disciplinary scientific expertise, and engagement with healthcare professionals, to drive innovative new products, solutions, and experiences centered around consumer health.
Our Business Segments
We operate our business through the following three reportable business segments:
• Self Care. Our Self Care product categories include: Pain Care; Cough, Cold and Allergy; and Other Self Care (Digestive Health, Smoking Cessation, Eye Care, and Other). Major brands in the segment include Tylenol ® , Motrin ® , Nicorette ® , Benadryl ® , Zyrtec ® , Zarbee’s ® , ORSL TM , Rhinocort ® , and Calpol ® .
• Skin Health and Beauty. Our Skin Health and Beauty product categories include: Face and Body Care; and Hair, Sun and Other. Major brands in the segment include Neutrogena ® , Aveeno ® , Dr.Ci:Labo ® , OGX ® , Le Petit Marseillais ® , Lubriderm ® , and Rogaine ® .
• Essential Health. Our Essential Health product categories include: Oral Care; Baby Care; and Other Essential Health (Women’s Health, Wound Care, and Other). Major brands in the segment include Listerine ® , Johnson’s ® , BAND-AID ® Brand Adhesive Bandages, Stayfree ® , o.b. ® tampons, Carefree ® , and Desitin ® Diaper Rash.
For additional information about our three reportable business segments, see “ —Key Factors Affecting Our Results—Our Brands and Product Portfolio ” and Note 19 , “ Segments of Business and Geographic Areas , ” to the Consolidated Financial Statements .
Separation from Johnson & Johnson
In November 2021, Johnson & Johnson (“J&J”), our former parent company, announced its intention to separate its Consumer Health segment (the “Consumer Health Business”) into an independent publicly traded company (the “Separation”). Kenvue was incorporated in Delaware in February 2022, as a wholly owned subsidiary of J&J, to serve as the ultimate parent company of J&J’s Consumer Health Business. In April 2023, J&J completed the transfer of substantially all of the assets and liabilities of the Consumer Health Business to us and our subsidiaries. In May 2023, we completed an initial public offering (the “IPO” or “Kenvue IPO”) of approximately 10.4% of our outstanding common stock and began trading on the New York Stock Exchange (“NYSE”) under the ticker symbol “KVUE.” Following the Kenvue IPO, J&J owned approximately 89.6% of our outstanding common stock. In July 2023, J&J announced an exchange offer (the “Exchange Offer”) under which its shareholders could
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exchange shares of J&J common stock for shares of our common stock owned by J&J. In August 2023, J&J completed the Exchange Offer and exchanged shares representing 80.1% of our common stock, completing the Separation from J&J and transition to being a fully independent public company. Following the Separation, J&J continues to own approximately 9.5% of our outstanding common stock.
See Note 1, “Description of the Company and Summary of Significant Accounting Policies,” to the Consolidated Financial Statements for additional information.
We are incurring certain costs in connection with our establishment as a standalone public company (the “Separation-related costs”). We expect the non-recurring Separation-related costs will continue through at least fiscal year 2024. For additional information about the Separation, see Note 1, “Description of the Company and Summary of Significant Accounting Policies,” and Note 12, “Relationship with J&J,” to the Consolidated Financial Statements included herein.
Relationship with J&J
We have entered into the Separation Agreement and various other agreements with J&J for the purpose of effecting the Separation. These agreements provide a framework for our relationship with J&J and govern various interim and ongoing relationships between us and J&J that follow the completion of the Kenvue IPO. See Note 12, “Relationship with J&J,” to the Consolidated Financial Statements included herein for additional information on these agreements.
Kenvue Headquarters
On April 20, 2023, we entered into a long-term lease for a newly renovated office building and a newly constructed R&D 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 and R&D center. The relocation to this campus is expected to commence in 2025 for the office building and continue through 2026 for the new R&D building. We will continue to operate from our interim corporate headquarters in Skillman, New Jersey until that time. On February 21, 2024, we listed our headquarters in Skillman for sale, which met the criteria to be classified as held for sale at that date. We are currently evaluating the impact of the change in classification on our results of operations for the first quarter 2024.
Key Factors Affecting Our Results
We believe that our performance and future success depend on a number of factors that present significant opportunities for us but also pose risks and challenges, including those discussed below and in Part 1, Item 1A, “Risk Factors,” of this Form 10-K.
Our Brands and Product Portfolio
We have a world class, global portfolio of iconic and modern brands, and we have been making and investing in consumer products for over 135 years that are trusted by generations of consumers. Our business is balanced and resilient with leading brands across categories and geographic markets. Our brands are widely recognized and represent a combination of global powerhouses and regional brands, many of which hold leading positions in their respective categories. Our brands are built for moments that uniquely matter; these moments of care create an emotional connection to our products that forms deep bonds between consumers and our brands.
Consumers, customers, and third-party partners value and trust the reputation, reliability, and status of our brands and the quality, performance, and functionality of our products, and we believe there are significant opportunities to further increase our category and brand penetration by continuing to deepen our brand relevance and salience across our portfolio, continually earning a place for our products in consumers’ hearts and homes.
Shifting Consumer Preferences
Everyday care has never been a more essential part of the consumer health journey. Globally, preferences and expectations for consumer health products continue to evolve, with a heightened focus on preventative care and science-backed solutions. While the focus on consumer health was already on the rise before the COVID-19 pandemic, this focus has further accelerated through the full cycle of the pandemic. Consumers are also shifting the paradigm of beauty towards health. Other recent trends that have affected consumer preferences include an aging population, premiumization (where consumers switch their purchases to premium alternatives), a growing middle class in emerging markets, and the rise of digital ecosystems that create new opportunities for personalized health solutions. We expect these trends to continue and that consumers will continue to seek solutions that meet their health goals, creating growth opportunities across our product portfolio.
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Consumer preferences and purchasing patterns are difficult to predict and may fluctuate rapidly. Moreover, market trends and consumer preferences and purchasing patterns may vary by geographic region, and we seek to complement our portfolio of iconic global brands with strong regional brands that are uniquely tailored to local preferences and trends.
Innovation
We rely on science. We have always prioritized science as the core of how we provide care, and we remain committed to this approach. Our ability to quickly develop new products and technologies and to adapt and market our products on an ongoing basis to meet evolving consumer preferences is an essential component of our business strategy. Several of our products have a long history of life-enhancing, first-to-market innovations. In many situations, we have driven the innovation and clinical compendium of entire categories. By leveraging world-class research and development capabilities and a team of research and development professionals, we have a multi-disciplinary and differentiated approach to innovation.
Increased Competition
Our products are sold in a highly competitive global marketplace, which, in recent years, has experienced increased retail trade concentration, the emergence of retail buying alliances, the rapid growth of e-commerce, and the integration of traditional and digital operations at key retail trade customers. One of our customers accounted for approximately 12%, 13%, and 14% of our total Net sales for the fiscal twelve months ended December 31, 2023, January 1, 2023, and January 2, 2022, respectively. Our top 10 customers represented approximately 41%, 42%, and 43% of our total Net sales for the fiscal twelve months ended December 31, 2023, January 1, 2023, and January 2, 2022, respectively . A s a result of these trends, certain large-format retail trade customers have significant bargaining strength and represent a significant proportion of our total Net sales.
We face substantial competition in each of our business segments and product lines and across all geographic markets in which we operate. We compete with companies of all sizes on the basis of cost-effectiveness, product performance, real or perceived product advantages, intellectual property rights, advertising, and promotional activities, brand recognition and loyalty, consumer convenience, pricing, and geographic reach. Our competitors include multinational corporations, smaller companies that often operate on a regional basis, retailers’ private-label brands, and generic non-branded products. Many of these competitors have benefited from the substantial growth in e-commerce and focus extensively on direct to consumer or other non-traditional, digital business models. Competitive factors impacting our business also include market dynamics and evolving consumer preferences, brand image, a broad product portfolio, new product innovations and product development, pricing that is attractive to consumers, cost inputs, and the ability to attract and retain talented employees. We expect that the continued attractiveness of the categories and geographic markets in which we operate will encourage the entry of new competitors of all sizes, which could increase these and other competitive pressures in the future.
Sourcing, Manufacturing, and Supply Chain Management
Our ability to meet the needs of our consumers and customers depends on the proper functioning of our manufacturing and supplier operations. Our manufacturing operations require the timely delivery of sufficient amounts of complex, high-quality components and materials. We have built our supply chain network to deploy resources across the globe where they are most needed. Our sourcing, manufacturing, and demand planning capabilities are continuously optimized to meet evolving market dynamics. Our extensive distribution network and sales organization enable us to establish strategic partnerships with key suppliers and retailers across multiple markets and channels, where we further leverage our scale to drive flexible manufacturing capacity and supply chain optimization. We believe this approach builds and supports our resilience across economic cycles and allows us to prioritize or expand our geographic focus based on our strategic priorities. Nonetheless, in recent years, we have experienced, and continue to experience, higher than expected inflation, including escalating transportation, commodity, and other supply-chain costs and disruptions that have adversely affected, and continue to adversely affect, our results of operations. Although certain costs have moderated to an extent, we continue to experience higher energy and labor costs.
Supply Chain Optimization Initiatives
Since 2019, we have taken significant steps to meet consumer demand and mitigate supply chain constraints. We have redesigned our manufacturing and distribution network, optimizing both in-house and external manufacturing and distribution footprints to improve lead time and reliability across the globe. We selectively invested in specific technologies and expanded our capacity in different geographic markets with the intent to increase competitiveness by improving cost, speed, compliance, and customer service. As a result, our historical results of operations reflect savings delivered through these end-to-end supply chain optimization initiatives.
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Macroeconomic Trends
Macroeconomic factors affect consumer spending patterns and thereby our results of operations. These factors include general economic conditions, inflation, consumer confidence, employment rates, business conditions, the availability of credit, interest rates, tax rates, and fuel and energy costs. Factors that impact consumer discretionary spending, which remain volatile globally, continue to create a complex and challenging retail environment for us and our third-party partners. We intend to continue to evaluate and adjust our operating strategies and cost management opportunities to help mitigate any impacts on our results of operations resulting from broader macroeconomic conditions and policy changes, while remaining focused on the long-term growth of our business.
Global economic challenges, including the impact from acts of war, military actions, terrorist attacks, or civil unrest, such as the ongoing Russia-Ukraine War or the ongoing conflict in the Middle East, may continue to cause economic uncertainty and volatility. The impact of these issues may adversely affect prevailing economic conditions and our business, results of operations or financial condition.
Russia-Ukraine War
Although the long-term implications of the ongoing military conflict between Russia and Ukraine (the “Russia-Ukraine War”) are difficult to predict at this time, the financial impact of the conflict to us during the fiscal twelve months ended December 31, 2023, January 1, 2023, and January 2, 2022 was not significant to our results of operations. For the fiscal twelve months ended December 31, 2023, January 1, 2023, and January 2, 2022, our Ukrainian business represented 0.2%, 0.1%, and 0.3% of our Net sales, respectively. For the fiscal twelve months ended December 31, 2023, January 1, 2023, and January 2, 2022, our Russian business represented 1.0%, 1.4%, and 1.8% of our Net sales, respectively.
In the first quarter of fiscal year 2022, we announced our decision to suspend supply of all of our products into Russia other than our over-the-counter medicines within our Self Care segment, which we continued to supply as patients rely on many of these products for healthcare purposes. Supply of the suspended products terminated during the second quarter of fiscal year 2022. We also suspended all advertising in Russia, all clinical trials in Russia, and any additional investment in Russia. We will continue to monitor the geopolitical situation in Russia and to evaluate our activities and future operations in Russia.
Foreign Currency Exposure
We report our consolidated financial results in U.S. dollars but have significant non-U.S. operations. A large portion of our business is conducted in currencies other than U.S. dollars, and generally the applicable local currency is our functional currency in that locality. As a result, we face foreign currency exposure on the translation into U.S. dollars of our results of operations in numerous jurisdictions primarily in the European Union, the United Kingdom, Japan, China, Canada, Brazil, and India. In addition, as we continue to expand our global operations, our exposure to foreign currency risk could become more significant, particularly if the U.S. dollar strengthens in the future.
Where possible, we manage foreign currency exposure through a variety of methods. We may adopt natural hedging strategies whereby favorable and unfavorable foreign currency impacts to our foreign currency-denominated operating expenses are mitigated to a certain extent by the natural, opposite impact on our foreign currency-denominated Net sales. In an effort to minimize the impact on earnings and cash flows of foreign currency rate movements, we engage in a combination of selling price increases, where permitted, sourcing strategies, cost-containment measures and selective hedging of foreign currency transactions. We cannot guarantee that foreign currency exchange rates will be stable in the future or that foreign currency risk can be mitigated with these risk management strategies. Nonetheless, it is not practical for us to mitigate all of our foreign currency exposure, nor are we able to accurately predict the possible impact of future foreign currency exchange rate fluctuations on our results of operations, due to our constantly changing exposure to various foreign currencies, difficulty in predicting fluctuations in foreign currency exchange rates relative to the U.S. dollar, and the significant number of foreign currencies involved.
Acquisitions and Divestitures
We refine our portfolio through acquisitions towards high-growth, high-margin businesses as well as divestitures of assets that we do not believe are well integrated into our product portfolio and strategic direction. We have demonstrated an ability to successfully integrate and scale acquired businesses to further build upon our market leadership across our product portfolio. During the fiscal twelve months ended January 2, 2022, we divested several brands globally in line with our strategy. We did
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not complete any significant acquisitions or divestitures during the fiscal twelve months ended December 31, 2023 and January 1, 2023.
We intend to continue to pursue a disciplined and prudent approach to acquisitions and partnership opportunities that accelerate growth within our business. We believe our strong balance sheet will allow us to strategically make acquisitions and divestitures while maintaining our disciplined approach to capital allocation.
Legal Proceedings
We and/or certain of our subsidiaries are involved from time to time in various lawsuits and claims relating to intellectual property, commercial contracts, product liability, labeling, marketing, advertising, pricing, antitrust and trade regulation, labor and employment, indemnification, data privacy and security, environmental, health and safety, and tax matters, governmental investigations, and other legal proceedings that arise in the ordinary course of our business. See Note 17, “Commitments and Contingencies,” to the Consolidated Financial Statements included herein for additional information regarding our current legal proceedings.
A significant number of personal injury claims alleging that talc causes cancer were made against J&J and certain of its affiliates arising out of the use of body powders containing talc, primarily Johnson’s ® Baby Powder. These personal injury suits were filed primarily in state and federal courts in the United States and in Canada.
Pursuant to the Separation Agreement, J&J has retained all liabilities on account of or relating to harm arising out of, based upon or resulting from, directly or indirectly, the presence of or exposure to talc or talc-containing products sold by J&J or its affiliates in the United States and Canada (the “Talc-Related Liabilities”) and, as a result, has agreed to indemnify us for the Talc-Related Liabilities in the United States and Canada and any costs associated with resolving such claims. We will, however, remain responsible for all liabilities on account of or relating to harm arising out of, based upon or resulting from, directly or indirectly, the presence of or exposure to talc or talc-containing products sold outside the United States or Canada.
Except for the Talc-Related Liabilities and certain other liabilities for which the Company was indemnified by J&J, the Company generally remains responsible for liabilities relating to, arising out of, or resulting from the past or current operation or conduct of the Company’s business.
Restructuring
See Note 20, “Restructuring, ” to the Consolidated Financial Statements included herein for information about our restructuring programs.
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Results of Operations
Fiscal Twelve Months Ended December 31, 2023 Compared with Fiscal Twelve Months Ended January 1, 2023
Our results for the fiscal twelve months ended December 31, 2023 and January 1, 2023 were as follows:
Fiscal Twelve Months Ended Change In Fiscal Year
December 31, 2023 January 1, 2023 2022 to 2023
(Dollars in Millions) Amount Percent
Net sales $ 15,444 $ 14,950 $ 494 3.3 %
Cost of sales 6,801 6,665 136 2.0
Gross profit 8,643 8,285 358 4.3
Selling, general, and administrative expenses 6,141 5,633 508 9.0
Other operating income, net (10) (23) 13 56.5
Operating income 2,512 2,675 (163) (6.1)
Other expense, net 72 38 34 89.5
Interest expense, net 250 — 250 *
Income before taxes 2,190 2,637 (447) (17.0)
Provision for taxes 526 573 (47) (8.2)
Net income $ 1,664 $ 2,064 $ (400) (19.4) %
* Calculation not meaningful.
Net Sales
Net sales were $15.4 billion and $15.0 billion for the fiscal twelve months ended December 31, 2023 and January 1, 2023, respectively, an increase of $494 million, or 3.3%. Excluding the impact of unfavorable changes in currency rates of $253 million, Organic growth was $747 million, primarily attributable to value realization (defined as price including mix), and increased demand across our Self Care segment, with all product categories experiencing growth. In Skin Health and Beauty, growth was driven by the easing of supply chain constraints, strong e-commerce and club channel performance, one-time supply constraints, and the impact of a strong sun season on Sun Care. This growth in Skin Health and Beauty was partially offset by volume declines in the United States, due to underperformance in commercial in-store execution and portfolio rationalization initiatives in 2022, along with market softness in China. Momentum in Essential Health continued, driven by value realization and strong performance in Oral Care, along with growth in Women’s Health led by value realization and brand activation, partially offset by overall volume declines primarily due to category contractions, as well as our supply suspension of certain personal care products in Russia since March 2022.
Cost of Sales
Cost of sales were $6.8 billion and $6.7 billion for the fiscal twelve months ended December 31, 2023 and January 1, 2023, respectively, an increase of $136 million, or 2.0% primarily attributable to impact of higher costs of key ingredients and packaging materials due to the impact of inflation. The increase was partially offset by the realization of benefits associated with our supply chain optimization initiatives and $107 million favorable translational currency impacts. Gross profit margin increased 60 basis points to 56.0% as compared to the prior year primarily due to growth in Net sales driven by value realization and the realization of benefits associated with our supply chain optimization initiatives, partially offset by unfavorable transactional foreign currency fluctuations.
Selling, General, and Administrative Expenses
Selling, general, and administrative (“SG&A”) expenses were $6.1 billion and $5.6 billion for the fiscal twelve months ended December 31, 2023 and January 1, 2023, respectively, an increase of $508 million, or 9.0%. SG&A as a percentage of Net sales increased 210 basis points to 39.8%, as compared to the prior year, primarily attributable to higher costs in enterprise functions as we operate on a standalone basis, transition services agreement costs with J&J, and a $255 million increase in non-recurring Separation-related costs. These cost increases were partially offset by favorable currency impacts of $64 million.
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Other Operating Income, Net
Other operating income, net was $10 million and $23 million for the fiscal twelve months ended December 31, 2023 and January 1, 2023, respectively, a decrease of $13 million. The decrease was primarily driven by the accounting impact of net economic benefit arrangements with J&J in connection with the Deferred Local Businesses (see Note 1, “Description of the Company and Summary of Significant Accounting Policies,” to the Consolidated Financial Statements included herein for additional information) and an increase in litigation-related expenses, partially offset by the reversal of a contingent liability that was no longer considered to be probable and the gain recognized on the sale of a manufacturing facility in Lancaster, Pennsylvania of $9 million.
Other Expense, Net
Other expense, net was $72 million and $38 million for the fiscal twelve months ended December 31, 2023 and January 1, 2023, respectively, an increase in expense of $34 million, primarily driven by higher foreign currency losses and impairments on equity securities.
Interest Expense, Net
Interest expense, net was $250 million for the fiscal twelve months ended December 31, 2023 driven by the interest expense recognized on the Senior Notes and notes issued under the commercial paper program in 2023 in connection with the IPO, partially offset by interest income, including $33 million of interest earned on the debt proceeds in escrow and the Facility Agreement. See Note 5, “Borrowings,” to the Consolidated Financial Statements included herein for additional information.
Provision For Taxes
Provision for taxes was $526 million and $573 million for the fiscal twelve months ended December 31, 2023 and January 1, 2023, respectively, a decrease in income tax expense of $47 million. The decrease is primarily due to changes in income before taxes and tax reserve releases due to statute of limitation expirations. The decrease is offset by a reduction in our capacity to utilize foreign tax credits against U.S. foreign source income due to the increase in annual interest expense. As a result, we recorded a valuation allowance against a deferred tax asset related to future foreign tax credit benefits.
Fiscal Twelve Months Ended January 1, 2023 Compared with Fiscal Twelve Months Ended January 2, 2022
Our results for the fiscal twelve months ended January 1, 2023 and January 2, 2022 were as follows:
Fiscal Twelve Months Ended Change In Fiscal Year
January 1, 2023 January 2, 2022 2021 to 2022
(Dollars in Millions) Amount Percent
Net sales
$ 14,950 $ 15,054 $ (104) (0.7) %
Cost of sales
6,665 6,635 30 0.5
Gross profit 8,285 8,419 (134) (1.6)
Selling, general, and administrative expenses
5,633 5,484 149 2.7
Other operating (income) expense, net (23) 15 (38) *
Operating income 2,675 2,920 (245) (8.4)
Other expense (income), net 38 (5) 43 *
Income before taxes 2,637 2,925 (288) (9.8)
Provision for taxes 573 847 (274) (32.3)
Net income $ 2,064 $ 2,078 $ (14) (0.7) %
* Calculation not meaningful.
A detailed discussion of the period-over-period changes in the results for the fiscal twelve months ended January 1, 2023 and the fiscal twelve months ended January 2, 2022, with the exception of the Provision for taxes line item which is described below, can be found under the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the final prospectus filed on May 4, 2023 with the U.S. Securities and Exchange Commission pursuant to Rule
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424(b)(4) under the Securities Act relating to the Company’s Registration Statement on Form S-1 (the “IPO Prospectus”) for the Kenvue IPO.
As described in Note 1, “Description of the Company and Summary of Significant Accounting Policies,” effective in the third quarter of fiscal year 2023, the Company changed its accounting principle for Global Intangible Low-Tax Income (“GILTI”) from the deferred approach to the period cost approach, which resulted in adjustments to the Provisions for taxes line item in the Consolidated Statements of Operations as compared to the amounts reported for the fiscal twelve months ended January 1, 2023 and January 2, 2022 in our IPO Prospectus. A detailed discussion of the period-over-period changes in the Provision for taxes line item for the fiscal twelve months ended January 1, 2023 and the fiscal twelve months ended January 2, 2022, inclusive of the adjustments for the change in accounting principle for GILTI, can be found below.
Provision For Taxes
Provision for taxes was $573 million and $847 million for the fiscal twelve months ended January 1, 2023 and January 2, 2022, respectively, a decrease in income tax expense of $274 million. The $274 million decrease in income tax expense was primarily due to a lower effective tax rate in the fiscal twelve months ended January 1, 2023 resulting from the ability to claim certain deductions and additional foreign tax credits that were limited in the fiscal twelve months ended January 2, 2022 as a result of the talc litigation settlement.
Segment Results
Segment profit is based on Operating income, excluding depreciation and amortization, non-recurring Separation-related costs, restructuring expenses and operating model optimization initiatives, the impact of the conversion of stock-based awards, issuance of Founder Shares, Other operating (income) expense, net, and unallocated general corporate administrative expenses (referred to herein as “Segment adjusted operating income”), as management excludes these items in assessing segment financial performance. General corporate/unallocated expenses, which include expenses related to treasury, legal operations and certain other expenses, along with gains and losses related to the overall management of our company, are not allocated to the segments. In assessing segment performance and managing operations, management does not review segment assets.
See Note 19, “Segments of Business and Geographic Areas,” to the Consolidated Financial Statements included herein for additional information.
Fiscal Twelve Months Ended December 31, 2023 Compared with Fiscal Twelve Months Ended January 1, 2023
The following table presents Segment net sales and Segment adjusted operating income and the period-over-period changes in Segment net sales and Segment adjusted operating income for the fiscal twelve months ended December 31, 2023, January 1, 2023, and January 2, 2022. See Note 19, “Segments of Business and Geographic Areas,” to the Consolidated Financial Statements included herein for further details regarding Segment net sales and Segment adjusted operating income.
Fiscal Twelve Months Ended Change In Fiscal Year
December 31, 2023 January 1, 2023 2022 to 2023
2022 to 2023
(Dollars in Millions) Amount Percent Amount Percent Amount Percent
Segment Net Sales
Self Care $ 6,451 41.8 % $ 6,030 40.3 % $ 421 7.0 %
Skin Health and Beauty 4,378 28.3 4,350 29.1 28 0.6
Essential Health 4,615 29.9 4,570 30.6 45 1.0
Segment net sales
$ 15,444 100.0 % $ 14,950 100.0 % $ 494 3.3 %
Self Care $ 2,299 $ 2,088 $ 211 10.1 %
Skin Health and Beauty 679 708 (29) (4.1)
Essential Health 1,011 1,111 (100) (9.0)
Segment adjusted operating income (1)
$ 3,989 $ 3,907 $ 82 2.1 %
Reconciliation to Income before taxes:
Depreciation
305 296
Amortization
322 348
Separation-related costs
468 213
Restructuring expenses and operating model optimization initiatives (2)
32 100
Conversion of stock-based awards (3)
55 —
Founder Shares (4)
9 —
Other operating income, net (10) (23)
General corporate/unallocated expenses 296 298
Operating income $ 2,512 $ 2,675
Other expense, net 72 38
Interest expense 250 —
Income before taxes $ 2,190 $ 2,637
(1) In the first quarter of fiscal year 2023, we adjusted the allocation for certain intangible asset amortization costs within Cost of Sales to align with segment financial results as measured by us, including the CODM. Accordingly, we updated its segment disclosures to reflect the updated presentation in all prior periods. Total segment adjusted operating income did not change as a result of this update.
(2) Exclusive of the restructuring expenses and operating model optimization initiatives included in Other operating income, net in the Company’s Consolidated Statements of Operations.
(3) Segment adjusted operating income excludes the impact of the conversion of stock-based awards (see Note 11, “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 twelve months ended December 31, 2023 relating to employee services provided prior to the Separation of $203 million.
(4) 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 Shares”). On October 2, 2023, the Founder Shares were granted to all Kenvue employees in the form of stock options and PSUs to executive officers and either stock options and PSUs or RSUs to non-executive individuals (see Note 11, “Stock-Based Compensation”).
Organic Growth
We assess our Net sales performance by measuring Organic growth, a non-GAAP financial measure, which measures the period-over-period change in Net sales excluding the impact of changes in foreign currency exchange rates and the impact of
acquisitions and divestitures. Management believes Organic growth provides investors with additional, supplemental information that they may find useful in assessing our results of operations by excluding the impact of certain items that we believe do not directly reflect our underlying operations.
The following tables present a reconciliation of the change in U.S. GAAP Net sales to Organic growth for the fiscal twelve months ended December 31, 2023 compared to the fiscal twelve months ended January 1, 2023:
Fiscal Twelve Months Ended December 31, 2023 vs January 1, 2023 (1)
Reported Net sales change Impact of foreign currency Organic growth
(Dollars in Millions) Amount Percent Amount Amount Percent
Self Care $ 421 7.0 % $ (84) $ 505 8.4 %
Skin Health and Beauty 28 0.6 (52) 80 1.8
Essential Health 45 1.0 (117) 162 3.6
Total $ 494 3.3 % $ (253) $ 747 5.0 %
Fiscal Twelve Months Ended December 31, 2023 vs January 1, 2023 (1)
Reported Net sales change Impact of foreign currency Organic growth
Price/Mix (2)
Volume
Self Care 7.0 % (1.4) % 7.1 % 1.3 %
Skin Health and Beauty 0.6 (1.2) 6.6 (4.8)
Essential Health 1.0 (2.6) 9.6 (6.0)
Total 3.3 % (1.7) % 7.7 % (2.7) %
(1) Acquisitions and divestitures did not materially impact the reported Net sales change.
(2) Also referred to as value realization.
A detailed discussion of the period-over-period changes in Segment net sales and Segment adjusted operating income for the fiscal twelve months ended December 31, 2023 and the fiscal twelve months ended January 1, 2023 is presented below. A detailed discussion of the period-over-period changes in Segment net sales and Segment adjusted operating income for the fiscal twelve months ended January 1, 2023 and the fiscal twelve months ended January 2, 2022 can be found under the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our IPO Prospectus.
Self Care Segment
Self Care Segment Net Sales
The Self Care Segment net sales were $6.5 billion and $6.0 billion for the fiscal twelve months ended December 31, 2023 and January 1, 2023, respectively, an increase of $421 million, or 7.0%. Excluding the unfavorable impact of foreign currency translation, Organic growth was $505 million or 8.4%, primarily driven by value realization of 7.1% and volume-related increases of 1.3% driven by increased demand across our Self Care segment, with all product categories experiencing growth. Increased demand for Cough, Cold, and Allergy products due to greater instances of respiratory illness, primarily in Europe and China, innovation-based volume growth, one-time supply replenishment, primarily in the United States, related to low trade inventory levels at the start of the year, and brand activation across product categories fueled growth for the segment.
Self Care Segment Adjusted Operating Income
The Self Care Segment adjusted operating income increased by $211 million, or 10.1% to $2.3 billion for the fiscal twelve months ended December 31, 2023. The increase was primarily driven by value realization, volume-related increases, and the realization of benefits associated with our supply chain optimization initiatives, partially offset by the negative impact of transactional foreign currency fluctuations and the negative impact of cost inflation.
Skin Health and Beauty Segment
Skin Health and Beauty Segment Net Sales
The Skin Health and Beauty Segment net sales were $4.4 billion and $4.4 billion for the fiscal twelve months ended December 31, 2023 and January 1, 2023, respectively, an increase of $28 million, or 0.6%. Excluding the unfavorable impact of foreign currency translation, Organic growth was $80 million, or 1.8%, primarily driven by value realization of 6.6%, offset by volume-related decreases of 4.8%. The increase was driven by the easing of supply chain constraints, strong e-commerce and club channel performance, one-time supply replenishment, and share gains in Sun Care, which were fueled by a strong sun season, partially offset by underperformance in commercial U.S. in-store execution, portfolio rationalization initiatives in 2022, and market softness in China.
Skin Health and Beauty Segment Adjusted Operating Income
The Skin Health and Beauty Segment adjusted operating income decreased by $29 million, or 4.1% to $679 million for the fiscal twelve months ended December 31, 2023. The decrease was primarily driven by the negative impact of cost inflation and the negative impact of transactional foreign currency fluctuations, partially offset by value realization and the realization of benefits associated with our supply chain optimization initiatives.
Essential Health Segment
Essential Health Segment Net Sales
The Essential Health Segment net sales were $4.6 billion and $4.6 billion for the fiscal twelve months ended December 31, 2023 and January 1, 2023, respectively, an increase of $45 million, or 1.0%. Excluding the unfavorable impact of foreign currency translation, Organic growth was $162 million, or 3.6%, primarily driven by value realization of 9.6%, led by strong performance in Oral Care and growth in Women’s Health. The increase was partially offset by volume declines of 6.0%, primarily due to category contractions, as well as our supply suspension of certain personal care products in Russia since March 2022.
Essential Health Segment Adjusted Operating Income
The Essential Health Segment adjusted operating income decreased by $100 million, or 9.0% to $1.0 billion for the fiscal twelve months ended December 31, 2023. The decrease was primarily driven by the negative impact of cost inflation and the negative impact of transactional foreign currency fluctuations, partially offset by value realization and the realization of benefits associated with our supply chain optimization initiatives.
Liquidity and Capital Resources
Prior to April 4, 2023, our working capital requirements and capital expenditures were satisfied as part of J&J’s corporate-wide cash management and centralized funding programs, and a substantial portion of our cash was transferred to J&J. Cash and cash equivalents held by J&J at the corporate level were not specifically identifiable to us.
Effective April 4, 2023, upon completion of the Consumer Health Business Transfer (as defined in Note 1, “Description of the Company and Summary of Significant Accounting Policies” to the Consolidated Financial Statements included herein) we no longer participate in J&J’s corporate-wide cash management and centralized funding programs.
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Cash Flows
Summarized cash flow information for the fiscal twelve months ended December 31, 2023, January 1, 2023, and January 2, 2022 were as follows:
Change In Fiscal Year
Fiscal Twelve Months Ended 2022 to 2023
(Dollars in Millions) December 31, 2023 January 1, 2023 Amount Percent
Net income $ 1,664 $ 2,064 $ (400) (19.4) %
Net changes in assets and liabilities $ 797 $ (513) $ 1,310 *
Net cash flows from operating activities $ 3,168 $ 2,525 $ 643 25.5 %
Net cash flows used in investing activities $ (488) $ (390) $ (98) 25.1 %
Net cash flows used in financing activities $ (2,527) $ (1,583) $ (944) 59.6 %
* Calculation not meaningful.
A detailed discussion of the period-over-period changes in the results for the fiscal twelve months ended December 31, 2023 and the fiscal twelve months ended January 1, 2023 is presented below. A detailed discussion of the period-over-period changes in the results for the fiscal twelve months ended January 1, 2023 and the fiscal twelve months ended January 2, 2022 can be found under the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our IPO Prospectus.
Operating Activities
Net cash flows from operating activities were $3.2 billion and $2.5 billion for the fiscal twelve months ended December 31, 2023 and January 1, 2023, respectively, an increase of $643 million. The increase was primarily attributable to changes in working capital balances driven by 1) increased accounts payable and accrued liabilities due to the timing of payments, 2) a decrease in inventory balances compared to the prior year period, resulting from our supply chain optimization initiatives and the rebuilding of inventory levels by customers following supply shortages in the prior year, and 3) a decrease in accounts receivable balances compared to the prior year period, resulting from collection efforts.
Investing Activities
Net cash flows used in investing activities were $488 million and $390 million for the fiscal twelve months ended December 31, 2023 and January 1, 2023, respectively. Cash used in investing activities in both the fiscal twelve months ended December 31, 2023 and January 1, 2023 was primarily driven by purchases of property, plant, and equipment, partially offset by the proceeds from the sale of assets.
Financing Activities
Net cash flows used in financing activities were $2.5 billion and $1.6 billion for the fiscal twelve months ended December 31, 2023 and January 1, 2023, respectively. Cash flows used in financing activities for the fiscal twelve months ended December 31, 2023 primarily reflect $13.8 billion in distribution to J&J in connection with the Separation and $0.8 billion in dividends paid, partially offset by $7.7 billion of net proceeds from Senior Notes (as defined below), $4.2 billion of proceeds from the sale of common stock in connection with the Kenvue IPO, and $0.6 billion of net proceeds from the issuance of commercial paper under the Commercial Paper Program (as defined below). In addition, we recognized Net transfers to J&J of $274 million and $1.6 billion for the fiscal twelve months ended December 31, 2023 and January 1, 2023, respectively. Net transfers to J&J were driven by cash pooling and general financing activities, indirect corporate cost allocations from J&J, and taxes deemed to be settled with J&J. For further details regarding Net transfer from (to) J&J, see Note 12, “Relationship with J&J,” to the Consolidated Financial Statements included herein.
Sources of Liquidity
Our primary sources of liquidity are cash on hand, which consisted of cash and cash equivalents of $1.4 billion as of December 31, 2023, cash flows from operations, borrowing capacity under our Revolving Credit Facility of $4.0 billion and authorized Commercial Paper Program issuance of $4.0 billion. As of December 31, 2023, we had no amounts outstanding under the
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Revolving Credit Facility and $599 million of outstanding balances under our Commercial Paper Program, net of related discount of $1 million.
Our ability to fund our operating needs will depend on our ability to continue to generate positive cash flow from operations, and on our ability to obtain debt financing on acceptable terms or to issue additional equity or equity-linked securities. Based upon our history of generating positive cash flows, we believe our existing cash and cash generated from operations will be sufficient to service our current obligations for at least the next 12 months.
Management believes that our cash balances and funds provided by operating activities, along with borrowing capacity and access to capital markets, taken as a whole, provide adequate liquidity to meet all of our current and long-term obligations when due, including third-party debt that we incurred in connection with the Separation, adequate liquidity to fund capital expenditures, and flexibility to meet investment opportunities that may arise. However, we cannot assure you that we will be able to obtain additional debt or equity financing on acceptable terms in the future.
Cash and cash equivalents increased by $151 million during the fiscal twelve months ended December 31, 2023 to $1.4 billion as of December 31, 2023, as compared to $1.2 billion as of January 1, 2023, respectively. Cash and cash equivalents held by our foreign subsidiaries was $1.3 billion and $1.1 billion, respectively, as of December 31, 2023 and January 1, 2023.
Supplier Finance Program
As a part of our ongoing efforts to maximize working capital and managing liquidity, we work with suppliers to optimize payment terms and conditions on accounts payable through a voluntary supply chain financing program. The program provides some of our suppliers with the opportunity to sell receivables due from us to participating financial institutions at the sole discretion of both the suppliers and the financial institutions. We are not a party to the arrangements between the suppliers and the third-party financial institutions. Our obligations to the suppliers, including amounts due, and scheduled payment dates, are not affected by a participating supplier’s decision to participate in the program. See Note 1, “Description of the Company and Summary of Significant Accounting Policies,” to the Consolidated Financial Statements included herein.
Senior Notes
On March 22, 2023, we issued eight series of senior unsecured notes (the “Senior Notes”) in an aggregate principal amount of $7.75 billion. The net proceeds to us from the Senior Notes offering was $7.7 billion after deductions of discounts and issuance costs of $77 million. The net proceeds were reflected as Restricted cash on the Consolidated Balance Sheets prior to their release from escrow on April 5, 2023. Upon release from escrow, these funds were loaned to J&J through the Facility Agreement dated April 5, 2023. For further details on the Senior Notes and Facility Agreement, see Note 5. “Borrowings,” to the Consolidated Financial Statements included herein. The unamortized discounts and debt issuance costs related to the Senior Notes as of December 31, 2023 were approximately $72 million. The interest payments are due on March 22 and September 22 of each year, and commenced on September 22, 2023.
Our Senior Notes are governed by an indenture and supplemental indenture between us and a trustee (collectively, the “indenture”). The indenture contains certain covenants, including limitations on us and certain of our subsidiaries’ ability to incur liens or engage in sale-leaseback transactions. The indenture also contains restrictions on our ability to consolidate, merge or sell substantially all of our assets. In addition, the indenture contains other customary terms, including certain events of default, upon the occurrence of which, the Senior Notes may be declared immediately due and payable.
Commercial Paper Program
On March 3, 2023, we entered into a commercial paper program (the “Commercial Paper Program”). Our Board has authorized the issuance of up to $4.0 billion in an aggregate principal amount of commercial paper under the Commercial Paper Program. Any such issuance will mature within 364 days from date of issue. The Commercial Paper Program contains representations and warranties, covenants and default that are customary for this type of financing. The commercial paper notes issued under the Commercial Paper Program are unsecured notes ranking at least pari passu with all of our other senior unsecured indebtedness.
Prior to the Kenvue IPO, we issued $1.25 billion under the Commercial Paper Program which, collectively with the Senior Notes as further described above, are referred to as the “Debt Financing Transactions.”
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Revolving Credit Facility
On March 6, 2023, we entered into a credit agreement providing for a five-year senior unsecured revolving credit facility (the “Revolving Credit Facility”) in an aggregate principal amount of $4.0 billion to be made available in U.S. dollars and Euros.
Facility Agreement
On April 5, 2023, we entered into the Facility Agreement, allowing us to lend the proceeds from the issuance of debt (including commercial paper) in an aggregate amount of $8.9 billion to J&J. Interest on loans made from the Facility Agreement was charged at an interest rate equal to the Secured Overnight Financing Rate (“SOFR”) less an adjusted margin of 15 basis points, with a floor of 0% (a weighted average interest rate of 4.7%) to be paid monthly in arrears. We recognized interest income of $33 million in the fiscal twelve months ended December 31, 2023 in relation to the Facility Agreement.
Upon completion of the Kenvue IPO on May 8, 2023, the Facility Agreement was terminated and the balance of the Facility Agreement, and all accrued interest, were repaid by J&J, for a total cash inflow of $9.0 billion. We remitted this cash back to J&J as a part of the distribution to J&J in connection with the Separation.
Interest Expense, Net
We recognized interest expense of $358 million for the fiscal twelve months ended December 31, 2023 and interest income of $108 million for the fiscal twelve months ended December 31, 2023. The net amount was included in Interest expense, net in the Consolidated Statements of Operations.
Compliance with Covenants
As of December 31, 2023, we were in compliance with all debt covenants, and no default or event of default has occurred.
Distribution to J&J
On May 8, 2023, in conjunction with the Consumer Health Business Transfer, we distributed $13.8 billion to J&J from the 1) net proceeds received from the sale of the common stock in the Kenvue IPO, 2) net proceeds received from the Debt Financing Transactions as defined in Note 5, “Borrowings,” of the Consolidated Financial Statements included herein, and 3) any cash and cash equivalents in excess of the $1.17 billion in cash and cash equivalents retained by Kenvue immediately following the Kenvue IPO.
Future Cash Requirements
We expect our future cash requirements will relate to working capital, capital expenditures, restructuring and integration, compensation and benefit related obligations, interest expense and debt service obligations, litigation costs, the return of capital to shareholders, including through the payment of any dividend and other contractual obligations that arise in the normal course of business. We may also use cash to enter into business development transactions, such as licensing arrangements or strategic acquisitions.
As of December 31, 2023, we expect our primary cash requirements for 2024 to include capital expenditures. We have made payments of $469 million for property, plant, and equipment for the fiscal twelve months ended December 31, 2023.
Kenvue’s Board has authorized a share repurchase program, under which we are authorized to repurchase up to 27 million shares of our outstanding common stock in open market or privately negotiated transactions. The program has no expiration date and may be suspended or discontinued at any time. The intent of this repurchase program is to offset dilution from the vesting or exercise of equity awards under Kenvue’s equity incentive plan. We repurchased 350,000 shares of our outstanding common stock for $7 million during the fiscal twelve months ended December 31, 2023.
Contractual Obligations
We are party to contractual obligations involving commitments to make payments to third parties, which impact our short-term and long-term liquidity and capital resource needs. Our contractual cash obligations include required payments of long-term
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debt principal and interest, purchase obligations, expected obligations under our pension plans, operating lease payments, and tax-related obligations. Our material cash requirements include the following contractual and other obligations:
• Debt Obligations and Interest Payments —See Note 5, “Borrowings,” to the Consolidated Financial Statements included herein for additional information on our debt and the timing of expected future principal and interest payments.
• Purchase Obligations— As of December 31, 2023, we had purchase obligations of approximately $0.5 billion in connection with suppliers for the purchases of raw materials, packaging, other materials, and finished goods in the normal course of business, which are payable within 12 months.
• Pensions —It is our objective to contribute to the pension plans to ensure adequate funds are available to make benefit payments to plan participants and beneficiaries when required. See Note 7, “Pensions,” to the Consolidated Financial Statements included herein for additional information on our pensions and the timing of expected future payments related to projected benefit plan contributions.
• Operating Leases —See Note 8, “Leases,” to the Consolidated Financial Statements included herein for additional information on our operating leases and the timing of expected future payments.
See Note 14, “Income Taxes,” to the Consolidated Financial Statements included herein for additional information on our tax-related obligations.
Future Litigation
In the ordinary course of business, we are involved in litigation, claims, government inquiries, investigations, charges, and proceedings. See Note 17, “Commitments and Contingencies,” to the Consolidated Financial Statements included herein for further details regarding certain matters that are currently pending. Our ability to successfully resolve pending and future litigation may adversely impact our financial condition, results of operations, or cash flows.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements (as defined under the rules and regulations of the SEC) or any relationships with unconsolidated entities that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, net sales or expenses, results of operations, liquidity, cash requirements, or capital resources.
Critical Accounting Policies and Estimates
Critical accounting policies and estimates are those policies and estimates made in accordance with generally accepted accounting principles that are most important and material to the preparation of the consolidated financial statements and which require management’s most subjective and complex judgments due to the need to select policies from among alternatives available and to make estimates about matters that are inherently uncertain. We base our estimates on historical experience and other factors that we believe to be reasonable under the circumstances. On an ongoing basis, we review our estimates to ensure that these estimates appropriately reflect changes in our business and new information as it becomes available. If historical experience and other factors we use to make these estimates do not reasonably reflect future activity, our business, results of operations, or financial condition could be adversely affected.
Revenue Recognition
Our revenue contracts represent a single performance obligation to sell our products to customers. Revenue from the sale of products to customers is recognized at a single point in time when ownership, risks, and rewards transfer, which can be on the date of shipment or the date of receipt by the customer depending on the terms of the contract. Net sales exclude taxes collected by us on behalf of governmental authorities and include the shipping and handling fees charged to customers.
The nature of our business gives rise to several types of variable consideration including trade promotions, comprised of coupons, product listing allowances, cooperative advertising arrangements, volume-based incentive programs, as well as discounts to customers, rebates, sales incentives, and product returns, which are estimated at the time of the sale using the “expected value” method or the “most likely amount” method based on the form of variable consideration. Trade promotions, discounts to customers, rebates, and sales incentives are issued to customers at the point of sale and are estimated based on contractual terms, historical experience, trend analysis, and projected market conditions in the various markets served. Revenue is recognized net of provisions for discounts and trade promotions. The potential of estimates to vary differs by product,
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customer type, and geographic location. Historically, adjustments to these estimates to reflect updated expectations or actual results have not been material to our overall business.
See Note 19, “Segments of Business and Geographic Areas,” to the Consolidated Financial Statements included herein for further disaggregation of net sales and Note 1, “Description of the Company and Summary of Significant Accounting Policies,” to the Consolidated Financial Statements included herein for further information regarding revenue recognition.
Income Taxes
Prior to the Kenvue IPO, the Company’s operations were calculated on a carve-out basis and included certain hypothetical foreign tax credit benefits. Following the Kenvue IPO, these hypothetical foreign tax credit benefits are not available for future utilization by the Company and were removed from the tax provision. Furthermore, the Company operated as part of J&J until the completion of the Exchange Offer on August 23, 2023, and therefore the Company will be included in J&J’s U.S. Federal consolidated income tax return until that date. The Company will then file a standalone U.S. Federal consolidated income tax return for the remainder of the fiscal year 2023. The Company expects to file income tax returns on a standalone basis in most other jurisdictions in which it operates for the fiscal year 2023. Certain current income tax liabilities related to our activities included in J&J’s income tax returns were assumed to be immediately settled with J&J through the Net Parent investment or Additional Paid-In Capital accounts on the Consolidated Balance Sheets and reflected in the Consolidated Statements of Cash Flows as a financing activity. Following the Exchange Offer, our operating footprint as well as tax return elections and assertions are expected to be different and therefore, our income taxes as presented in the Consolidated Financial Statements may differ in future periods.
Income taxes are recorded based on amounts refundable or payable for the current year and include the results of any differences between U.S. GAAP accounting and tax reporting, recorded as deferred tax assets or liabilities. We estimate deferred tax assets and liabilities based on enacted tax regulations and rates. Future changes in tax laws and rates may affect recorded deferred tax assets and liabilities.
U.S. Federal, state, and foreign income tax payables and receivables are recognized on the Consolidated Balance Sheets for entities that file separate income tax returns and make direct payments to taxing authorities. Prior to the Kenvue IPO, U.S. federal, state and foreign income tax payables and receivables for entities that were included in the filing of a combined, consolidated or group income tax return with J&J were deemed settled with J&J and were included in the “Net Investment from J&J.”
Management establishes valuation allowances on deferred tax assets when it is determined to be “more likely than not” that some portion or all of the deferred tax assets may not be realized. Management considers positive and negative evidence in evaluating our ability to realize our deferred tax assets, including our historical results, forecasts of future ability to realize our deferred tax assets, and forecasts of future taxable income on a jurisdiction-by-jurisdiction basis.
We have unrecognized tax benefits for uncertain tax positions. We follow U.S. GAAP, which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The estimates for these positions are regularly assessed based upon all available information. These estimates may be revised in the future and such changes may result in a material additional expense or benefit to our financial results or our effective tax rate.
In the United States, the Tax Cuts and Jobs Act of 2017 (“TCJA”) includes provisions for GILTI. GILTI is described as the excess of a U.S. shareholder’s total net foreign income over a deemed return on tangible assets, as provided by the TCJA. In January 2018, the Financial Accounting Standards Board issued guidance that allowed companies to elect as an accounting policy whether to record the tax effects of GILTI in the period the tax liability is generated (i.e., “period cost”) or to provide for deferred tax assets and liabilities related to basis differences that exist at the balance sheet date and are expected to affect the amount of GILTI inclusion in future years upon reversal (i.e., “deferred method”). The Company previously followed J&J’s accounting policy to consider the deferred tax effects of GILTI. Effective in the third quarter of fiscal year 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.”
We entered into a tax matters agreement with J&J in connection with the Separation. For more information on the Tax Matters Agreement, see Note 12, “Relationship with J&J,” and in our Proxy Statement.
See Note 1, “Description of the Company and Summary of Significant Accounting Policies,” and Note 14, “Income Taxes,” to the Consolidated Financial Statements included herein for further information regarding income taxes.
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See Note 14, “Income Taxes,” for the Company’s analysis on material changes in tax law.
Goodwill and Intangible Assets
We assess goodwill and intangible assets with indefinite lives at least annually for impairment, or more frequently if impairment indicators exist. Factors considered for the annual impairment test or if indicators of impairment exist include:
• macroeconomic industry and market conditions;
• a significant adverse shift in the operating environment or the manner in which an asset is used; or
• pending litigation.
Intangible assets that have finite useful lives continue to be amortized over their useful lives and are reviewed for impairment if impairment indicators exist. Our evaluation is based on an assessment of potential indicators of impairment, such as:
• an adverse change in legal factors or in the business climate that could affect the value of an asset;
• an adverse change in the extent or manner in which an asset is used or is expected to be used; or
• current or forecasted reductions in net sales, operating income, or cash flows associated with the use of an asset.
During the fiscal twelve months ended January 1, 2023, we reallocated goodwill to align with the new operating segments determined in 2022: 1) Self Care, 2) Skin Health and Beauty, and 3) Essential Health, which are also our reporting units. As a result of this realignment, goodwill was reassigned to each of the reporting units using a relative fair value approach. We estimate the fair values of a reporting unit using a discounted cash flow model. Following the change in reporting units during the fiscal twelve months ended January 1, 2023, the Company performed a quantitative impairment test on each of the reporting units. After completing the testing, the fair value of each of these reporting units exceeded its carrying value, and, therefore, there was no impairment to goodwill.
We completed our annual goodwill impairment analysis during the fourth quarter of fiscal year 2023 by performing a quantitative assessment on each of the reporting units and concluded that no impairment to goodwill was necessary as the fair value of each reporting unit was in excess of its respective carrying value.
We did not recognize an intangible asset impairment during the fiscal twelve months ended December 31, 2023 and January 2, 2022. During the fiscal twelve months ended January 1, 2023, we recognized an intangible impairment of $12 million related to certain definite-lived trademarks deemed as irrecoverable in Other operating (income) expense, net in the Consolidated Statements of Operations.
See Note 1, “Description of the Company and Summary of Significant Accounting Policies,” and Note 4, “Intangible Assets and Goodwill,” to the Consolidated Financial Statements included herein for further information regarding goodwill and intangible assets.
Stock-Based Compensation
The Company recognizes compensation costs related to equity awards granted ratably over the requisite service period, which is the vesting period of the award, based on the estimated fair value of the awards on the grant date.
The estimated fair value of stock options is determined using the Black-Scholes option valuation model. The inputs used in determining the fair value are the expected volatility, expected dividend yield, risk-free rate, and expected term.
The fair value of restricted stock units (“RSUs”) is determined based on the fair value of the Company’s common stock on the grant date.
The Company’s performance stock units (“PSUs”) have a singular market condition, which is described below. The estimated fair value of PSUs is determined using the Monte Carlo valuation model. The inputs used in determining the fair value are the length of the performance period, the risk-free rate, and the stock prices, correlations, and expected volatility of the Company and the firm in the selected peer group.
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The payout of PSU awards is assessed by comparing the Company’s TSR during a certain three-year period to the respective TSR of companies in a selected performance peer group. Given the requirement to meet certain defined market criteria, the recipient of a PSU may earn a total payout ranging from 0% to 200% of the target award.
For all equity awards, the original estimate of the grant date fair value is not subsequently revised unless the awards are modified. The Company accounts for forfeitures during the period in which they occur.
See Note 11, “Stock-Based Compensation,” to the Consolidated Financial Statements included herein for more information on equity awards granted by Kenvue.
Recently Issued Accounting Standards
See Note 1, “Description of the Company and Summary of Significant Accounting Policies,” to the Consolidated Financial Statements included herein for a description of recently issued accounting standards not yet adopted and their anticipated impact to the Consolidated Financial Statements.
Other Information
Baby Powder Transition
On August 11, 2022, we announced the commercial decision to transition to an all cornstarch-based baby powder portfolio. As a result of this transition, talc-based Johnson’s ® Baby Powder was discontinued globally in 2023. Talc-based Johnson’s ® Baby Powder was previously discontinued during 2020 in certain markets including the United States and Canada. We do not expect the impact of this change to have a significant impact on our results of operations.
Deferred Markets
In order to ensure compliance with applicable law, to obtain necessary governmental approvals and other consents and for other business reasons, we deferred the transfer of certain assets and liabilities of businesses in certain non-U.S. jurisdictions, including China, Malaysia, and Russia, until after the completion of the Kenvue IPO. On September 11, 2023, J&J transferred the equity interests in the majority of the Deferred Legal Entities (as defined in Note 1, “Description of the Company and Summary of Significant Accounting Policies,” to the Consolidated Financial Statements included herein) to the Company that previously had been consolidated as Variable Interest Entities (“VIEs”) in the Company’s Consolidated Financial Statements. The Consolidated Financial Statements included herein include businesses in all jurisdictions in which we will operate following the completion of the Separation, including any Deferred Local Business (as defined in Note 1, “Description of the Company and Summary of Significant Accounting Policies,” to the Consolidated Financial Statements included herein). For more information regarding Deferred Local Businesses, see “Risk Factors—Risks Related to Our Relationship with J&J—The transfer of certain assets and liabilities from J&J to us contemplated by the Separation has not been completed and may be significantly delayed or not occur at all” and Note 1, “Description of the Company and Summary of Significant Accounting Policies,” to the Consolidated Financial Statements included herein.