Kenvue Inc. 10-K

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Audited Consolidated Financial Statements Page No. Report of Independent Registered Public Accounting Firm (PCAOB ID 238 ) 78 Consolidated Balance Sheets 80 Consolidated Statements of Operations 81 Consolidated Statements of Comprehensive Income 82 Consolidated Statements of Equity 83 Consolidated Statements of Cash Flows 84 Notes to the Consolidated Financial Statements 85 77 Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareholders of Kenvue Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Kenvue Inc. and its subsidiaries (the “Company”) as of December 31, 2023 and January 1, 2023, and the related consolidated statements of operations, of comprehensive income, of equity and of cash flows for each of the three fiscal years in the period ended December 31, 2023, including the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and January 1, 2023, and the results of its operations and its cash flows for each of the three fiscal years in the period ended December 31, 2023 in conformity with accounting principles generally accepted in the United States of America. Change in Accounting Principle As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for global intangible low-taxed income in 2023. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Revenue Recognition – U.S. Net Sales As described in Notes 1 and 19 to the consolidated financial statements, the Company’s total net sales were $15.4 billion for the fiscal year ended December 31, 2023, of which, $6.8 billion is related to U.S. net sales. Management recognizes the revenue from these sales at a single point in time when obligations under the terms of a contract with the customer are satisfied; generally, this occurs with the transfer of control of the goods to customers, which can be on the date of shipment or the date of receipt by the customer depending on the terms of the contract. 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, are accounted for as variable consideration and recorded as a reduction in sales in the same period as the related sale. 78 The principal consideration for our determination that performing procedures relating to U.S. net sales revenue recognition is a critical audit matter is a high degree of auditor effort in performing procedures related to the Company’s U.S. net sales revenue recognition. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the revenue recognition process, including controls over the recording of U.S. net sales upon transfer of control to the customer, and controls over the recording of trade promotions. These procedures also included, among others, (i) evaluating U.S. net sales revenue transactions by testing the issuance and settlement of invoices and credit memos, (ii) tracing transactions not settled to a detailed listing of accounts receivable, (iii) confirming a sample of outstanding customer invoice balances at fiscal year end, and obtaining and inspecting source documents, including invoices, sales contracts, shipping documents, proof of delivery, and subsequent cash receipts, where applicable, for confirmations not returned, (iv) testing the completeness and accuracy of data provided by management, (v) testing trade promotions processed by the Company, on a sample basis, including evaluating those discounts for consistency with contractual terms of the Company’s programs, (vi) testing credit memos on a sample basis and (vii) testing a sample of unsettled trade promotions for completeness and accuracy. /s/ PricewaterhouseCoopers LLP Florham Park, New Jersey March 1, 2024 We have served as the Company’s auditor since 2021. 79 KENVUE INC. CONSOLIDATED BALANCE SHEETS (Dollars in Millions, Shares in Thousands, Except Per Share Data) December 31, 2023 January 1, 2023 Assets Current assets Cash and cash equivalents $ 1,382 $ 1,231 Trade receivables, less allowances for credit losses ($ 25 and $ 35 as of December 31, 2023 and January 1, 2023, respectively) 2,073 2,122 Inventories 1,851 2,226 Prepaid expenses and other receivables 567 175 Other current assets 265 123 Total current assets 6,138 5,877 Property, plant, and equipment, net 2,042 1,820 Intangible assets, net 9,619 9,853 Goodwill 9,271 9,185 Deferred taxes on income 158 147 Other assets 623 434 Total Assets 27,851 27,316 Liabilities and Equity Current liabilities Loans and notes payable 599 — Accounts payable 2,489 1,829 Accrued liabilities 1,456 906 Accrued rebates, returns, and promotions 795 862 Accrued taxes on income 142 329 Total current liabilities 5,481 3,926 Employee related obligations 360 214 Long-term debt 7,687 — Deferred taxes on income 2,621 2,479 Other liabilities 491 727 Total liabilities 16,640 7,346 Commitments and contingencies (Note 17) Equity Preferred stock, $ 0.01 par value, 750,000 shares authorized, no shares issued and outstanding as of December 31, 2023 — — Common stock, $ 0.01 par value, 12,500,000 shares authorized; 1,915,407 and 1,915,057 shares issued and outstanding as of December 31, 2023 19 — Additional paid-in capital 16,147 — Treasury stock, at cost, 350 shares ( 7 ) — Retained earnings 429 — Net investment from Johnson & Johnson — 25,425 Accumulated other comprehensive loss ( 5,377 ) ( 5,455 ) Total equity 11,211 19,970 Total Liabilities and Equity $ 27,851 $ 27,316 See accompanying Notes to Consolidated Financial Statements. 80 KENVUE INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in Millions, Shares in Thousands, Except Per Share Data) Fiscal Twelve Months Ended December 31, 2023 January 1, 2023 January 2, 2022 Net sales $ 15,444 $ 14,950 $ 15,054 Cost of sales 6,801 6,665 6,635 Gross profit 8,643 8,285 8,419 Selling, general, and administrative expenses 6,141 5,633 5,484 Other operating (income) expense, net ( 10 ) ( 23 ) 15 Operating income 2,512 2,675 2,920 Other expense (income), net 72 38 ( 5 ) Interest expense, net 250 — — Income before taxes 2,190 2,637 2,925 Provision for taxes 526 573 847 Net income $ 1,664 $ 2,064 $ 2,078 Net income per share Basic $ 0.90 $ 1.20 $ 1.21 Diluted $ 0.90 $ 1.20 $ 1.21 Weighted average common stock Basic 1,846,135 1,716,160 1,716,160 Diluted 1,850,325 1,716,160 1,716,160 See accompanying Notes to Consolidated Financial Statements. 81 KENVUE INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Dollars in Millions) Fiscal Twelve Months Ended December 31, 2023 January 1, 2023 January 2, 2022 Net income $ 1,664 $ 2,064 $ 2,078 Other comprehensive income (loss) Foreign currency translation, net of taxes 219 ( 1,045 ) ( 923 ) Employee benefit plans: Prior service cost, net of amortization 8 ( 1 ) — (Gain)/loss, net of amortization ( 101 ) 58 18 Effect of exchange rates ( 9 ) 6 7 Net change, net of income tax provision (benefit) ( 102 ) 63 25 Derivatives and hedges: Unrealized gain/(loss) arising during period 66 12 ( 3 ) Reclassification to net income (loss) ( 28 ) ( 2 ) 3 Net change, net of income tax provision 38 10 — Other comprehensive income (loss) 155 ( 972 ) ( 898 ) Comprehensive income $ 1,819 $ 1,092 $ 1,180 See accompanying Notes to Consolidated Financial Statements 82 KENVUE INC. CONSOLIDATED STATEMENTS OF EQUITY (Dollars in Millions, Shares in Thousands) Fiscal Twelve Months Ended December 31, 2023 Common Stock Additional Paid-In Capital Treasury Stock Retained Earnings Net Investment from Johnson & Johnson Accumulated Other Comprehensive Loss Total Equity Shares Amount Shares Amount Balance, January 3, 2021 (1) — $ — $ — — $ — $ — $ 21,983 $ ( 3,585 ) $ 18,398 Net income — — — — — — 2,078 — 2,078 Other comprehensive loss — — — — — — — ( 898 ) ( 898 ) Net transfers from Johnson & Johnson — — — — — — 913 — 913 Balance, January 2, 2022 (1) — $ — $ — — $ — $ — $ 24,974 $ ( 4,483 ) $ 20,491 Net income — — — — — — 2,064 — 2,064 Other comprehensive loss — — — — — — — ( 972 ) ( 972 ) Net transfers to Johnson & Johnson — — — — — — ( 1,613 ) — ( 1,613 ) Balance, January 1, 2023 (1) — $ — $ — — $ — $ — $ 25,425 $ ( 5,455 ) $ 19,970 Net income — — — — — 1,195 469 — 1,664 Other comprehensive income — — — — — — — 155 155 Cash dividends on common stock — — — — — ( 766 ) — — ( 766 ) Net transfers to Johnson & Johnson — — — — — — ( 308 ) — ( 308 ) Stock-based compensation — — 153 — — — 35 — 188 Distribution to Johnson & Johnson in connection with the Separation — — ( 13,788 ) — — — — — ( 13,788 ) Issuance of common stock in connection with the Kenvue IPO 1,914,894 19 4,222 — — — — — 4,241 Issuance of common stock under the Kenvue 2023 Plan 513 — 8 — — — — — 8 Purchase of treasury stock ( 350 ) — — 350 ( 7 ) — — — ( 7 ) Reclassification of Net Investment from Johnson & Johnson — — 25,712 — — — ( 25,712 ) — — Separation-related adjustments — — ( 160 ) — — — 91 ( 77 ) ( 146 ) Balance, December 31, 2023 1,915,057 $ 19 $ 16,147 350 $ ( 7 ) $ 429 $ — $ ( 5,377 ) $ 11,211 (1) Includes cumulative effect of change in accounting principle related to Global Intangible Low-Taxed Income (“GILTI”). See Note 1, “Description of the Company and Summary of Significant Accounting Policies,” for more information. See accompanying Notes to Consolidated Financial Statements. 83 KENVUE INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Millions) Fiscal Twelve Months Ended December 31, 2023 January 1, 2023 January 2, 2022 Cash flows from operating activities Net income $ 1,664 $ 2,064 $ 2,078 Adjustments to reconcile net income to cash flows from operating activities Depreciation and amortization 627 644 731 Stock-based compensation 188 137 141 Deferred income taxes ( 114 ) 180 521 Other 6 13 ( 5 ) Net changes in assets and liabilities Trade receivables 44 ( 142 ) ( 303 ) Inventories 349 ( 582 ) ( 77 ) Other current and non-current assets ( 429 ) 131 ( 68 ) Accounts payable 390 52 330 Accrued liabilities 1,064 ( 17 ) ( 2,977 ) Employee related obligations ( 78 ) 2 14 Accrued taxes on income ( 331 ) ( 5 ) ( 19 ) Other liabilities ( 212 ) 48 ( 32 ) Net cash flows from operating activities 3,168 2,525 334 Cash flows used in investing activities Purchases of property, plant, and equipment ( 469 ) ( 375 ) ( 295 ) Transfer of funds to J&J pursuant to the Facility Agreement ( 8,941 ) — — Proceeds from J&J upon repayment of the Facility Agreement 8,941 — — Proceeds from sale of assets 21 8 77 Other investing activities ( 40 ) ( 23 ) 47 Net cash flows used in investing activities ( 488 ) ( 390 ) ( 171 ) Cash flows from (used in) financing activities (Payments of) proceeds from loans and notes payables ( 14 ) 14 ( 7 ) Proceeds from Commercial Paper Program, net of issuance cost 574 — — Proceeds from issuance of Senior Notes, net of issuance cost 7,686 — — Proceeds from Kenvue IPO, net 4,241 — — Distribution to J&J in connection with the Separation ( 13,788 ) — — Dividends paid ( 766 ) — — Net transfer from (to) J&J ( 274 ) ( 1,597 ) 7 Other financing activities ( 186 ) — — Net cash flows used in financing activities ( 2,527 ) ( 1,583 ) — Effect of exchange rate changes on cash and cash equivalents ( 2 ) ( 61 ) ( 41 ) Cash and cash equivalents, beginning of period 1,231 740 618 Net increase in cash and cash equivalents 151 491 122 Cash and cash equivalents, end of period $ 1,382 $ 1,231 $ 740 Supplemental disclosures of cash flow information Net cash paid for income taxes (1) $ ( 699 ) $ ( 316 ) $ ( 363 ) Cash paid for interest $ ( 224 ) $ — $ — (1) Net cash paid includes payments to J&J under the Tax Matters Agreements (as defined in FN 12, “Relationship with J&J,”) for income tax liabilities, which J&J has paid on the Company’s behalf post Kenvue IPO to the tax authorities. See accompanying Notes to Consolidated Financial Statements. 84 KENVUE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Description of the Company and Summary of Significant Accounting Policies Description of the Company and Business Segments Kenvue Inc. (“Kenvue” or the “Company”) is a pure play consumer health company with iconic brands including Aveeno ® , BAND-AID ® Brand Adhesive Bandages, Johnson’s ® , Listerine ® , Neutrogena ® , Tylenol ® , and Zyrtec ® . 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 pain care, cough, cold and allergy, as well as digestive health, smoking cessation, eye care, 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. Kenvue was initially formed as a wholly owned subsidiary of Johnson & Johnson (“J&J”). 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 Businesses (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, 2) net proceeds received from the Debt Financing Transactions as defined in Note 5, “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 announced 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 completed 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 as of the completion of the Exchange Offer, J&J owned 9.5 % of the outstanding shares of Kenvue common stock. 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 audited financial statements for all periods presented, including the historical results of the Company prior to April 4, 2023, are now referred to as the “Consolidated Financial Statements”. Intercompany balances and transactions have been eliminated. The Consolidated Financial Statements include the accounts of the Company and its affiliates and entities consolidated under the variable interest and voting models. 85 Periods prior to the Consumer Health Business Transfer 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 derived from J&J’s historical consolidated financial statements and accounting records as if the Company had been operated on a standalone basis. 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 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. Cash generated from the Company’s operations prior to April 4, 2023 was generally managed by J&J’s centralized treasury function and was swept into J&J and its affiliates’ bank accounts. Cash and cash equivalents on the Consolidated Balance Sheet represent balances in accounts specifically identifiable to the Company that were not swept into J&J and its affiliates’ bank accounts. J&J’s third-party interest expense was not allocated for any of the periods prior to April 4, 2023 as the Company was not the legal obligor of the debt and the borrowings were not directly attributable to the Company’s operations. The Company’s equity balance in these financial statements prior to April 4, 2023 represents the excess of total assets over total liabilities. Equity is impacted by changes in comprehensive income, contributions from or to J&J prior to the Kenvue IPO, which was the result of treasury activities and net funding provided by or distributed to J&J. J&J calculated foreign currency translation on its consolidated assets and liabilities, which included assets and liabilities of the Company prior to April 4, 2023. Foreign currency translation recorded during the fiscal twelve months ended December 31, 2023, January 1, 2023, and January 2, 2022 was based on currency movements specific to the Company’s Consolidated Financial Statements. The income tax amounts in the Consolidated Financial Statements prior to the Kenvue IPO have been calculated based on a separate return methodology and presented as if the Company’s operations were reported by separate taxpayers in the jurisdictions in which the Company operates. See Note 14, “Income Taxes,” for further discussion. Prior to the Kenvue IPO, all transactions between the Company and J&J were considered to be effectively settled for cash in the Consolidated Financial Statements at the time the transaction was recorded. The effects of the settlement of these transactions between the Company and J&J are reflected in the Consolidated Statements of Cash Flows as “Net transfer from (to) J&J” within financing activities, and in the Consolidated Balance Sheets and Consolidated Statements of Equity as “Net transfers to Johnson & Johnson”. Use of Estimates The preparation of the Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and revenue and expenses during the periods reported. Estimates are used when accounting for, among other things, sales discounts, trade promotions, rebates, allowances and incentives, product liabilities, income taxes and related valuation allowance, withholding taxes, pension, postretirement benefits, fair value of financial instruments, stock-based compensation assumptions, depreciation, amortization, employee benefits, contingencies, allocations of cost and expenses from J&J and its affiliates, goodwill and intangible asset and liability valuations. Actual results may or may not differ from those estimates. 86 Economic Uncertainty Macroeconomic factors affect consumer spending patterns and thereby the Company’s 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. Annual Closing Date The Company follows the concept of a fiscal year, which ends on the Sunday nearest to the end of the month of December. Normally each fiscal year consists of 52 weeks, but every five or six years the fiscal year consists of 53 weeks, and therefore includes additional shipping days, as was the case in fiscal year 2020, and will be the case again in fiscal year 2026. Fiscal year 2023 refers to the fiscal twelve months ended December 31, 2023. Fiscal year 2022 refers to the fiscal twelve months ended January 1, 2023. Fiscal year 2021 refers to the fiscal twelve months ended January 2, 2022. Reportable Segments The Company operates in the following reportable segments: 1) Self Care, 2) Skin Health and Beauty, and 3) Essential Health. Cash and Cash Equivalents All highly liquid investments with original maturities of three months or less are considered to be cash equivalents. Cash equivalents are included in the Company’s Cash and cash equivalents on the Consolidated Balance Sheets. Trade Receivable and Allowance for Credit Losses Trade receivables, net are stated net of certain sales provisions and the allowance for credit losses. The Company estimates the current expected credit loss on its receivables based on various factors, including historical credit loss experience, customer credit worthiness, value of collaterals (if any), and any relevant current and reasonably supportable future economic factors. Trade receivable balances are written off against the allowance when it is deemed probable that the trade receivable will not be collected. Fiscal Twelve Months Ended (Dollars in Millions) December 31, 2023 January 1, 2023 January 2, 2022 Allowance for credit losses, beginning of period $ ( 35 ) $ ( 32 ) $ ( 37 ) Provision ( 4 ) ( 9 ) ( 4 ) Utilization 14 5 8 Currency translation adjustment — 1 1 Allowance for credit losses, end of period $ ( 25 ) $ ( 35 ) $ ( 32 ) Inventories Inventories are stated at the lower of cost or net realizable value and are accounted for using the first-in, first-out method. Cost is determined on a standard cost basis that approximates the first-in, first-out method. Costs include direct materials, direct labor, and overhead costs. Property, Plant, and Equipment and Depreciation Property, plant, and equipment are stated at cost less accumulated depreciation. The Company utilizes the straight-line method of depreciation over the estimated useful lives. Building and building equipment 20 - 30 years Land and leasehold improvements 10 - 20 years Machinery and equipment 2 - 13 years Software 3 - 8 years 87 Upon retirement or other disposal of property, plant and equipment, the costs and related amounts of accumulated depreciation or amortization are eliminated from the asset and accumulated depreciation accounts, respectively. The difference, if any, between the net asset value and the proceeds are recorded in Other (income) expense, net, operating. Capitalized Internal-Use Software Internal-use software development costs are accounted for in accordance with ASC 350-40, Internal-Use Software . The costs incurred in the preliminary stages of development are expensed as incurred. Once an application has reached the development stage, internal and external costs incurred to develop internal-use software are capitalized. Capitalized internal-use software costs are amortized on a straight-line basis over the estimated useful life of the software when the software is ready for its intended use. Maintenance and enhancement costs, including those costs in the post-implementation stages, are typically expensed as incurred, unless such costs relate to substantial upgrades and enhancements to the software that result in added functionality, in which case the costs are capitalized and amortized on a straight-line basis over the estimated useful life of the software. The Company reviews the carrying value for impairment whenever facts and circumstances exist that would suggest that assets might be impaired or that the useful lives should be modified. Intangible Assets Intangible assets are reported at cost, less accumulated amortization and impairments, as applicable. The Company amortizes intangible assets with a finite life over their respective useful lives on a straight-line basis. The estimated useful lives of patents, trademarks and customer relationships range from 3 years to 40 years and for other intangibles ranges from 20 years to 40 years. The useful life for customer relationships is estimated based on various customer attributes including customer type, size, geography, length of relationships, and nature of relationships. Intangible assets deemed to have indefinite lives are not amortized but are subjected to annual tests of impairment or whenever events or changes in circumstances indicate they may be impaired. The Company may perform or bypass an optional qualitative assessment before proceeding to a quantitative impairment test. If the Company determines the fair value of the indefinite-lived intangible asset is more likely than not greater than its carrying amount, no additional testing is necessary. If not, it writes the carrying value down to the fair value. See Note 4, “Intangible Assets and Goodwill,” for more information on intangible assets. Goodwill Goodwill represents the excess of the consideration transferred over the fair value of net assets of businesses acquired. The Consolidated Balance Sheets reflect goodwill established based on past transactions allocated to the Company’s operations by J&J prior to the Kenvue IPO. Goodwill is not amortized but is tested for impairment at least annually in the fourth quarter at the reporting unit level on the first day of the fiscal fourth quarter, or more frequently if impairment indicators exist. The Company has the option to first assess qualitative factors to determine whether the quantitative goodwill impairment test is necessary. If the Company concludes it is more likely than not that fair value is less than carrying value, a quantitative fair value test is performed. The Company may bypass the qualitative assessment in any period and proceed directly to the quantitative impairment test. If carrying value is greater than fair value, a goodwill impairment charge will be recorded for the difference (up to the carrying value of goodwill). See Note 4, “Intangible Assets and Goodwill,” for more information on goodwill. Impairment of Long-Lived Assets Long-lived assets with finite lives are tested for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. If indicators of impairment are present, the asset group is tested for recoverability by comparing the carrying value of the asset group to the related estimated undiscounted future cash flows expected to be derived from the asset group, which include the amount and timing of the projected future cash flows. If the expected undiscounted cash flows are less than the carrying value of the asset, then the asset is considered to be impaired and its carrying value is written down to fair value. If quoted market prices are not available, the Company will estimate fair value using a discounted value of estimated future cash flows. Indefinite-lived intangible assets are tested for impairment annually or more frequently if events or changes in circumstances between annual tests indicate that the asset may be impaired. Impairment losses on indefinite-lived intangible assets are recognized based on a comparison of the fair value of the asset to its carrying value. No impairment was recognized for the fiscal twelve months ended December 31, 2023 and January 2, 2022. See Note 4, “Intangible Assets and Goodwill,” for impairment recorded in the fiscal twelve months ended January 1, 2023. 88 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 in the Company’s Consolidated Statements of Operations over the term on the related debt using the effective interest method. Financial Instruments The Company uses derivative financial instruments to manage exposure to foreign currency fluctuations. Prior to the Kenvue IPO, the Company participated in J&J’s centralized hedging and offsetting programs. The effects of foreign currency derivatives were allocated to the Company based on the portion that was deemed to be associated with the Company’s operations. Additionally, in certain jurisdictions, the Company uses forward foreign exchange contracts to manage its exposure to the variability of cash flows, primarily related to the foreign exchange rate changes of future intercompany product sales and third-party purchases of materials denominated in a foreign currency. The Company uses interest rate swaps as an instrument to manage interest rate risk related to forecasted fixed rate borrowings, and cross currency interest rate swaps to manage the risk related to foreign currency net investments. As required by U.S. GAAP, all derivative instruments held by the Company are recorded on the Consolidated Balance Sheets at fair value. Fair value is the exit price that would be received to sell an asset or paid to transfer a liability. Fair value is a market-based measurement determined using assumptions that market participants would use in pricing an asset or liability. The authoritative literature establishes a three-level hierarchy to prioritize the inputs used in measuring fair value, with Level 1 having the highest priority and Level 3 having the lowest. Changes in the fair value of derivatives designated as cash flow hedges are recorded within gain or loss on cash flow hedges as a component of other comprehensive income until the underlying transaction affects earnings and are then reclassified to earnings in the same account as the hedged transaction. Changes in fair value of derivatives designated as net investment hedges are recorded within foreign currency translation (“CTA”) as a component of other comprehensive income until the hedged investment is either sold or substantially liquidated and are then reclassified to earnings. Any changes in the fair value of derivatives designated as fair value hedges are recorded in net income. The Company documents all relationships between hedged items and derivatives. The overall risk management strategy includes reasons for undertaking hedge transactions and entering into derivatives. See Note 16, “Fair Value Measurements”, for more information on fair value instruments. Defined Benefit Retirement Plans The Company’s defined benefit retirement plan costs are valued using actuarial valuations. The Company recognizes the funded or unfunded status of its defined benefit pension plans on the Consolidated Balance Sheets and recognizes changes in the funded status that arise during the period but that are not recognized as components of net periodic benefit cost, within other comprehensive income, net of income taxes. The projected benefit obligation represents the actuarial present value of benefits expected to be paid upon our employee’s expected date of separation or retirement. Amounts related to the Company’s defined benefit pension plans are recorded based on estimates and assumptions. Factors used in developing estimates of these liabilities include, among other things, assumptions related to discount rates, rates of return on investments, healthcare cost trends, benefit payment patterns, and other factors. See Note 7, “Pensions,” for more information. Revenue Recognition The Company’s revenue contracts represent a single performance obligation to sell its products to customers. Revenue from the sale of products to customers is recognized at a single point in time when obligations under the terms of a contract with the customer are satisfied; generally, this occurs with the transfer of control of the goods to customers, 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 the Company on behalf of governmental authorities. In addition, the Company has elected to account for shipping and handling activities as fulfillment costs and includes the shipping and handling fees charged to the customers as a part of the transaction price to be recognized when control of the product transfers. The Company’s global payment terms are typically between 30 to 90 days. 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, are accounted for as 89 variable consideration and recorded as a reduction in sales in the same period as the related sale. To estimate variable consideration, the Company may apply both the “expected value” method and the “most likely amount” method based on the form of variable consideration, after considering which method would provide the best prediction of consideration to be received from the Company’s customers. The redemption cost of consumer coupons is based on historical redemption experience by product and value. Volume-based incentive programs are based on the estimated sales volumes for the incentive period. The related liability is recognized within Accrued rebates, returns and promotions on the Consolidated Balance Sheets. Sales returns are almost exclusively not resalable. The reserves related to sales returns are recorded at full sales value and are estimated based on historical sales and returns information. See Note 19, “Segments of Business and Geographic Areas”, for further disaggregation of net sales. Net Income Per Share The Company determines net income per share in accordance with ASC 260, Earnings Per Share . Basic net income per share is computed by dividing net income by the weighted average number of shares outstanding for the applicable period. Diluted net income per share is computed by dividing net income by the weighted average number of shares plus the effect of dilutive potential shares outstanding for the applicable period using the treasury stock method. Dilutive potential shares include shares from equity awards and have been excluded where their inclusion would be anti-dilutive. Separation-Related Costs 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 Consolidated Financial Statements. These non-recurring Separation-related costs were $ 468 million and $ 213 million for the fiscal twelve months ended December 31, 2023 and January 1, 2023, respectively and are included in SG&A expenses. The Company did not incur Separation-related costs in the fiscal twelve months ended January 2, 2022. Advertising Advertising expenses worldwide, which comprised television, radio, print media and digital advertising, were $ 1,349 million, $ 1,356 million, and $ 1,461 million for the fiscal twelve months ended December 31, 2023, January 1, 2023, and January 2, 2022, respectively, and are included in SG&A expenses in the Consolidated Statements of Operations. Shipping and Handling Shipping and handling costs incurred were $ 320 million, $ 322 million, and $ 305 million for the fiscal twelve months ended December 31, 2023, January 1, 2023, and January 2, 2022, respectively, and are included in SG&A expense in the Consolidated Statements of Operations. Product Liability Accruals for product liability claims are recorded, on an undiscounted basis, when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated based on existing information and actuarially determined estimates where applicable. The accruals are adjusted periodically as additional information becomes available. The Company accrues an estimate of the legal defense costs needed to defend each matter when those costs are probable and can be reasonably estimated. To the extent adverse verdicts have been rendered against the Company, the Company does not record an accrual until a loss is determined to be probable and can be reasonably estimated. Research and Development Research and development costs were $ 399 million, $ 375 million, and $ 355 million for the fiscal twelve months ended December 31, 2023, January 1, 2023, and January 2, 2022, respectively, and are included in SG&A expenses in the Consolidated Statements of Operations. 90 Income Taxes Income taxes are recorded based on amounts refundable or payable for the current fiscal year and include the results of any differences between U.S. GAAP accounting and tax reporting, recorded as deferred tax assets or liabilities. The Company estimates 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 file 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 the Company’s ability to realize its deferred tax assets, including its historical results and forecasts of future taxable income on a jurisdiction-by-jurisdiction basis. The Company has unrecognized tax benefits for uncertain tax positions. The Company follows 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 have a material additional expense or benefit to the Company’s financial results and its effective tax rate. See Note 14, “Income Taxes”, for more information on income taxes and see “Change in Accounting Principle” within this footnote for more information on GILTI accounting method change. Stock-Based Compensation The Company recognizes compensation costs related to stock options granted ratably over the requisite service period, which is the vesting period of the award, based on the estimated fair value of the stock award on the grant date. The estimated fair value of stock options is determined using the Black-Scholes option valuation model. Stock options generally vest over a three-year period with annual vesting. The Company recognizes compensation costs related to restricted stock units (“RSUs”) ratably over the requisite service period based on the fair value of the Company’s common stock on the grant date. RSUs generally vest over a three-year period with annual vesting. The Company recognizes compensation costs related to performance stock units (“PSUs”), each of which has a singular market condition, ratably over the requisite service period based on the estimated fair value of the PSU on the grant date. The estimated fair value of PSUs is determined using the Monte Carlo valuation model. See Note 11, “Stock-Based Compensation,” for more information on the conversion of J&J awards to Kenvue awards in connection with the completion of the Exchange Offer. Stock-based compensation expense is recognized in the Consolidated Statements of Operations and is classified as a non-cash activity in the Consolidated Statements of Cash Flows. The Company accounts for forfeitures during the period in which they occur. Prior to the Kenvue IPO, certain employees of the Company participated in J&J’s stock-based compensation plans. Stock-based compensation expense related to these plans was recognized based on specific identification of cost related to the Company’s employees. The Company also received allocated stock-based compensation expense relating to employees of central support functions provided by J&J. Foreign Currency For translation of its international operations, the Company has determined that the majority of its local currencies are the functional currencies except those in highly inflationary economies, which are defined as those which have had compound cumulative rates of inflation of 100% or more during the past three years, or where a substantial portion of its cash flows are not in the local currency. The Company has accounted for operations in Argentina and Turkey as highly inflationary. The net assets of international operations where the local currencies have been determined to be the functional currencies are translated into U.S. dollars, the reporting currency, using period-end exchange rates and at the average exchange rates for the reporting period for revenue and expense accounts. The cumulative foreign currency translation adjustment is recorded as a 91 component of Accumulated other comprehensive loss in equity. Foreign currency translation recorded in these Consolidated Financial Statements is based on currency movements specific to the Company’s assets and liabilities included on the Consolidated Balance Sheets during the periods presented. Foreign currency exchange gains and losses on transactions occurring in a currency other than an operation’s functional currency are recognized as a component of Other expense (income), net in the Consolidated Statements of Operations. Net currency transaction losses (gains) were $ 64 million, $ 105 million, and $( 16 ) million for the fiscal twelve months ended December 31, 2023, January 1, 2023, and January 2, 2022, respectively. 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 Separation, 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 Consolidated Balance Sheets 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 in the Company’s Consolidated Financial Statements. 92 In the fiscal twelve months ended December 31, 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 Consolidated Financial Statements, except for the Deferred Legal Entities below. All Deferred Legal Entities are exposed to similar operational risks and are therefore monitored and evaluated on a similar basis by management. Accordingly, the financial information for Deferred Legal Entities has been aggregated and the following table summarizes the consolidated assets and liabilities of these entities, on the Consolidated Balance Sheets. The amounts represented in this table are only those assets of the VIEs that can be used to settle only the VIE’s obligations and the VIE’s creditors (or beneficial interest holders) have no recourse against the general credit of the primary beneficiary. (Dollars in Millions) December 31, 2023 Assets Current assets Cash and cash equivalents $ 109 Trade receivables, less allowances for credit losses 57 Inventories 18 Prepaid expenses and other receivables 6 Total current assets 190 Property, plant, and equipment, net 5 Deferred taxes on income 2 Other assets 1 Total assets $ 198 Liabilities Current liabilities Accounts payable $ 5 Accrued liabilities 12 Accrued rebates, returns, and promotions 14 Accrued taxes on income 3 Total current liabilities 34 Total liabilities $ 34 The Company recognized net income of $ 85 million related to the Deferred Legal Entities for the fiscal twelve months ended December 31, 2023 in the Company’s Consolidated Statements of Operations. 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). In relations to the net economic benefit arrangements, the Company recognized a receivable of $ 10 million and a payable of $ 49 million to J&J as of December 31, 2023 on the Company’s Consolidated Balance Sheets and $ 36 million of net income for the fiscal twelve months ended December 31, 2023 in the Company’s 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 in fiscal year 2022, see Note 19, “Segments of Business and Geographic Areas”. 93 Change in Accounting Principle GILTI Accounting Method Change 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. In 2018, the Financial Accounting Standards Board (“FASB”) 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, J&J, 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 Consolidated Financial Statements were as follows: December 31, 2023 January 1, 2023 (Dollars in Millions) Prior to Change Effect of Change As Reported Prior to Change Effect of Change As Adjusted Consolidated Balance Sheets: Assets Deferred taxes on income $ 158 $ — $ 158 $ 147 $ — $ 147 Liabilities Accrued taxes on income $ 142 $ — $ 142 $ 329 $ — $ 329 Deferred taxes on income $ 2,664 $ ( 43 ) $ 2,621 $ 2,428 $ 51 $ 2,479 Equity Additional paid-in capital $ 16,085 $ 62 $ 16,147 $ — $ — $ — Retained Earnings $ 452 $ ( 23 ) $ 429 $ — $ — $ — Net investment from Johnson & Johnson $ — $ — $ — $ 25,474 $ ( 49 ) $ 25,425 Accumulated other comprehensive loss $ ( 5,381 ) $ 4 $ ( 5,377 ) $ ( 5,453 ) $ ( 2 ) $ ( 5,455 ) Fiscal Twelve Months Ended December 31, 2023 January 1, 2023 January 2, 2022 (Dollars in Millions, Except Per Share Data) Prior to Change Effect of Change As Reported Prior to Change Effect of Change As Adjusted Prior to Change Effect of Change As Adjusted Consolidated Statements of Operations: Income before taxes $ 2,190 $ — $ 2,190 $ 2,637 $ — $ 2,637 $ 2,925 $ — $ 2,925 Provision for taxes 643 ( 117 ) 526 550 23 573 894 ( 47 ) 847 Net income $ 1,547 $ 117 $ 1,664 $ 2,087 $ ( 23 ) $ 2,064 $ 2,031 $ 47 $ 2,078 Basic net income per share $ 0.84 $ 0.06 $ 0.90 $ 1.22 $ ( 0.02 ) $ 1.20 $ 1.18 $ 0.03 $ 1.21 Diluted net income per share $ 0.84 $ 0.06 $ 0.90 $ 1.22 $ ( 0.02 ) $ 1.20 $ 1.18 $ 0.03 $ 1.21 94 Fiscal Twelve Months Ended December 31, 2023 January 1, 2023 January 2, 2022 (Dollars in Millions) Prior to Change Effect of Change As Reported Prior to Change Effect of Change As Adjusted Prior to Change Effect of Change As Adjusted Consolidated Statements of Comprehensive Income: Foreign currency translation, net of taxes $ 213 $ 6 $ 219 $ ( 1,053 ) $ 8 $ ( 1,045 ) $ ( 926 ) $ 3 $ ( 923 ) Other comprehensive income (loss) $ 149 $ 6 $ 155 $ ( 980 ) $ 8 $ ( 972 ) $ ( 901 ) $ 3 $ ( 898 ) Fiscal Twelve Months Ended December 31, 2023 (Dollars in Millions) Prior to Change Effect of Change As Reported Consolidated Statements of Equity: Net transfers from J&J $ 25,474 $ ( 49 ) $ 25,425 Accumulated other comprehensive loss ( 5,453 ) ( 2 ) ( 5,455 ) Cumulative effect adjustment to beginning balance $ 20,021 $ ( 51 ) $ 19,970 Net income $ 1,547 $ 117 $ 1,664 Other comprehensive income $ 149 $ 6 $ 155 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 $ ( 118 ) $ ( 28 ) $ ( 146 ) Ending balance $ 11,167 $ 44 $ 11,211 Fiscal Twelve Months Ended January 1, 2023 January 2, 2022 (Dollars in Millions) Prior to Change Effect of Change As Reported Prior to Change Effect of Change As Adjusted Consolidated Statements of Equity: Net transfers from J&J $ 24,872 $ 102 $ 24,974 $ 21,928 $ 55 $ 21,983 Accumulated other comprehensive loss ( 4,473 ) ( 10 ) ( 4,483 ) ( 3,572 ) ( 13 ) ( 3,585 ) Cumulative effect adjustment to beginning balance $ 20,399 $ 92 $ 20,491 $ 18,356 $ 42 $ 18,398 Net income $ 2,087 $ ( 23 ) $ 2,064 $ 2,031 $ 47 $ 2,078 Other comprehensive loss $ ( 980 ) $ 8 $ ( 972 ) $ ( 901 ) $ 3 $ ( 898 ) Net transfers from (to) Johnson & Johnson $ ( 1,485 ) $ ( 128 ) $ ( 1,613 ) $ 913 $ — $ 913 Ending balance $ 20,021 $ ( 51 ) $ 19,970 $ 20,399 $ 92 $ 20,491 95 Fiscal Twelve Months Ended December 31, 2023 January 1, 2023 January 2, 2022 (Dollars in Millions) Prior to Change Effect of Change As Reported Prior to Change Effect of Change As Adjusted Prior to Change Effect of Change As Adjusted Consolidated Statements of Cash Flows: Net income $ 1,547 $ 117 $ 1,664 $ 2,087 $ ( 23 ) $ 2,064 $ 2,031 $ 47 $ 2,078 Deferred income taxes $ 3 $ ( 117 ) $ ( 114 ) $ 157 $ 23 $ 180 $ 568 $ ( 47 ) $ 521 Recently Adopted Accounting Standards Accounting Standards Update (“ASU”) 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 standard includes an amendment to present rollforward information in each annual reporting period, which is effective for fiscal years beginning after December 15, 2023. The Company will adopt this amendment beginning in fiscal year 2024. 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 fiscal year 2023, the Company participated in J&J’s supplier financing program. As of December 31, 2023 and January 1, 2023, the Company’s accounts payable balances included $ 227 million and $ 293 million, respectively, related to invoices from suppliers participating in the supplier finance program. Recently Issued Accounting Standards Not Yet Adopted ASU 2023-09: Improvements to Income Tax Disclosures In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. ASU 2023-09 enhances the transparency of income tax disclosures, primarily by requiring public business entities to disclose 1) consistent categories and greater disaggregation of information in the rate reconciliations and 2) the disclosure of income taxes paid disaggregated by jurisdiction, among other requirements. This guidance is effective for public entities for the fiscal years beginning after December 15, 2024, and early adoption is permitted. The amendments are applicable on a prospective basis, although retrospective basis is also permitted. The Company is currently evaluating this guidance and the impact on its income tax disclosures. ASU 2023-07: Segment Reporting (Topic 280) – Improvements to Reportable Segment Disclosures In November 2023, the FASB issued ASU 2023-07 , Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures . ASU 2023-07 scopes in entities with a single reportable segment and requires those entities to provide all disclosures required in Topic 280. Among other various new disclosures, ASU 2023-07 additionally requires that current annual disclosures about a reportable segment’s profit or loss and assets also be provided in interim periods. Enhanced reporting requirements for all entities includes disclosure of 1) significant segment expenses, 2) the title and position of the chief operating decision maker (the “CODM”), and 3) how the CODM uses disclosed measure(s) of a segment’s profit or loss in assessing segment performance and allocating resources. This guidance is effective for public entities for fiscal years beginning after December 15, 2023 and for interim periods within fiscal years beginning after December 15, 2024. Companies are required to apply the amendments retrospectively to all prior periods presented in the financial statements and early adoption is permitted. The Company is currently evaluating this guidance and expects that adoption will result in new disclosures, including significant segment expenses. 96 2. Inventories As of December 31, 2023 and January 1, 2023, inventories were comprised of: (Dollars in Millions) December 31, 2023 January 1, 2023 Raw materials and supplies $ 304 $ 351 Goods in process 115 123 Finished goods 1,432 1,752 Total inventories $ 1,851 $ 2,226 3. Property, Plant and Equipment As of December 31, 2023 and January 1, 2023, property, plant and equipment at cost and the related accumulated depreciation were: (Dollars in Millions) December 31, 2023 January 1, 2023 Machinery and equipment $ 2,447 $ 2,280 Buildings and building equipment 1,749 1,709 Software 1,491 1,329 Construction in progress 480 307 Land and land improvements 76 75 Total property, plant and equipment, gross $ 6,243 $ 5,700 Less: accumulated depreciation ( 4,201 ) ( 3,880 ) Total property, plant and equipment, net $ 2,042 $ 1,820 Depreciation expense in the fiscal twelve months ended December 31, 2023, January 1, 2023, and January 2, 2022 was $ 305 million, $ 296 million, and $ 317 million, respectively. 4. Intangible Assets and Goodwill As of December 31, 2023 and January 1, 2023, the gross and net amounts of intangible assets were: December 31, 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 $ 4,444 $ ( 1,698 ) $ 2,746 $ 4,400 $ ( 1,485 ) $ 2,915 Customer relationships 2,125 ( 1,151 ) 974 2,127 ( 1,063 ) 1,064 Other intangibles 1,320 ( 669 ) 651 1,343 ( 650 ) 693 Total definite-lived intangible assets $ 7,889 $ ( 3,518 ) $ 4,371 $ 7,870 $ ( 3,198 ) $ 4,672 Indefinite-lived intangible assets: Trademarks $ 5,187 $ — $ 5,187 $ 5,122 $ — $ 5,122 Other 61 — 61 59 — 59 Total intangible assets, net $ 13,137 $ ( 3,518 ) $ 9,619 $ 13,051 $ ( 3,198 ) $ 9,853 The weighted average amortization period for patents and trademarks is 20 years. The weighted average amortization period for customer relationships is 32 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 97 intangible assets relates to the acquisition of Pfizer Consumer Health in 2006. Carrying amount changes for the fiscal twelve months ended December 31, 2023 and January 1, 2023 were driven by currency translations. The Company recognized an intangible asset impairment of $ 12 million related to certain definite-lived trademarks deemed as irrecoverable in Other operating (income) expense, net for the fiscal twelve months ended January 1, 2023. The Company did not recognize an intangible asset impairment during the fiscal twelve months ended December 31, 2023 and January 2, 2022. Amortization expense, which was included in Cost of Sales, for the Company’s amortizable assets was as follows: Fiscal Twelve Months Ended (Dollars in Millions) December 31, 2023 January 1, 2023 January 2, 2022 Trademarks $ 187 $ 187 $ 213 Customer relationships and Other intangibles 135 161 201 Total Amortization expense $ 322 $ 348 $ 414 The estimated amortization expense before tax for the five succeeding years is approximately: (Dollars in Millions) 2024 2025 2026 2027 2028 $ 309 $ 287 $ 278 $ 278 $ 278 During the fiscal twelve months ended January 1, 2023, the Company realigned and began managing its operations differently, and as a result the Company reallocated its goodwill to align with the new operating segments during the fiscal twelve months ended January 1, 2023. This realignment in segment structure resulted in a change in the Company’s former reporting units, which are now divided between: 1) Self Care, 2) Skin Health and Beauty, and 3) Essential Health, which are also the Company’s reportable segments. As a result of this realignment, goodwill was reassigned to each of the reporting units using a relative fair value approach. The Company estimates the fair values of a reporting unit using a discounted cash flow model. Goodwill by reportable segment was as follows: (Dollars in Millions) Consumer Health Business Self Care Skin Health and Beauty Essential Health Total Goodwill at January 2, 2022 $ 9,810 $ — $ — $ — $ 9,810 Currency translation/other ( 664 ) — — — ( 664 ) Goodwill at July 3, 2022 $ 9,146 $ — $ — $ — $ 9,146 Realignment of segment goodwill ( 9,146 ) 5,193 2,334 1,619 — Currency translation/other — 1 31 7 39 Goodwill at January 1, 2023 $ — $ 5,194 $ 2,365 $ 1,626 $ 9,185 Currency translation/other — 114 ( 50 ) 22 86 Goodwill at December 31, 2023 $ — $ 5,308 $ 2,315 $ 1,648 $ 9,271 The majority of the Goodwill balance relates to the acquisition of Pfizer Consumer Health in 2006. The fair value of a reporting unit refers to the price that would be received to sell the unit as a whole in an orderly transaction between market participants. The Company estimates the fair values of a reporting unit using a discounted cash flow model. The discounted cash flow model relies on assumptions regarding revenue and net income growth rates, projected working capital needs, capital expenditures, and discount rates. To estimate fair value, the Company discounts the forecasted cash flows of each reporting unit. The discount rate the Company uses represents the estimated weighted average cost of capital, which reflects the overall level of inherent risk involved in its reporting unit operations and the rate of return a market participant would expect to earn. The quantitative fair value test is performed utilizing long-term growth rates and discount rates applied to the estimated cash flows in estimation of fair value. To forecast a reporting unit’s cash flows the Company takes into consideration economic conditions and trends, estimated future operating results, management’s projections, and a market participant’s view of growth rates and product lives, and anticipates future economic conditions. Revenue growth rates inherent in these forecasts are based on input from internal and 98 external market research that compare factors such as growth in global economies, recent industry trends and product lifecycles. Macroeconomic factors such as changes in economies, changes in the competitive landscape, changes in government legislation, product lifecycles, industry consolidations and other changes beyond the Company’s control could have a positive or negative impact on achieving its targets. Accordingly, if market conditions deteriorate, or if the Company is unable to execute its strategies, it may be necessary to record impairment charges in the future. Re-segmentation Goodwill Impairment Test 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: 1) Self Care, 2) Skin Health and Beauty, and 3) Essential Health. 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. Annual Goodwill Impairment Tests The Company completed its annual goodwill impairment tests for the fiscal twelve months ended December 31, 2023, January 1, 2023, and January 2, 2022 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. 5. Borrowings The components of the Company’s debt as of December 31, 2023 and January 1, 2023 were as follows: (Dollars in Millions) December 31, 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 9 — Discounts and debt issuance costs ( 72 ) — Total long-term debt $ 7,687 $ — Current portion of long-term debt — — Commercial paper 600 — Discounts and debt issuance costs ( 1 ) — Total loans and notes payable 599 — Total debt $ 8,286 $ — 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 99 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 filing and legal fees that were not significant, which the Company capitalized as debt issuance costs. The unamortized discounts and debt issuance costs related to the Senior Notes at December 31, 2023 were approximately $ 72 million. Amortization of discounts and debt issuance costs related to the Senior Notes for the fiscal twelve months ended December 31, 2023 was $ 5 million. The weighted average effective interest rate of the Company’s long-term debt as of December 31, 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 Senior Notes will rank equally in right of payment with the Company’s other existing and future senior unsecured indebtedness. 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. The schedule of principal payments required on the Company’s Senior Notes for the next five years, and thereafter, is as fol lows: (Dollars in Millions) 2024 2025 2026 2027 2028 Thereafter $ — $ 750 $ 750 $ — $ 1,000 $ 5,250 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 (the “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 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.” As of December 31, 2023, the Company had $ 599 million of outstanding balances under its Commercial Paper Program, net of a related discount of $ 1 million. Interest expense incurred as a result of the Commercial Paper Program for the fiscal twelve months ended December 31, 2023 was $ 25 million. The weighted average effective interest rate of the Company’s commercial paper as of December 31, 2023 was 5.2 % and the weighted average maturities as of December 31, 2023 were less than 90 days. 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 100 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 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 December 31, 2023, the Company had no outstanding balances under its Revolving Credit Facility. 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 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 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 in the Company’s Consolidated Statements of Operations and are presented as cash inflows from operations within the Statement of Cash Flows. Interest Expense, Net The amount included in Interest expense, net in the Company’s Consolidated Statements of Operations consists of the following: Fiscal Twelve Months Ended (Dollars in Millions) December 31, 2023 January 1, 2023 January 2, 2022 Interest expense $ 358 $ — $ — Interest income (1) ( 108 ) — — Interest expense, net $ 250 $ — $ — (1) Includes interest income of $ 33 million for the fiscal twelve months ended December 31, 2023 recognized in relation to the Facility Agreement with J&J. 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 $ 8.0 billion as of December 31, 2023. Fair value was estimated using market prices using quoted prices in active markets which 101 would be considered Level 2 in the fair value hierarchy. The carrying value of the commercial paper notes approximated the fair value as of December 31, 2023 due to the nature and short-term duration of the instrument. Compliance with Covenants As of December 31, 2023, the Company was in compliance with all debt covenants and no default or event of default has occurred. 6. Employee Related Obligations As of December 31, 2023 and January 1, 2023, employee related obligations recorded on the Company’s Consolidated Balance Sheets were: (Dollars in Millions) December 31, 2023 January 1, 2023 Pension benefits $ 342 $ 216 Postretirement benefits 5 5 Severance benefits 39 — Total employee obligations 386 221 Less: current benefits in Accrued liabilities ( 26 ) ( 7 ) Employee related obligations - non-current $ 360 $ 214 7. Pensions In connection with the completion of the Separation, the Company converted all multiemployer plans to a multiple employer plan or a single-employer plan. Single Employer Plans The Company is the plan sponsor for certain defined benefit retirement plans (collectively, “the Plans”) and these Consolidated Financial Statements reflect the periodic benefit costs and funded status of such plans. The Company uses December 31 as the fiscal year-end measurement date for the Plans, which are located outside the United States. Net periodic benefit costs for the Company’s defined benefit retirement plans sponsored by the Company for the fiscal twelve months ended December 31, 2023, January 1, 2023, and January 2, 2022 included the following components: Fiscal Twelve Months Ended (Dollars in Millions) December 31, 2023 January 1, 2023 January 2, 2022 Service cost $ 21 $ 8 $ 7 Interest cost 26 4 2 Amortization of (gain) loss ( 2 ) 4 6 Special events 10 — — Expected return on plan assets ( 25 ) ( 1 ) — Net periodic benefit cost $ 30 $ 15 $ 15 The service cost component of net periodic benefit cost is presented in the same line items in the Consolidated Statements of Operations where other employee compensation costs are reported, including Cost of sales and SG&A expenses. All other components of net periodic benefit costs are presented as part of Other expense (income), net in the Consolidated Statements of Operations. During the fiscal twelve months ended December 31, 2023, the Company converted a defined benefit plan to a defined contribution plan, which resulted in a settlement loss of $ 14 million, partially offset by a curtailment gain of $ 4 million. The net balance is disclosed in the “Special events” line within Net periodic benefit cost. 102 The following table provides the weighted-average actuarial assumptions: Fiscal Twelve Months Ended Worldwide Benefit Plans December 31, 2023 January 1, 2023 January 2, 2022 Net Periodic Benefit Cost Service cost discount rate 3.4 % 2.3 % 1.2 % Interest cost discount rate 4.6 % 3.1 % 0.7 % Rate of increase in compensation levels 3.3 % 2.5 % 2.7 % Expected long-term rate of return on plan asses 5.5 % 2.9 % 2.1 % Benefit Obligation Discount rate 3.6 % 4.2 % 1.4 % Rate of increase in compensation tables 3.3 % 2.7 % 2.7 % The Company’s discount rates are determined by considering current yield curves representing high-quality, long-term fixed income instruments. The resulting discount rates are consistent with the duration of plan liabilities. The Company’s methodology in determining service and interest cost uses duration specific spot rates along that yield curve to the Plans’ liability cash flows. The expected rates of return on plan asset assumptions represent the Company’s assessment of long-term returns on diversified investment portfolios globally. The assessment is determined using projections from external financial sources, long-term historical averages, actual returns by asset class and the various asset class allocations by market. 103 The following table sets forth information related to the benefit obligation and the fair value of plan assets for the fiscal twelve months ended December 31, 2023 and January 1, 2023 for the Plans sponsored by the Company: (Dollars in Millions) December 31, 2023 January 1, 2023 Change in Benefit Obligation Projected benefit obligation - beginning of year $ 235 $ 303 Service cost 21 8 Interest cost 26 4 Actuarial (gain) loss (1) 99 ( 82 ) Plan participants’ contributions 7 — Curtailments, settlements & restructuring ( 50 ) — Benefits paid from plan ( 22 ) ( 8 ) Effect of exchange rates 31 ( 19 ) Transfers 473 25 Other 9 4 Projected benefit obligation - end of year $ 829 $ 235 Change in Plan Assets Plan assets at fair value - beginning of year $ 19 $ — Company contributions 27 9 Plan participants’ contributions 7 — Benefits paid from plan assets ( 22 ) ( 8 ) Actual return on plan assets ( 30 ) ( 1 ) Curtailments, settlements & restructuring ( 36 ) — Effect of exchange rates 18 ( 2 ) Transfers 552 21 Plan assets at fair value - end of year $ 535 $ 19 Funded status - end of year $ ( 294 ) $ ( 216 ) Amounts recognized on the Consolidated Balance Sheets consist of the following: Other assets $ 53 $ — Accrued liabilities $ ( 9 ) $ ( 7 ) Employee related obligations - non-current ( 338 ) ( 209 ) Total recognized on the Consolidated Balance Sheets - end of year $ ( 294 ) $ ( 216 ) Amounts recognized in Accumulated Other Comprehensive Income consist of the following: Net actuarial (gain) loss $ 123 $ ( 15 ) Transfers 100 — Prior service cost ( 6 ) 4 Total before tax effects $ 217 $ ( 11 ) Accumulated benefit obligations - end of year $ 747 $ 204 (1) The actuarial gain for retirement plans in 2022 was primarily related to increases in discount rates. The actuarial loss in 2023 was primarily related to increases in discount rates and changes in the rate of compensation. 104 (Dollars in Millions) December 31, 2023 January 1, 2023 Net periodic benefit cost $ 30 $ 15 Net actuarial loss (gain) (1) 118 ( 82 ) Amortization of net actuarial loss 4 ( 4 ) Effect of exchange rates 9 ( 6 ) Total (income)/loss recognized in other comprehensive income, before tax $ 131 $ ( 92 ) Total recognized in net periodic benefit cost and other comprehensive income $ 161 $ ( 77 ) (1) The actuarial gain for retirement plans in 2022 was primarily related to increases in discount rates. The actuarial loss in 2023 was primarily related to decreases in discount rates and changes in the rate of compensation. The Company’s pension plans are funded in accordance with local regulations. Additional discretionary contributions are made when deemed appropriate to meet the long-term obligations of the Plans. For certain plans, funding is not a common practice, as funding provides no economic benefit. Consequently, the Company’s pension plans are not funded. The following table displays the projected future benefit payments from the Company’s defined benefit retirement plans and other benefit plans: (Dollars in Millions) 2024 2025 2026 2027 2028 2029-2034 Projected future benefit payments Retirement plans $ 35 $ 38 $ 37 $ 38 $ 41 $ 231 The Company currently has $ 17 million in projected benefit plan contributions. The Company’s investment objective is to generate investment returns that provide adequate assets to meet current and future benefit obligations. The investment objectives are achieved through diversification of the retirement plan assets and management of liquidity to meet benefit payments and an appropriate balance of long-term investment return and risk. Plan assets are diversified by asset class in order to reduce volatility of overall results and to take advantage of various investment opportunities. The Company’s retirement plan assets as of December 31, 2023 were primarily comprised of debt, equity and other assets. Other assets are mainly comprised of monetary assets such as cash and real estate property. The increased volatility associated with equity securities that generate higher expected returns are offset by long duration fixed income securities that help reduce the volatility of the overall portfolio. Investment risk exposure is carefully controlled with plan assets rebalanced to target allocations on a periodic basis and continued monitoring through investment portfolio reviews. The Company’s retirement plan asset allocation at the end of December 31, 2023 and January 1, 2023 and target allocations for 2024 are as follows: Percent of Plan Assets Target Allocation Worldwide Retirement Plans December 31, 2023 January 1, 2023 2024 Equity securities 19 % 42 % 24 % Debt securities 54 % 56 % 58 % Other assets 27 % 2 % 18 % Total plan assets 100 % 100 % 100 % Determination of Fair Value of Plan Assets The Plans have established a process for determining fair values. Fair value is based upon quoted market prices, where available. If listed prices or quotes are not available, fair value is based upon models that primarily use, as inputs, market-based or independently sourced market parameters, including yield curves, interest rates, volatilities, equity or debt prices, foreign exchange rates and credit curves. While the Plans believe the valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. 105 Valuation Hierarchy 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 The Net Asset Value (“NAV”) is based on the value of the underlying assets owned by the fund, minus its liabilities, and then divided by the number of shares outstanding. Following is a description of the valuation methodologies used for the investments measured at fair value. • Debt instruments — A limited number of these investments are valued at the closing price reported on the major market on which the individual securities are traded. The debt instruments primarily relate to government bonds, money held by trusts, or bonds taken from funds. Where quoted prices are available in an active market, the investments are classified as Level 1. If quoted market prices are not available for the specific security, then fair values are estimated by using other observable inputs including pricing models, quoted prices of securities with similar characteristics or discounted cash flows and are classified as Level 2. • Equity securities — Equity securities are valued at the closing price reported on the active market on which the individual securities are traded. Substantially all equity securities are classified within Level 1 of the valuation hierarchy. • Other assets — Other assets include cash and money markets held within an account that guarantee a fixed percentage return. Substantially all cash and monetary assets are classified within Level 1 of the valuation hierarchy. Insurance contracts with a defined return are classified as Level 2 assets within the valuation hierarchy. As of December 31, 2023, other assets also included insured benefits to employees allocated from a pension Trustee. The value of these assets is determined based on the vested value of the underlying employee obligations multiplied by the publicly available coverage ratio of the Trustee. These assets are categorized as Level 3. • Commingled Funds — The fair value of non-publicly traded funds is determined using the NAV provided by the administrator of the fund when the Company has the ability to redeem the asset at measurement date. When the Company is using the NAV as a practical expedient those investments are not included in the valuation hierarchy. The investments are valued using the NAV provided by the fund administrator. Assets in the Level 2 category have a quoted market price. The following table sets forth the retirement plans' investments measured at fair value as of December 31, 2023 and January 1, 2023: Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) (1) Assets Measured at NAV Total Assets (Dollars in Millions) December 31, 2023 Debt instruments $ — $ 197 $ — $ — $ 197 Equity securities $ 26 $ — $ — $ — $ 26 Other assets $ 56 $ 1 $ 146 $ — $ 203 Commingled funds $ — $ 101 $ — $ 8 $ 109 Investments at fair value $ 82 $ 299 $ 146 $ 8 $ 535 (1) The activity of the Level 3 Other Assets is consist of $ 127 million transfers from J&J and $ 19 million of returns during the year resulting from additional vested benefits and the trustee’s coverage ratio. 106 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Assets (Dollars in Millions) January 1, 2023 Debt instruments $ — $ 9 $ — $ 9 Equity securities $ 9 $ — $ — $ 9 Other assets $ — $ — $ 1 $ 1 Investments at fair value $ 9 $ 9 $ 1 $ 19 Participation in J&J 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 on the Company's Consolidated Balance Sheets. After the Separation, the Company no longer had any multiemployer plans as they were all converted to a multiple employer pension plan or a single-employer pension plan. The 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 $ 17 million, $ 54 million, and $ 93 million for the fiscal twelve months ended December 31, 2023, January 1, 2023, and January 2, 2022, respectively. In connection with the Separation, J&J has provided participation rights for a 15-year period for certain employees to continue receiving the pension benefits within the United States and Canada. As a result of this benefit provided to Kenvue employees, an asset has been recorded on the Consolidated Balance Sheet during the fiscal twelve months ended December 31, 2023 in the amount of $ 94 million that will be amortized straight line over the 15-year period ended 2039. Savings Plan In the United States, the Company has voluntary 401(k) savings plans designed to enhance the existing retirement programs covering eligible employees. The Company matches a percentage of each employee’s contributions consistent with the provisions of the plan for which he/she is eligible. Total matching contributions attributable to the Company’s employees were $ 46 million, $ 14 million, and $ 14 million for the fiscal twelve months ended December 31, 2023, January 1, 2023, and January 2, 2022, respectively. Post-Employment Benefit Plans Additionally, J&J maintains a post-employment benefit plan to provide limited benefits to its former employees, including former employees of the Company, if they are involuntarily terminated. The duration of these benefits is generally based on the employee’s term of service with J&J, and includes both severance compensation and other benefits, including medical coverage. The post-employment plan is published and is considered a benefit to employees which is earned over the employee’s term of service. As a result, J&J recognizes the cost of this benefit as it is earned by the employee as required by ASC 712, Compensation — non-retirement post-employment benefits. The cost of this benefit allocated to the Company in the fiscal twelve months ended December 31, 2023, January 1, 2023, and January 2, 2022 was approximately $ 18 million, $ 46 million, and $ 49 million, respectively, and is reflected as an expense in the Consolidated Statements of Comprehensive Income. 8. Leases The Company determines whether an arrangement is a lease at contract inception by establishing if the contract conveys the right to control the use of identified property, plant, or equipment for a period of time in exchange for consideration. Right of Use (“ROU”) assets are included in Other assets and lease liabilities are included in Accrued liabilities and Other liabilities on the Consolidated Balance Sheets. The ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent an obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of all minimum lease payments over the lease term. The Company uses its incremental borrowing rate for leases entered into after the 107 Separation based on the information available at commencement date in determining the present value of lease payments, when the implicit rate of the lease is not readily determinable. Prior to the Separation, the Company used J&J’s incremental borrowing rate. The Company primarily has operating leases for space, vehicles, manufacturing equipment and data processing equipment. The Company does not have any significant finance leases. In connection with the Kenvue IPO, J&J and Kenvue also entered into various lease agreements, in which the Company subleased properties from J&J. Lease terms may include options to extend or terminate the lease. These options are included in the lease term when it is reasonably certain that the Company will exercise that option. Our lease agreements do not contain any significant residual value guarantees or restrictive covenants. Operating lease expense is recognized on a straight-line basis over the lease term. 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 commenced 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. 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. Lease Assets and Liabilities Right of Use assets (“ROU assets”) and lease liabilities associated with the Company's operating leases are included on the Consolidated Balance Sheets as of December 31, 2023 and January 1, 2023 were as follows: (Dollars in Millions) December 31, 2023 (1) January 1, 2023 ROU assets included in: Other non-current assets $ 139 $ 110 Lease liabilities included in: Accrued and other current liabilities 44 35 Other non-current liabilities 97 81 Total lease liabilities $ 141 $ 116 (1) Includes leases with J&J of $ 52 million of ROU assets, $ 13 million of current lease liabilities, and $ 39 million of non-current lease liabilities. See Note 12, “Relationship with J&J,” for more information. Lease Cost For the fiscal twelve months ended December 31, 2023, January 1, 2023, and January 2, 2022, sublease income, short-term lease expense, and variable operating lease costs were not material. Operating lease costs for the fiscal twelve months ended December 31, 2023, January 1, 2023, and January 2, 2022 were $ 48 million, $ 42 million, and $ 54 million, respectively. 108 Maturity of Lease Liabilities As of December 31, 2023, the estimated operating lease future payments before tax for the five succeeding years and thereafter is approximately: (Dollars in Millions) Fiscal Twelve Months Ended 2024 $ 49 2025 36 2026 26 2027 17 2028 8 Thereafter 18 Total $ 154 Less: Imputed interest 13 Total current and non-current lease liabilities $ 141 Other Information Other information related to operating leases for fiscal twelve months ended December 31, 2023, January 1, 2023, and January 2, 2022 were as follows: Fiscal Twelve Months Ended (Dollars in Millions) December 31, 2023 January 1, 2023 January 2, 2022 Cash paid from operating cash flows for amounts included in the measurement of lease liabilities $ 49 $ 43 $ 55 For the fiscal twelve months ended December 31, 2023, $ 120 million of ROU assets were obtained in exchange for new operating lease liabilities. For both the fiscal twelve months ended January 1, 2023 and January 2, 2022, the amount of ROU assets obtained in exchange for new operating lease liabilities was not material. Lease Term and Discount Rate The following table discloses the weighted-average remaining lease term and weighted-average discount rate for the Company's leases, excluding short-term leases: December 31, 2023 January 1, 2023 Weighted-average remaining lease term 5 years 7 years Weighted-average discount rate 3.6 % 2.3 % 109 9. Accrued and Other Liabilities Accrued liabilities consisted of: (Dollars in Millions) December 31, 2023 January 1, 2023 Accrued expenses $ 465 $ 447 Accrued compensation and benefits 406 272 Lease liability 44 35 Other accrued liabilities (2) 541 152 Accrued liabilities $ 1,456 $ 906 Other liabilities consisted of: (Dollars in Millions) December 31, 2023 January 1, 2023 Accrued income taxes - noncurrent $ 188 $ 584 Noncurrent lease liability 97 81 Tax indemnification liability (1) 141 — Other noncurrent accrued liabilities (2) 65 62 Other liabilities $ 491 $ 727 (1) The balance primarily relates to the Tax Matters Agreement entered into 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. See Note 12, “Relationship with J&J,” for more information. (2) 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 fiscal year 2023. See Note 12, “Relationship with J&J,” for more information. 110 10. Accumulated Other Comprehensive Loss Components of other comprehensive loss consisted of the following: (Dollars in Millions) Foreign Currency Translation Employee Benefit Plans (1) Gain (Loss) On Cash Flow Hedges Total Accumulated Other Comprehensive Loss January 3, 2021 $ ( 3,508 ) $ ( 76 ) $ ( 1 ) $ ( 3,585 ) OCI before reclassifications ( 923 ) 29 ( 3 ) ( 897 ) Amounts reclassified to the Consolidated Statements of Operations — ( 4 ) 3 ( 1 ) Net current period OCI ( 923 ) 25 — ( 898 ) January 2, 2022 ( 4,431 ) ( 51 ) ( 1 ) ( 4,483 ) OCI before reclassifications ( 1,045 ) 66 12 ( 967 ) Amounts reclassified to the Consolidated Statements of Operations — ( 3 ) ( 2 ) ( 5 ) Net current period OCI ( 1,045 ) 63 10 ( 972 ) January 1, 2023 ( 5,476 ) 12 9 ( 5,455 ) OCI before reclassifications 219 ( 181 ) 66 104 Amounts reclassified to the Consolidated Statements of Operations — 2 ( 28 ) ( 26 ) Net current period OCI 219 ( 179 ) 38 78 December 31, 2023 $ ( 5,257 ) $ ( 167 ) $ 47 $ ( 5,377 ) (1) Net change for the fiscal twelve months ended December 31, 2023 includes Separation adjustments of $ 77 million in connection with transfers of certain pensions plans by J&J to the Company. 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 Consolidated Statements of Comprehensive Income. The income tax (benefit) expense allocated to the components of Accumulated other comprehensive loss before reclassification are as follows: Fiscal Twelve Months Ended (Dollars in Millions) December 31, 2023 January 1, 2023 January 2, 2022 Foreign currency translation $ ( 12 ) $ ( 91 ) $ ( 91 ) Employee benefit plans $ 50 $ 30 $ 10 The income tax (benefit) expense allocated to gain (loss) on cash flow hedges before reclassification was not significant for the fiscal twelve months ended December 31, 2023, January 1, 2023, and January 2, 2022. The income tax (benefit) expense allocated to the reclassifications from Accumulated other comprehensive loss to the Consolidated Statements of Operations was not significant for the fiscal twelve months ended December 31, 2023, January 1, 2023, and January 2, 2022. 11. Stock-Based Compensation J&J Plans and Conversion of J&J Awards 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 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 2022 Plan became effective subsequent to the expiration of the J&J 2012 Plan. The J&J Plans provide for the grant of stock options, RSUs, PSUs, other stock-based awards, and cash awards to employees and directors, including 111 the Company’s personnel. Stock-based compensation granted pursuant to the J&J Plans was denominated in shares of J&J’s common stock. As such, all awards granted subsequent to the effective date of the J&J 2022 Plan and prior to the completion of the Exchange Offer were issued under the J&J 2022 Plan. On August 23, 2023 (the “Conversion Date”), J&J equity-based awards held by Kenvue employees were accounted for as if they were forfeited by J&J and generally replaced by Kenvue equity-based awards under the Kenvue 2023 Plan (see the “Kenvue 2023 Plan” section below within this footnote for additional details) with terms consistent to those applicable to the J&J awards, subject to adjustments to the number of underlying 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 in Note 12, “Relationship with J&J”). 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 of service were 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. Upon the conversion, there were 69,438,910 shares of common stock underlying the converted awards that were eligible to be issued under the Kenvue 2023 Plan. The terms of the converted Kenvue awards are as follows: Conversion of RSUs On the Conversion Date, the Company was deemed to have issued 12.5 million RSUs with an incremental cost of $ 283 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 common stock at the deemed Conversion Date, adjusted to reflect that the RSUs do not have dividend participation rights through the vesting date (using a dividend rate assumption consistent with the assumption disclosed within the table below). Conversion of Stock Options On the Conversion Date, the Company was deemed to have issued 57 million non-qualified stock options and incentive stock options with an incremental cost of $ 198 million. These stock options 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. All stock options will be vested by January 2027. These stock options provide for accelerated vesting in certain change in control scenarios. Each stock option has a weighted average exercise price of approximately $ 21.01 as of the Conversion Date. The fair value of each stock option is estimated using the Black-Scholes option valuation model. The assumptions used in calculating the fair value of the converted stock options were as follows: Assumption August 2023 Converted Stock Options Expected volatility (1) 16.5 % - 21.4 % Expected dividend yield (2) 3.2 % Risk-free rate (3) 4.2 % - 5.4 % Expected term (4) 0.5 years - 6.5 years (1) Expected volatility is based on the historical volatility of a selected group of the Company’s peers and other factors. (2) Expected dividend yield is calculated using the assumed dividend payout per common share as a percentage of the average Kenvue common share price for the prior three month period, which is then annualized. (3) Risk-free rate is based on the U.S. Treasury yield curve in effect as of the Conversion Date (4 ) Expected term is consistent with the historical experiences of J&J for awards similar to those in the Kenvue population. 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 twelve months ended December 31, 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 expense. From the Conversion Date through the end of the fiscal twelve months ended December 31, 2023, the Company recognized $ 215 million of 112 compensation costs attributable to the RSUs and stock options described above. In total, the Company recognized incremental stock-based compensation expense of $ 240 million in the fiscal twelve months ended December 31, 2023. Kenvue 2023 Plan In March 2023, the Company’s Board 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, 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 denominated in shares of the Company’s common stock. The Kenvue 2023 Plan was approved by J&J, as sole shareholder of the Company, prior to the Kenvue IPO and became effective in May 2023. The maximum aggregate number of shares of common stock that was approved for issuance under the Kenvue 2023 Plan was 188,897,256 . 69,438,910 shares underlying awards converted from J&J awards to Kenvue awards (as described in the “J&J Plans and Conversion of J&J Awards” section above), will not reduce the maximum aggregate number of shares of common stock that may be issued under the Kenvue 2023 Plan. 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. The Founder Shares were granted to executive officers in the form of stock options and PSUs and to non-executive individuals in the form of either RSUs or as stock options and PSUs. The Company expects to recognize approximately $ 71 million in stock-based compensation expense related to the Founder Shares. The expense will be amortized over the requisite service period of the awards, which ranges from one to three years . 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 twelve months ended December 31, 2023, January 1, 2023, and January 2, 2022, were as follows: Fiscal Twelve Months Ended (Dollars in Millions) December 31, 2023 January 1, 2023 January 2, 2022 Stock options $ 90 $ 43 $ 41 RSUs 76 74 73 PSUs 22 20 27 Stock-based compensation expense $ 188 $ 137 $ 141 Cost of sales $ 67 $ 30 $ 33 Selling, general, and administrative expenses 121 107 108 Stock-based compensation expense $ 188 $ 137 $ 141 Stock-based compensation expense includes $ 2 million, $ 26 million, and $ 38 million for the fiscal twelve months ended December 31, 2023, January 1, 2023, and January 2, 2022, respectively, of allocated charges from J&J based on percentage attribution related to J&J employees providing services to the Company. Following the completion of the Separation, the Company no longer allocates charges of this nature. 113 The Company’s unrecognized compensation expense and the related remaining requisite service periods for stock options, RSUs, and PSUs outstanding for the fiscal twelve months ended December 31, 2023, January 1, 2023, and January 2, 2022, were as follows: (Dollars in Millions) Stock Options December 31, 2023 January 1, 2023 January 2, 2022 Unrecognized compensation expense $ 107 $ 34 $ 28 Weighted average remaining requisite service period 1.44 years 1.21 years 1.76 years RSU Unrecognized compensation expense $ 148 $ 58 $ 49 Weighted average remaining requisite service period 1.38 years 1.27 years 1.74 years PSU Unrecognized compensation expense $ 31 $ 13 $ 13 Weighted average remaining requisite service period 2.78 years 1.28 years 1.82 years Stock Options Under the Kenvue 2023 Plan, Kenvue granted stock options which expire 10 years from the grant date and vest over service periods that range from six months to four years . All stock options are granted using the close price of Kenvue common stock on the New York Stock Exchange on the grant date. The fair value of each stock option award is estimated using the Black-Scholes option valuation model. The weighted average assumptions used in calculating the fair value of stock options granted the fiscal twelve months ended December 31, 2023, January 1, 2023, and January 2, 2022, were as follows: YTD Fiscal Twelve Months Ended December 31, 2023 January 1, 2023 January 2, 2022 Expected volatility (1) 20.8 % 18.0 % 18.6 % Expected dividend yield (2) 3.5 % 2.7 % 2.5 % Risk-free rate (3) 4.5 % 2.0 % 0.8 % Expected term (4) 6 years 7 years 7 years (1) For awards granted under the Kenvue 2023 Plan, expected volatility is based on the historical volatility of a selected group of the Company’s peers and other factors. For awards granted under the J&J Plans, expected volatility was based on a blended rate of 10-year weekly historical overall volatility rate and a five-week average implied volatility rate based on at-the-money traded J&J stock options with a contractual term of two years . (2) For awards granted under the Kenvue 2023 Plan, expected dividend yield is calculated using the assumed dividend payout per common share as a percentage of the average Kenvue common share price for the prior three month period, which is then annualized. For awards granted under the J&J Plans, expected dividend yield was calculated using the assumed dividend payout per common share as a percentage of the spot J&J common share price as of the grant date. (3) Risk-free rate is based on the U.S. Treasury yield curve in effect as of the grant date for options granted under both the Kenvue 2023 Plan and the J&J Plans. (4) For awards granted under the Kenvue 2023 Plan, expected term is consistent with the historical experiences of J&J for awards similar to those in the Kenvue population. For awards granted under the J&J plans, expected term was calculated based on J&J’s historical data. 114 A summary of stock option activity under the Kenvue 2023 Plan during the fiscal twelve months ended is presented below: Aggregate Intrinsic Value (Options in Thousands) Options Weighted Average Exercise Price Weighted Average Remaining Contractual Term (Dollars in Millions) Options outstanding of Kenvue common stock at January 1, 2023 — $ — Awards converted from J&J Plans 56,958 $ 21.01 Options granted 8,433 $ 20.36 Options exercised ( 478 ) $ 16.20 Options canceled/forfeited/adjusted (1) ( 725 ) $ 21.72 Options outstanding at December 31, 2023 64,188 $ 20.60 7.2 years $ 83 Options exercisable at December 31, 2023 20,303 $ 17.93 4.7 years $ 73 (1) Includes employee transfers in and out. The weighted average fair value of stock options granted was $ 3.82 , $ 23.23 , and $ 20.86 in the fiscal twelve months ended December 31, 2023, January 1, 2023, and January 2, 2022, respectively. The total intrinsic value of stock options exercised was $ 96 million , $ 64 million, and $ 56 million in the fiscal twelve months ended December 31, 2023, January 1, 2023, and January 2, 2022, respectively. During 2023, the majority of the exercises occurred pre-Separation. Cash proceeds received from the exercise of stock options denominated in Kenvue common stock was $ 7 million in the fiscal twelve months ended December 31, 2023. The tax benefit associated with cash proceeds received from the exercise of stock options in the fiscal twelve months ended December 31, 2023 was $ 18 million, of which $ 17 million related to the exercise of stock options prior to the Separation. Restricted Share Units and Performance Share Units Under the Kenvue 2023 Plan, Kenvue granted RSUs which vest over service periods that range from one year to three years . Kenvue also granted PSUs, which are paid in shares of Kenvue’s common stock after the end of a three-year performance period. The vesting of PSUs is tied to the completion of service periods that range from one year to three years and the achievement, over a three-year period, of relative total shareholder return for Kenvue stock. The number of shares earned at the end of the three-year period will vary, based on actual performance, from 0 % to 200 % of the target number of PSUs granted. Under the J&J Plans, J&J granted PSUs, which were paid in shares of J&J common stock after the end of a three-year performance period. The vesting of PSUs was tied to the completion of service periods that ranged from six months to three years and the achievement, over a three-year period, of two equally-weighted goals that directly aligned with or helped drive long-term J&J shareholder return: adjusted operational earnings per share and relative total shareholder return. The number of shares earned at the end of the three-year period varied, based on actual performance, from 0 % to 200 % of the target number of PSUs granted. The fair value of RSUs granted under the Kenvue 2023 Plan is equivalent to the close price of Kenvue stock on the grant date as all RSUs granted have dividend participation rights during the vesting period. For awards granted under the J&J Plans, the fair value of RSUs granted was equivalent to the fair market value on the grant date, discounted by the expected dividend yield, as the RSUs did not have dividend participation rights during the vesting period. For PSUs granted under the Kenvue 2023 Plan, the fair value for the relative total shareholder return goal of each PSU granted was estimated on the grant date using a Monte Carlo valuation model. For PSUs granted under the J&J Plans, the fair value for the net income per share goal of each PSU was estimated on the grant date using the fair market value of J&J shares at the grant date, discounted by the expected dividend yield, as the PSUs did not have dividend participation rights during the vesting period, and the fair value for the relative total shareholder return of each PSU was estimated on the grant date using a Monte Carlo valuation model. 115 A summary of unvested RSU and PSU activity under the Kenvue 2023 Plan during the fiscal twelve months ended December 31, 2023 is presented below: (Shares in Thousands) Outstanding Restricted Stock Units Weighted-Average Grant Date Fair Value Outstanding Performance Stock Units Weighted-Average Grant Date Fair Value Shares of Kenvue at January 1, 2023 — $ — — $ — Awards converted from J&J Plans 12,495 22.67 — — Granted 1,044 20.37 1,665 23.57 Issued ( 36 ) 23.34 — — Canceled/forfeited/adjusted ( 205 ) 22.37 ( 35 ) 23.22 Shares at December 31, 2023 13,298 $ 22.49 1,630 $ 23.58 The weighted average grant date fair value of RSUs granted was $ 153.69 and $ 152.73 in the fiscal twelve months ended January 1, 2023, and January 2, 2022, respectively. The aggregate fair value of RSUs issued was $ 44 million and $ 45 million in the fiscal twelve months ended January 1, 2023 and January 2, 2022, respectively. The weighted average grant date fair value of PSUs granted was $ 178.45 and $ 187.50 in the fiscal twelve months ended January 1, 2023 and January 2, 2022, respectively. The aggregate fair value of PSUs issued was $ 4 million and $ 5 million in the fiscal twelve months ended January 1, 2023 and January 2, 2022, respectively. 12. Relationship with J&J On August 23, 2023, Kenvue became a fully independent company upon the completion of the Exchange Offer (see Note 1, “Description of the Company and Summary of Significant Accounting Policies), and J&J ceased to be a related party on that date. The Company continues to have material agreements with J&J – see “ Transactions with J&J, including the Separation Agreement ” 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 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 in the Company’s 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 SG&A 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 in the Company’s Consolidated Statements of Operations for the fiscal twelve months ended December 31, 2023, January 1, 2023, and January 2, 2022 were as follows: Fiscal Twelve Months Ended (Dollars in Millions) December 31, 2023 January 1, 2023 January 2, 2022 Cost of sales $ 25 $ 149 $ 182 Selling, general, and administrative expenses 120 679 649 Total $ 145 $ 828 $ 831 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 116 made in areas such as manufacturing, selling and marketing, research and development, information technology, and infrastructure. No allocations were made after Kenvue became a fully independent company. Net Transfers (to) from Johnson & Johnson Net transfers (to) from Johnson & Johnson are included in Net investment from Johnson & Johnson in the Consolidated Balance Sheets and Consolidated Statements of Equity and within financing activities in the 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) from Johnson & Johnson subsequent the second quarter of fiscal year 2023. The components of Net transfers (to) from Johnson & Johnson for the fiscal twelve months ended December 31, 2023, January 1, 2023, and January 2, 2022 were as follows: Fiscal Twelve Months Ended (Dollars in Millions) December 31, 2023 January 1, 2023 January 2, 2022 Cash pooling and general financing activities $ ( 446 ) $ ( 2,568 ) $ ( 832 ) Corporate cost allocations 145 828 831 Taxes deemed settled with J&J 27 78 44 Allocated derivative and hedging gains — 65 ( 36 ) Net transfers (to) from Johnson & Johnson as reflected in the Consolidated Statements of Cash Flows $ ( 274 ) $ ( 1,597 ) $ 7 Stock-based compensation expense (1) — 137 141 Other (2) ( 34 ) ( 153 ) 765 Net transfers (to) from Johnson & Johnson as reflected in the Consolidated Statements of Equity $ ( 308 ) $ ( 1,613 ) $ 913 (1) Stock-based compensation expense is separately shown within the Consolidated Statements of Equity in the fiscal twelve months ended December 31, 2023, and therefore no longer a reconciling item between the Consolidated Statements of Equity and the Consolidated Statements of Cash Flows. (2) Other primarily relates to the impact of the change in accounting principle for GILTI in the fiscal twelve months ended December 31, 2023 and January 1, 2023, as well as Talc liability transferred to J&J, net of deferred taxes of $ 251 million in the fiscal twelve months ended January 2, 2022. Please see Note 1, “Description of the Company and Summary of Significant Accounting Policies—Change in Accounting Principle,” for more information on the impact of change in accounting principle related to GILTI. Transactions with J&J, including the Separation Agreement 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 1) recognition of balances with J&J including indemnification matters, 2) changes to income tax assets and liabilities as a result of change in the basis of presentation, 3) contribution of certain liabilities including pension and employee related obligations from J&J, 4) 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 5) 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. 117 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 lease agreements, in which the Company subleased properties from J&J. See Note 8, “Leases,” for more information. 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 in the Company’s Consolidated Financial Statements: (Dollars in Millions) December 31, 2023 January 1, 2023 Accounts payable and accrued liabilities $ 486 $ — Prepaid expenses and other receivables $ 213 $ — Other assets $ 87 $ — Other liabilities $ 153 $ — Fiscal Twelve Months Ended (Dollars in Millions) December 31, 2023 January 1, 2023 January 2, 2022 Cost of sales $ 148 $ — $ — Selling, general, and administrative expenses $ 189 $ — $ — 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. 118 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, August 23, 2025, covenants are 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 believes that it has complied with these requirements to date. The Company recorded approximately $ 168 million net liability for income and non-income indemnification tax payables and refunds, unrecognized tax benefits and associated interest due to J&J as Prepaid expenses and other receivables and Accrued liabilities for current assets and current liabilities, respectively, and to Other assets and Other liabilities for noncurrent assets and noncurrent liabilities, respectively, on the Consolidated Balance Sheets as of December 31, 2023. Debt Financing Transactions and IPO Consideration During the second quarter of fiscal year 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. 13. Other Operating (Income) Expense, Net and Other Expense (Income), Net Other operating (income) expense, net for the fiscal twelve months ended December 31, 2023, January 1, 2023, and January 2, 2022 consisted of: Fiscal Twelve Months Ended (Dollars in Millions) December 31, 2023 January 1, 2023 January 2, 2022 Litigation expense (income) (1) $ 26 $ ( 7 ) $ 92 Royalty income (2) ( 35 ) ( 39 ) ( 89 ) (Gain)/loss on disposal of fixed assets ( 9 ) 8 22 Impact of Deferred Markets (3) (Note 1) 28 — — Contingent liability reversal (4) ( 45 ) — — Other (5) 25 15 ( 10 ) Total Other operating (income) expense, net $ ( 10 ) $ ( 23 ) $ 15 (1) Includes $ 154 million of Talc-Related costs and $ 74 million of beneficial settlements for Brazil VAT legal resolution for the fiscal twelve months ended January 2, 2022. (2) In connection with a J&J corporate restructuring that started in October 2021, rights to receive streams of royalties payable from certain third parties to a Company affiliate were transferred to a subsidiary of J&J. Such J&J subsidiary retained those rights following the Separation. (3) Includes income taxes and service fees to be paid to J&J under the net economic benefit arrangements. (4) Includes the reversal of a contingent liability that was no longer considered to be probable. (5) Includes impact of foreign derivative contracts, intangible asset impairment, pension related and other miscellaneous operating (income) expenses. 119 Other expense (income), net for the fiscal twelve months ended December 31, 2023, January 1, 2023, and January 2, 2022 consisted of: Fiscal Twelve Months Ended (Dollars in Millions) December 31, 2023 January 1, 2023 January 2, 2022 Currency losses on transactions $ 58 $ 42 $ 20 Other (1) 14 ( 4 ) ( 25 ) Total Other expense (income), net $ 72 $ 38 $ ( 5 ) (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. 14. Income Taxes For the purposes of the Consolidated Financial Statements, 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 the entirety of each of the periods presented. 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 fiscal year 2023. The Company expects to file income tax returns on a standalone basis in most other jurisdictions in which it operates for 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, the Company’s 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. Effective in the third quarter of fiscal year 2023, the Company changed its 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”. The tables below reflect this change in accounting principle for all periods presented. The provision for taxes on income consists of: Fiscal Twelve Months Ended (Dollars in Millions) December 31, 2023 January 1, 2023 January 2, 2022 Current: U.S. taxes $ 266 $ 75 $ 8 International taxes 374 318 318 Total current taxes 640 393 326 Deferred: U.S. taxes ( 39 ) 228 580 International taxes ( 75 ) ( 48 ) ( 59 ) Total deferred taxes ( 114 ) 180 521 Provision for taxes $ 526 $ 573 $ 847 120 A comparison of income tax expense at the U.S. statutory rate of 21 % in the fiscal twelve months ended December 31, 2023, January 1, 2023, and January 2, 2022, to the Company’s effective tax rate is as follows: Fiscal Twelve Months Ended (Dollars in Millions) December 31, 2023 January 1, 2023 January 2, 2022 U.S. $ 825 $ 1,238 $ 1,367 International 1,365 1,399 1,558 Income before taxes $ 2,190 $ 2,637 $ 2,925 Tax rates: U.S. statutory rate 21.0 % 21.0 % 21.0 % U.S. taxes on international income (1) ( 1.5 ) ( 2.9 ) 7.8 International operations (2) 0.8 ( 1.6 ) ( 2.1 ) State 2.0 3.1 1.7 Change in valuation allowance 2.5 2.2 1.4 Tax benefits on stock-based compensation ( 0.5 ) ( 0.2 ) ( 0.3 ) All other ( 0.3 ) 0.1 ( 0.6 ) Effective tax rate 24.0 % 21.7 % 28.9 % (1) Includes the impact of the tax on GILTI and other foreign income that is taxable under the U.S. tax code as well as implications of repatriating foreign earnings. (2) International operations reflect the impacts of operations in jurisdictions with statutory tax rates different than the U.S. The Company’s largest international operations are in Canada, China, Japan, Singapore and Switzerland. For all periods presented the Company has subsidiaries operating in Singapore under various tax incentives. The 2023 amount includes $ 46 million net reduction in uncertain tax benefits. The worldwide effective income tax rates for the fiscal twelve months ended December 31, 2023 was 24.0 % and is higher than the U.S. corporate tax rate primarily due to the following: • The issuance of debt in the first quarter of 2023 resulted in an increase in annual interest expense and reduced our capacity to utilize foreign tax credits against U.S. foreign source income. This resulted in an increase in the valuation allowance for foreign tax credits related to earnings that are not indefinitely reinvested as well as state and local income taxes. These items are partially offset by reductions in unrecognized tax benefits in certain foreign jurisdictions reflected in international operations within the rate reconciliation as well as the recapture of an overall domestic loss allowing the Company to claim additional U.S. foreign tax credit benefits against the Company's U.S. tax on foreign earnings. The additional U.S. foreign tax credit benefit is reflected in U.S. taxes on international income within the rate reconciliation. The worldwide effective income tax rates for the fiscal twelve months ended January 1, 2023 was 21.7 % and is higher than the U.S. corporate tax rate primarily due to the following: • The overall domestic loss from the fiscal twelve months ended January 2, 2022 is being recaptured in the United States in the fiscal twelve months ended January 1, 2023 allowing the Company to claim additional U.S. foreign tax credits against the Company’s U.S. tax on foreign earnings. The additional U.S. foreign tax credit benefit is reflected in U.S. taxes on international income within the rate reconciliation. This benefit is offset by state taxes on current U.S. income and valuation allowances on state NOL carryforwards. The worldwide effective income tax rates for the fiscal twelve months ended January 2, 2022 was 28.9 % and is higher than the U.S. corporate tax rate primarily due to the following: • As a result of Talc settlement payments, there is a taxable loss in the U.S. preventing the Company from claiming a Section 250 deduction and utilizing U.S. foreign tax credits against the Company’s U.S. tax on foreign earnings. The incremental U.S. tax on foreign earnings is reflected in U.S. taxes on international income within the rate reconciliation. The increase in the worldwide effective income tax rate for the fiscal twelve months ended December 31, 2023 as compared to the fiscal twelve months ended January 1, 2023 was primarily the result of higher U.S. taxes on foreign income. With the 121 issuance of debt in the first quarter of 2023, the resulting increase in annual interest expense reduced the Company’s capacity to utilize foreign tax credits against U.S. foreign source income. As a result, the Company recorded a $ 52 million valuation allowance against a deferred tax asset related to anticipated foreign tax credit benefits. Furthermore, the recapture of an overall domestic loss allowing the Company to claim additional U.S. foreign tax credit benefits against the Company's U.S. tax on foreign earnings only existed through the Kenvue IPO date during the fiscal twelve months ended December 31, 2023 in comparison to the entire fiscal twelve months ended January 1, 2023. The tax rate is further increased by international operations as result of earnings mix changes, tax leakage on repatriation of foreign earnings from lower tier subsidiaries, and return to provision adjustments offset by reductions in unrecognized tax benefits. The decrease of the worldwide effective income tax rate for the fiscal twelve months ended January 1, 2023 as compared to the fiscal twelve months ended January 2, 2022 was primarily the result of U.S. incremental taxes on foreign earnings. As a result of Talc settlement payments, there is a taxable loss in the United States preventing the Company from claiming a Section 250 deduction and utilizing U.S. foreign tax credits against the Company’s U.S. tax on foreign earnings. The incremental U.S. tax on foreign earnings is reflected in U.S. taxes on international income within the rate reconciliation. Temporary differences and carryforwards as of December 31, 2023 and January 1, 2023 were as follows: Fiscal Twelve Months Ended December 31, 2023 January 1, 2023 (Dollars in Millions) Asset Liability Asset Liability Employee related obligations $ 29 $ — $ 20 $ — Stock-based compensation 57 — 75 — Depreciation of property, plant and equipment — ( 44 ) — ( 38 ) Goodwill and intangibles — ( 2,752 ) — ( 2,652 ) Reserves & liabilities 114 — 120 — Net operating loss (“NOL”) & tax credit carryforward 86 — 261 — Undistributed foreign earnings 49 ( 117 ) 99 ( 89 ) Miscellaneous international 123 — 28 — R&D capitalized for tax 52 — 55 — Miscellaneous U.S. 15 — 39 — Subtotal 525 ( 2,913 ) 697 ( 2,779 ) Valuation allowance ( 75 ) — ( 250 ) — Total deferred income taxes $ 450 $ ( 2,913 ) $ 447 $ ( 2,779 ) The Company has wholly owned international subsidiaries that have cumulative net losses. The Company believes that it is more likely than not that these subsidiaries will generate future taxable income sufficient to utilize these deferred tax assets. However, in certain jurisdictions, valuation allowances have been recorded against deferred tax assets for loss carryforwards that are not more likely than not to be realized. The Company has recognized $ 49 million and $ 110 million of deferred tax assets related to U.S. state and foreign NOL carryforwards and $ 37 million and $ 151 million of deferred tax assets related to U.S. federal and state, and foreign credit carryforwards as of December 31, 2023 and January 1, 2023 respectively. Foreign NOLs expire over various years based on local laws; however, if unused, the majority of foreign NOL carryforwards will expire between 2024 through 2033. Existing Federal tax credit carryforwards will expire in 2033. U.S. state NOLs generally expire between 2032 and 2041. Tax credit carryforwards of our Puerto Rico subsidiary do not expire. The Company assessed NOLs, credit carryforwards and other deferred tax assets for realizability and, based upon all available evidence, recorded valuation allowances against deferred tax assets on a “more-likely than not” standard. As of December 31, 2023, January 1, 2023, and January 2, 2022, valuation allowances of $ 75 million, $ 250 million, and $ 186 million have been recorded against certain NOLs and foreign tax credit carryforwards respectively. The Company recognized a net change in valuation allowance of $( 175 ) million, $ 64 million, and $ 42 million in the fiscal twelve months ended December 31, 2023, January 1, 2023, and January 2, 2022 respectively. On December 31, 2023, the net change was primarily related to a reduction in U.S. State and foreign tax credit carryforwards and related valuation allowances to reflect the Company’s separation from J&J recorded through the net parent investment at the time of the Kenvue IPO. 122 The Company has recorded deferred tax liabilities on all undistributed earnings of its international subsidiaries through the fiscal twelve months ended December 31, 2017 and certain undistributed earnings arising after the fiscal twelve months ended December 31, 2017. For all other undistributed earnings from our subsidiaries organized outside the United States, the Company has not recorded deferred taxes where the earnings are indefinitely reinvested. The Company intends to continue to reinvest these earnings in those international operations. If the Company decides at a later date to repatriate these earnings to the United States, the Company would be required to provide for the net tax effects on these amounts. The Company estimates that the tax effect of this repatriation would be approximately $ 87 million under currently enacted tax laws and regulations and at current currency exchange rates. The following table summarizes the activity related to unrecognized tax benefits: Fiscal Twelve Months Ended (Dollars in Millions) December 31, 2023 January 1, 2023 January 2, 2022 Beginning of year $ 437 $ 469 $ 519 Increases related to current year tax positions 26 32 31 Increases related to prior period tax positions 3 7 2 Decreases related to prior period tax positions ( 19 ) ( 49 ) ( 40 ) Settlements — ( 5 ) ( 15 ) Lapse of statute of limitations ( 42 ) ( 17 ) ( 28 ) Net decreases related to the Separation $ ( 220 ) $ — $ — End of year $ 185 $ 437 $ 469 The unrecognized tax benefits of $ 185 million at December 31, 2023, if recognized, $ 169 million would affect the Company’s annual effective tax rate. Pursuant to the Tax Matters Agreement between J&J and the Company, certain liabilities for unrecognized tax benefits have been reduced to reflect the fact that the liabilities are retained by J&J, including with respect to the US. federal income tax, or have been reclassified as indemnification payables to J&J where the liabilities relate to the Company for periods prior to the Kenvue IPO. The Company conducts business and files tax returns in numerous countries. The Company and J&J currently have tax audits in progress in several jurisdictions, which remain open from 2008 and forward. With respect to the United States, per the Tax Matters Agreement between J&J and the Company, J&J remains liable for all liabilities related to the final settlement of any U.S. federal income tax audits in which the Company is part of J&J’s federal consolidated tax return. The Company has therefore reduced its unrecognized tax benefits for U.S. federal uncertain tax positions as reflected in the table above under Net decreases related to the Separation. In other major jurisdictions where the Company conducts business, the years that remain open to tax audits range from 2015 and forward. The Company believes it is possible that certain tax audits in major jurisdictions where the Company conducts business outside of the United States may be completed over the next 12 months by their respective taxing authorities. 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 Consolidated Balance Sheets. Interest expense and penalties related to unrecognized tax benefits are classified as income tax expense on the Company’s Consolidated Statements of Operations. The Company recognized after tax interest expense (benefit) of $( 8 ) million, $ 13 million and $ 16 million in the fiscal twelve months ended December 31, 2023, January 1, 2023, and January 2, 2022, respectively. The total amount of accrued interest was $ 19 million and $ 147 million as of December 31, 2023 and January 1, 2023, respectively. On August 16, 2022, the United States enacted the Inflation Reduction Act of 2022 (“IRA”), which, among other things, introduced a 15% 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 billion, an excise tax on corporate stock buybacks, and several tax incentives to promote clean energy. Based on the Company’s current analysis for the fiscal twelve months ended December 31, 2023, the IRA is not expected to have a material impact on the Company’s Consolidated Financial Statements. The Company will continue to evaluate the impact of this law as additional guidance and clarification becomes available. On December 15, 2022, the EU Member States formally adopted the European Union’s Pillar Two Directive, which generally provides for a minimum effective tax rate of 15%, as established by the Organisation for Economic Co-operation and Development (“OECD”) Pillar Two Framework that was supported by over 130 countries worldwide. The EU effective dates 123 are January 1, 2024 and January 1, 2025 for different aspects of the directive. On July 17, 2023, the OECD published Administrative Guidance proposing certain safe harbor rules that effectively extend certain effective dates to January 1, 2027. The OECD continues to release additional guidance, including guidance on safe harbors for which we may qualify, and many countries have already implemented legislation consistent with the OECD Pillar Two Framework. Due to these new rules, our income tax expense could be unfavorably impacted as the legislation becomes effective in countries in which we conduct business. However, based on the Company’s current analysis for currently enacted laws, we do not expect a material impact to the Consolidated Financial Statements. We are continuing to evaluate the Model Global Anti-Base Erosion (“GloBE”) Rules for Pillar Two and related legislation, and their potential impact on future periods. 15. Net Income 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 J&J 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 December 31, 2023, the Company had 1,915,407,047 and 1,915,057,047 shares of common stock issued and outstanding, respectively. For the purposes of the Company’s net income 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 net income 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 the fiscal twelve months ended December 31, 2023, 44,745,842 shares were determined to be anti-dilutive under the treasury stock method and therefore were excluded from the diluted net income per share calculation. Net income per share for the fiscal twelve months ended December 31, 2023 and January 1, 2023 were calculated as follows: Fiscal Twelve Months Ended (Dollars in Millions, Shares in Thousands, Except Per Share Data) December 31, 2023 January 1, 2023 January 2, 2022 Net income $ 1,664 $ 2,064 $ 2,078 Basic weighted average number of shares outstanding 1,846,135 1,716,160 1,716,160 Diluted effects of stock-based awards 4,190 — — Diluted weighted average number of shares outstanding 1,850,325 1,716,160 1,716,160 Net income per share: Basic $ 0.90 $ 1.20 $ 1.21 Diluted $ 0.90 $ 1.20 $ 1.21 Share Repurchase Program During the third quarter of fiscal year 2023, the Company’s Board 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. Through December 31, 2023, approximately 350,000 shares have been repurchased under the program for $ 7 million or an average of $ 20.47 . 124 16. 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: December 31, 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 $ 63 $ — $ 63 $ — $ 39 $ — $ 39 $ — Interest rate swaps — — — — 29 — 29 — Total $ 63 $ — $ 63 $ — $ 68 $ — $ 68 $ — Liabilities: Forward foreign exchange contracts $ ( 50 ) $ — $ ( 50 ) $ — $ ( 15 ) $ — $ ( 15 ) $ — Cross currency swaps ( 25 ) — ( 25 ) — — — — — Interest rate swaps — — — — ( 39 ) — ( 39 ) — Total $ ( 75 ) $ — $ ( 75 ) $ — $ ( 54 ) $ — $ ( 54 ) $ — Net amount presented in Prepaid expenses and other receivables: $ 18 $ — $ 18 $ — $ 14 $ — $ 14 $ — Net amount presented in Accounts payable $ ( 30 ) $ — $ ( 30 ) $ — $ — $ — $ — $ — As of December 31, 2023 and January 1, 2023, cash equivalents were $ 329 million and $ 80 million, respectively, which were primarily comprised of time deposits and money market funds. 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 December 31, 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 and cross currency swaps are recorded at fair value that is derived from observable market data, including foreign exchange rates and yield curves. All derivative instruments are classified as Level 2 securities. The fair value of the Company’s derivative assets is included in Prepaid expenses and other receivables on the Company’s Consolidated Balance Sheets. The fair value of the Company’s derivative liabilities is included in Accounts payable on the Company’s Consolidated Balance Sheets. There were no transfers between Level 1, Level 2, or Level 3 during the fiscal twelve months ended December 31, 2023 and the fiscal twelve months ended January 1, 2023. 125 The following table sets forth the notional amounts of the Company’s outstanding derivative instruments: December 31, 2023 January 1, 2023 (Dollars in Millions) Forward foreign exchange contracts Cross currency swaps Total Forward foreign exchange contracts Interest rate swaps Total Cash flow hedges $ 3,522 $ — $ 3,522 $ 1,768 $ 2,400 $ 4,168 Undesignated forward foreign exchange contracts $ 588 $ — $ 588 $ — $ — $ — Net investment hedges $ — $ 500 $ 500 $ — $ — $ — For the fiscal twelve months ended December 31, 2023, January 1, 2023, and January 2, 2022, the Company recorded a total after-tax change in Accumulated other comprehensive loss of $ 38 million, $ 10 million, and $ — 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 income (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 income (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 in the Company’s Consolidated Statements of Operations, as applicable. The Company expects that substantially all of the amounts related to forward foreign exchange contracts will be reclassified into earnings over the next 12 months as a result of transactions that are expected to occur over that period. The maximum length of time over which the Company is hedging transaction exposure is 18 months. The amount ultimately realized in earnings may differ as foreign exchange rates change. Realized gains and losses are ultimately determined by actual exchange rates at maturity of the derivative. The following table is a summary of gains and losses on forward foreign exchange contracts designated as cash flow hedges within Other comprehensive income (loss) and amount reclassified into earnings: Fiscal Twelve Months Ended (Dollars in Millions) December 31, 2023 January 1, 2023 January 2, 2022 Gain (loss) recognized in Other comprehensive income (loss) $ 18 $ 11 $ ( 3 ) Gain (loss) reclassified from Other comprehensive income (loss) to earnings $ 28 $ ( 2 ) $ 3 126 The following tables are a summary of the reclassifications to Net Income related to the Company’s forward foreign exchange contracts for the fiscal twelve months ended December 31, 2023, January 1, 2023, and January 2, 2022: Fiscal Twelve Months Ended December 31, 2023 (Dollars in Millions) Net Sales Cost of Sales Other expense (income), net Gain (loss) on cash flow hedges $ 1 $ 30 $ ( 3 ) Gain on forward foreign exchange contracts not designated as hedges $ — $ — $ 10 Fiscal Twelve Months Ended January 1, 2023 (Dollars in Millions) Net Sales Cost of Sales Other expense (income), net Gain on cash flow hedges $ 21 $ 12 $ 30 Gain on forward foreign exchange contracts not designated as hedges $ — $ — $ 33 Fiscal Twelve Months Ended January 2, 2022 (Dollars in Millions) Net Sales Cost of Sales Other expense (income), net Gain (loss) on cash flow hedges $ 11 $ ( 23 ) $ ( 21 ) Loss on forward foreign exchange contracts not designated as hedges $ — $ — $ ( 15 ) Since 2022, the Company has entered into forward foreign 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 (income), net in the Company’s Consolidated Statements of Operations. As of December 31, 2023 and January 1, 2023, respectively, the Company held forward foreign exchange contracts that were not designated in cash flow hedging relationships of $ 4 million and $ — million , respectively. Forward Starting Interest Rate Swaps Beginning in the fourth quarter of fiscal year 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 twelve months ended December 31, 2023, the Company recorded a gain of $ 48 million in Accumulated other comprehensive loss, of which $ 38 million was related to the settlement of its forward starting interest rate swaps upon the issuance of the forecasted debt. The $ 38 million gain in Accumulated other comprehensive loss will be amortized and recorded in Other expense (income), net in the Company’s Consolidated Statements of Operations over the life of the 5-year , 10-year , and 30-year bonds. For the fiscal twelve months ended December 31, 2023, January 1, 2023, and January 2, 2022, the Company reclassified $ 4 million, $ — million , and $ — million , respectively, from Other comprehensive income (loss) to the Consolidated Statements of Operations. Net Investment Hedges The Company designated certain forward foreign exchange contracts and cross currency swap 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 second quarter of fiscal year 2023, the Company designated as a net investment hedge forward foreign exchange contracts 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 127 attributable to changes in spot rates recorded within CTA as a component of Other comprehensive income (loss). The Company has elected to exclude the changes in the fair value attributable to time value and spot-forward rate differences (the “excluded components”) from the assessment of the hedge effectiveness. The changes in fair value attributable to the excluded components were initially recorded within CTA as a component of Other comprehensive income (loss) and were recognized into Other expense (income), net in the Company’s Consolidated Statements of Operations ratably over the life of the contract. The forward currency exchange contracts designated as net investment hedges were settled in the third quarter of fiscal year 2023. During the fourth quarter of fiscal year 2023, the Company designated as a net investment hedge cross currency swap contracts to hedge exposure in foreign subsidiaries with local functional currencies. 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 within CTA as a component of Other comprehensive income (loss) and will remain there until the hedged net investments are sold or substantially liquidated. The excluded components were excluded from the assessment of the hedge effectiveness and had an initial value of $ 7 million as of December 31, 2023. The changes in fair value attributable to the excluded components were recognized into interest expense on a systematic and rational basis through the swap accrual over the life of the hedging instrument. The following table is a summary of gains and losses on cross currency swap contracts designated as net investment hedges within Other comprehensive income (loss) and amount reclassified into earnings: Fiscal Twelve Months Ended (Dollars in Millions) December 31, 2023 January 1, 2023 January 2, 2022 Loss recognized in CTA within Other comprehensive income (loss) $ ( 25 ) $ — $ — The Company did not reclassify any gains or losses from CTA within Other comprehensive income to earnings during the fiscal twelve months ended December 31, 2023, January 1, 2023, and January 2, 2022 related to cross currency swap contracts. 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 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 December 31, 2023 and January 1, 2023, such investments totaled $ 71 million and $ 66 million, respectively, and were included in Other assets on the Consolidated Balance Sheets. 128 17. 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, foreign exchange controls, antitrust and trade regulation, labor and employment, indemnification, data privacy and security, environmental, health and safety, 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 December 31, 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 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 on the Company’s 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. In February 2024, the Court entered final judgment in favor of JJCI and the other sellers of acetaminophen-containing products and dismissed the majority of cases then pending in the multi-district litigation. No trial dates have been set in the remaining 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, lawsuits have 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. 129 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, 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 two of the five outstanding putative class actions filed in Canada with similar allegations regarding Zantac or ranitidine use. Of the two outstanding putative class actions naming J&J and/or JJI, the Quebec Superior Court action has been stayed, and the Ontario Superior Court of Justice 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, and an appeal is pending before the U.S. Court of Appeals for the Eleventh Circuit. In September 2023, the Nonprescription Drugs Advisory Committee (the “NDAC”) of the 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. In December 2023, lawsuits filed in federal courts in the United States were organized as a multi-district litigation in the U.S. District Court for the Eastern District of New York. Separately, putative Canadian class actions were filed beginning 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, beginning in October 2023, two putative 130 securities class actions were 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 complaints allege that the Company made false or misleading statements, and omitted material facts, about PE and the efficacy of certain PE-containing products and seek damages for all shareholders who acquired shares pursuant to the registration statement and the final prospectus filed on May 4, 2023 with the U.S. Securities and Exchange Commission pursuant to Rule 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. The two cases have been consolidated as In re Kenvue Inc. Securities Litigation and a lead plaintiff has been appointed. Finally, in January 2024, shareholder derivative complaints were filed in the U.S. District Court for the District of New Jersey against the Company as the nominal defendant and the Company’s directors and certain of its officers as defendants, among other defendants. The derivative complaints allege breaches of fiduciary duties based on the Kenvue IPO disclosures regarding PE and seek damages and equitable relief. The derivative complaints have been consolidated as In re Kenvue, Inc. Derivative Litigation and have been stayed. 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 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. 18. Acquisitions and Divestitures During the fiscal twelve months ended December 31, 2023, January 1, 2023, and January 2, 2022, the Company did not make any significant acquisitions. During the fiscal twelve months ended January 2, 2022, the Company divested several brands and facilities and recognized a pre-tax gain of $ 25 million within Other expense (income), net. During the fiscal twelve months ended December 31, 2023 and January 1, 2023, the Company did not have any significant divestitures. 19. Segments of Business and Geographic Areas The Company historically operated as part of J&J and reported under J&J’s segment structure. Prior to the Separation, the Company’s 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 chief executive officer. During fiscal year 2022, the Company realigned its historical segment structure, resulting in three operating segments, which are also its reportable segments: 1) Self Care, 2) Skin Health and Beauty, and 3) Essential Health. Prior period presentations conform to the current segment reporting structure. 131 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 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 Pain Care Cough, Cold, and Allergy Other Self Care (Digestive Health, Smoking Cessation, Eye Care, 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, Wound Care, and Other) The Company’s product categories as a percentage of Net sales for the fiscal twelve months ended December 31, 2023, January 1, 2023, and January 2, 2022 were as follows: Fiscal Twelve Months Ended Product Categories December 31, 2023 January 1, 2023 January 2, 2022 Pain Care 14 % 13 % 11 % Cough, Cold and Allergy 13 13 12 Other Self Care 15 14 15 Face and Body Care 20 20 22 Hair, Sun and Other 9 9 8 Oral Care 10 10 11 Baby Care 9 10 10 Other Essential Health 10 11 11 Total 100 % 100 % 100 % 132 Segment Net Sales and Segment Adjusted Operating Income Segment net sales and Segment adjusted operating income for the fiscal twelve months ended December 31, 2023, January 1, 2023, and January 2, 2022 were as follows: Segment Net Sales Fiscal Twelve Months Ended (Dollars in Millions) December 31, 2023 January 1, 2023 January 2, 2022 Self Care $ 6,451 $ 6,030 $ 5,643 Skin Health and Beauty 4,378 4,350 4,541 Essential Health 4,615 4,570 4,870 Total $ 15,444 $ 14,950 $ 15,054 Segment Adjusted Operating Income Fiscal Twelve Months Ended (Dollars in Millions) December 31, 2023 January 1, 2023 January 2, 2022 Self Care $ 2,299 $ 2,088 $ 1,952 Skin Health and Beauty 679 708 878 Essential Health 1,011 1,111 1,224 Segment adjusted operating income (1) $ 3,989 $ 3,907 $ 4,054 Reconciliation to Income before taxes Less: Depreciation 305 296 317 Amortization 322 348 414 Separation-related costs 468 213 — Restructuring expenses and operating model optimization initiatives (2) 32 100 116 Conversion of stock-based awards (3) 55 — — Founder Shares (4) 9 — — Other operating expense (income), net ( 10 ) ( 23 ) 15 General corporate/unallocated expenses 296 298 272 Operating income $ 2,512 $ 2,675 $ 2,920 Other expense (income), net 72 38 ( 5 ) Interest expense, net 250 — — Income before taxes $ 2,190 $ 2,637 $ 2,925 (1) In the first quarter of fiscal year 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. 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 expense (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. 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”) . 133 Depreciation & Amortization Depreciation and amortization by segment for the fiscal twelve months ended December 31, 2023, January 1, 2023, and January 2, 2022 were as follows: Depreciation and Amortization Fiscal Twelve Months Ended (Dollars in Millions) December 31, 2023 January 1, 2023 (1) January 2, 2022 Self Care $ 202 $ 202 $ 212 Skin Health and Beauty 230 247 305 Essential Health 195 195 214 Total $ 627 $ 644 $ 731 (1) 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 depreciation and amortization disclosures in the impacted period. Total depreciation and amortization did not change as a result of this update. Geographic Information Net sales are attributed to a geographic region based on the location of the customer and for the fiscal twelve months ended December 31, 2023, January 1, 2023, and January 2, 2022 were as follows: Net Sales Fiscal Twelve Months Ended (Dollars in Millions) December 31, 2023 January 1, 2023 January 2, 2022 North America (1) $ 7,610 $ 7,418 $ 7,284 Europe, Middle East, and Africa 3,388 3,188 3,436 Asia-Pacific 3,107 3,146 3,276 Latin America 1,339 1,198 1,058 Total $ 15,444 $ 14,950 $ 15,054 (1) Includes U.S. net sales in the fiscal twelve months ended December 31, 2023, January 1, 2023, and January 2, 2022 of $ 6,767 million, $ 6,599 million, and $ 6,516 million, respectively. Long-lived assets consisting of property, plant and equipment, net of accumulated depreciation as of December 31, 2023 and January 1, 2023 as follows: Long-Lived Assets (Dollars in Millions) December 31, 2023 January 1, 2023 North America (1) $ 881 $ 784 Europe, Middle East, and Africa 558 509 Asia-Pacific 358 357 Latin America 245 170 Total $ 2,042 $ 1,820 (1) Includes U.S. long-lived assets as of December 31, 2023 and January 1, 2023 of $ 794 million and $ 670 million, respectively. Major Customers One customer accounted for approximately 12 %, 13 %, and 14 % of total net sales in the fiscal twelve months ended December 31, 2023, January 1, 2023, and January 2, 2022, respectively. 20. Restructuring During 2018, J&J announced plans to implement actions across its global supply chain that were intended to enable the Company to focus resources and increase investments in critical capabilities, technologies, and solutions necessary to 134 manufacture and supply its product portfolio of the future, enhance agility, and drive growth. These supply chain actions have included expanding its use of strategic collaborations, and bolstering its initiatives to reduce complexity, improving cost-competitiveness, enhancing capabilities, and optimizing its network. The restructuring charges associated with the program, and directly attributed to the Company, were primarily related to contractors/outside services, asset write-downs, and accelerated depreciation. The program was completed in the fiscal fourth quarter of fiscal year 2022 and as such, no costs were recognized for this program in the fiscal twelve months ended December 31, 2023. Costs have been recognized in the Consolidated Statements of Operations in the fiscal twelve months ended January 1, 2023 and January 2, 2022 as follows: Fiscal Twelve Months Ended (Dollars in Millions) January 1, 2023 January 2, 2022 Cost of sales $ 55 $ 48 Selling, general, and administrative expenses 45 68 Other expense, net, operating — 1 Total $ 100 $ 117 21. Selected Quarterly Financial Data (Unaudited) 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 GILTI from the deferred approach to the period cost approach, which resulted in adjustments to the Provisions for taxes and Income before taxes line items in the Consolidated Statements of Operations and Other comprehensive income (loss) line in the Consolidated Statements of Comprehensive Income. Selected unaudited quarterly financial data has been adjusted for the change in accounting principle for the fiscal years 2023 and 2022 and is summarized below: Fiscal Three Months Ended (Dollars in Millions Except Per Share Data) December 31, 2023 October 1, 2023 July 2, 2023 April 2, 2023 Net sales $ 3,666 $ 3,915 $ 4,011 $ 3,852 Gross profit $ 2,043 $ 2,250 $ 2,225 $ 2,125 Income before taxes $ 357 $ 585 $ 639 $ 609 Provision for income taxes $ 30 $ 147 $ 209 $ 140 Net income $ 327 $ 438 $ 430 $ 469 Basic net income per share $ 0.17 $ 0.23 $ 0.22 $ 0.27 Diluted net income per share $ 0.17 $ 0.23 $ 0.22 $ 0.27 Other comprehensive income (loss) $ 369 $ ( 240 ) $ ( 190 ) $ 216 Fiscal Three Months Ended (Dollars in Millions Except Per Share Data) January 1, 2023 October 2, 2022 July 3, 2022 April 3, 2022 Net sales $ 3,767 $ 3,789 $ 3,804 $ 3,590 Gross profit $ 2,046 $ 2,125 $ 2,158 $ 1,956 Income before taxes $ 512 $ 738 $ 775 $ 612 Provision for income taxes $ 151 $ 152 $ 170 $ 100 Net income $ 361 $ 586 $ 605 $ 512 Basic net income per share $ 0.21 $ 0.34 $ 0.35 $ 0.30 Diluted net income per share $ 0.21 $ 0.34 $ 0.35 $ 0.30 Other comprehensive income (loss) $ 750 $ ( 630 ) $ ( 817 ) $ ( 275 ) Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 135