Kenvue (US:KVUE)2023-11-03 20:36Part I — FINANCIAL INFORMATION Item 1. Financial Statements Kenvue's unaudited condensed consolidated financial statements detail its financial position and performance post-separation Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheet Highlights (in Millions) | Account | October 1, 2023 | January 1, 2023 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $1,062 | $1,231 | | Total current assets | $5,894 | $5,877 | | Goodwill | $8,974 | $9,185 | | Intangible assets, net | $9,487 | $9,853 | | Total Assets | $27,077 | $27,316 | | Liabilities & Equity | | | | Total current liabilities | $5,161 | $3,926 | | Long-term debt | $7,685 | $— | | Total Liabilities | $16,184 | $7,346 | | Total Equity | $10,893 | $19,970 | - Total liabilities significantly increased from $7.3 billion to $16.2 billion, primarily due to $7.7 billion in long-term debt incurred during the separation from Johnson & Johnson; total equity decreased from $20.0 billion to $10.9 billion due to distributions and reclassification14 Condensed Consolidated Statements of Operations Key Operating Results (in Millions, Except Per Share Data) | Metric | Q3 2023 | Q3 2022 | YTD 2023 | YTD 2022 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $3,915 | $3,789 | $11,778 | $11,183 | | Gross profit | $2,250 | $2,125 | $6,600 | $6,239 | | Operating income | $710 | $763 | $2,052 | $2,144 | | Interest expense, net | $100 | $— | $154 | $— | | Net income | $438 | $586 | $1,337 | $1,703 | | Diluted EPS | $0.23 | $0.34 | $0.73 | $0.99 | - For the third quarter, net sales grew 3.3% YoY to $3.9 billion, but net income decreased 25.3% to $438 million, primarily due to $100 million interest expense and higher SG&A16 Condensed Consolidated Statements of Cash Flows Cash Flow Summary (in Millions) | Cash Flow Activity | Nine Months Ended Oct 1, 2023 | Nine Months Ended Oct 2, 2022 | | :--- | :--- | :--- | | Net cash flows from operating activities | $2,218 | $1,881 | | Net cash flows used in investing activities | $(223) | $(223) | | Net cash flows used in financing activities | $(2,144) | $(1,520) | - Financing activities for the first nine months of 2023 were dominated by separation-related transactions, including $7.7 billion from Senior Notes, $4.2 billion from the IPO, and a $13.8 billion distribution to Johnson & Johnson28 Notes to Condensed Consolidated Financial Statements Detailed notes explain Kenvue's financial statements, covering separation, accounting policies, new debt, and key events like the IPO - Kenvue became a fully independent company on August 23, 2023, after Johnson & Johnson completed an exchange offer, with J&J now owning 9.5% of Kenvue's common stock35 - The company is organized into three business segments: Self Care, Skin Health and Beauty, and Essential Health31 - In connection with the separation, the company incurred significant new debt, including $7.75 billion in Senior Notes and establishing a $4.0 billion Commercial Paper Program and a $4.0 billion Revolving Credit Facility728186 - Pursuant to the Separation Agreement, Johnson & Johnson retained and indemnified Kenvue for all talc-related liabilities in the United States and Canada, while Kenvue remains responsible for liabilities outside these regions172 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Kenvue's financial performance, liquidity, and capital resources, highlighting Q3 sales growth and operating income decline Results of Operations Q3 2023 vs Q3 2022 Performance (in Millions) | Metric | Q3 2023 | Q3 2022 | Change (%) | | :--- | :--- | :--- | :--- | | Net sales | $3,915 | $3,789 | 3.3% | | Gross profit | $2,250 | $2,125 | 5.9% | | Operating income | $710 | $763 | (6.9)% | | Net income | $438 | $586 | (25.3)% | YTD 2023 vs YTD 2022 Performance (in Millions) | Metric | YTD 2023 | YTD 2022 | Change (%) | | :--- | :--- | :--- | :--- | | Net sales | $11,778 | $11,183 | 5.3% | | Gross profit | $6,600 | $6,239 | 5.8% | | Operating income | $2,052 | $2,144 | (4.3)% | | Net income | $1,337 | $1,703 | (21.5)% | - Q3 2023 organic growth was 3.6%, driven by 7.1% from price/mix, partially offset by a 3.5% decline in volume248 - YTD 2023 organic growth was 7.5%, driven by 8.4% from price/mix, partially offset by a 0.9% decline in volume267268 Segment Results Q3 2023 Net Sales by Segment (in Millions) | Segment | Q3 2023 Net Sales | YoY Change | Organic Growth | | :--- | :--- | :--- | :--- | | Self Care | $1,613 | 6.4% | 6.7% | | Skin Health and Beauty | $1,119 | (0.4)% | (0.4)% | | Essential Health | $1,183 | 3.0% | 3.8% | | Total | $3,915 | 3.3% | 3.6% | YTD 2023 Net Sales by Segment (in Millions) | Segment | YTD 2023 Net Sales | YoY Change | Organic Growth | | :--- | :--- | :--- | :--- | | Self Care | $4,914 | 10.1% | 12.0% | | Skin Health and Beauty | $3,377 | 3.5% | 5.1% | | Essential Health | $3,487 | 0.8% | 3.9% | | Total | $11,778 | 5.3% | 7.5% | Liquidity and Capital Resources - Post-separation, Kenvue's capital structure changed significantly with the issuance of $7.75 billion in Senior Notes and the establishment of a $4.0 billion Commercial Paper Program and a $4.0 billion Revolving Credit Facility282283287288 - Net cash from operating activities increased to $2.2 billion for the first nine months of 2023, up from $1.9 billion in the prior year, driven by favorable working capital changes278279 - The company declared a third-quarter dividend of $0.20 per share, paid on September 7, 2023, and a fourth-quarter dividend of $0.20 per share, payable on November 22, 2023291293 Item 3. Quantitative and Qualitative Disclosures About Market Risk Kenvue identifies primary market risks including foreign currency, inflation, interest rates, commodity prices, and credit risk - Primary market risks include foreign currency exposure, inflation on input costs, interest rate risk on new debt, commodity price risk, and customer credit risk298299301305306 - The company uses derivative instruments, such as forward foreign exchange contracts, to manage foreign currency exposure298 - In connection with the separation, the company incurred approximately $9.0 billion of new debt, including $7.75 billion in fixed-rate Senior Notes, exposing it to interest rate risk302 Item 4. Controls and Procedures Management concluded Kenvue's disclosure controls and procedures were effective, with no material changes to internal control over financial reporting - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the reporting period307 - There were no material changes to the company's internal control over financial reporting during the quarter308 Part II — OTHER INFORMATION Item 1. Legal Proceedings Legal proceedings information is incorporated by reference from Note 13, covering product liability claims and other litigation - Information regarding legal proceedings is incorporated by reference from Note 13, "Commitments and Contingencies," in the financial statements309 Item 1A. Risk Factors Risk factors are incorporated by reference from the Split-Off Prospectus, covering operational, financial, and separation-related challenges - Information regarding risk factors is incorporated by reference from the "Risk Factors" section of the company's Split-Off Prospectus310 Item 5. Other Information Kenvue adopted an Executive Severance Pay Plan, effective August 23, 2023, outlining benefits for executive officers upon termination - Kenvue adopted the Executive Severance Pay Plan on October 30, 2023, effective August 23, 2023313 - Under the plan, the CEO receives 2x base salary plus target bonus in a standard severance event, increasing to 2.5x after a change of control, with other executives receiving 1.5x and 2x respectively314317