Kenvue Inc. — Q2 2023 Form 10-Q
Reporting period: Fiscal quarter ended July 2, 2023; comparisons are with the fiscal quarter ended July 3, 2022. Six-month figures cover the periods ended July 2, 2023 and July 3, 2022. Amounts are U.S. dollars. Kenvue sells consumer health products in Self Care, Skin Health and Beauty, and Essential Health.
Business context
Kenvue completed its IPO on May 8, 2023, raising net proceeds of approximately $4.2 billion, and distributed approximately $13.8 billion to Johnson & Johnson (J&J) in connection with the separation. At IPO closing, J&J retained approximately 89.6% ownership. J&J initiated an exchange offer on July 24, 2023, allowing its shareholders to exchange J&J shares for Kenvue shares. Pre-IPO financial results reflect the business as part of J&J, including allocated corporate costs; these allocations may not represent standalone costs.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $4.011B | $3.804B | $7.863B | $7.394B |
| Gross profit | $2.225B | $2.158B | $4.350B | $4.114B |
| Operating income | $702M | $770M | $1.342B | $1.381B |
| Net income | $430M | $604M | $760M | $1.132B |
| Diluted EPS | $0.23 | $0.35 | $0.43 | $0.66 |
| Operating cash flow | Not separately reported | Not separately reported | $1.544B | $1.145B |
Q2 sales increased 5.4%; organic growth was 7.7%, offset by $87 million of unfavorable currency impact. Six-month sales increased 6.3%; organic growth was 9.4%, offset by $229 million of unfavorable currency impact. Growth primarily reflected price/mix, stronger Pain Care and cough/cold demand, and sun-care gains. Calculated gross margin was approximately 55.5% in Q2 (56.7% prior year); operating margin was approximately 17.5% (20.2%); net margin was approximately 10.7% (15.9%). For the six months, gross margin was approximately 55.3% (55.6%), operating margin 17.1% (18.7%), and net margin 9.7% (15.3%).
Q2 cost of sales rose 8.5%, faster than sales, with commodity inflation partly offset by supply-chain savings and favorable currency. SG&A rose 10.7%; standalone enterprise costs and $102 million of separation-related costs contributed. Six-month separation-related costs were $200 million, versus $59 million a year earlier; management expects such costs to continue through at least fiscal 2024. Higher interest expense and taxes also weighed on earnings. Six-month tax expense included a $188 million valuation allowance against deferred tax assets for future foreign tax credits.
Segment results
| Segment | Q2 sales | Q2 adjusted operating income | Six-month sales | Six-month adjusted operating income |
|---|---|---|---|---|
| Self Care | $1.661B (+12.2%) | $576M (+9.9%) | $3.301B (+12.1%) | $1.158B (+16.0%) |
| Skin Health and Beauty | $1.147B (+1.9%) | $201M (−17.3%) | $2.258B (+5.6%) | $350M (−5.4%) |
| Essential Health | $1.203B (+0.5%) | $250M (−20.4%) | $2.304B (−0.3%) | $461M (−17.7%) |
Segment adjusted operating income is a non-GAAP measure. Higher raw-material costs pressured Skin Health and Beauty and Essential Health. Essential Health volume declines were attributed in part to suspension of certain personal-care product supply in Russia; Self Care benefited from respiratory illness demand and, for the six months, supply replenishment.
Financial position, debt and liquidity
At July 2, 2023, cash and cash equivalents were $1.231 billion; current assets were $6.219 billion and current liabilities $5.299 billion. Total debt was $8.436 billion, comprising $7.684 billion of long-term debt and $752 million of commercial paper. Senior notes carry stated coupons of 4.90%–5.50%, with maturities from 2025 through 2063; commercial paper’s weighted-average effective rate was 5.2% and weighted-average maturity was under 90 days. The $4.0 billion revolving credit facility was undrawn. The company reported covenant compliance and no defaults.
Six-month operating cash flow increased to $1.544 billion, mainly due to working-capital timing, including higher payables and accrued liabilities and lower inventory. Capital expenditures were $132 million. Investing cash flow was an outflow of $118 million; financing cash flow was an outflow of $1.418 billion, reflecting the separation distribution and IPO/debt proceeds. Management believes cash, operating cash generation, borrowing capacity, and capital-market access will meet obligations for at least the next 12 months, while noting future financing on acceptable terms is not assured.
Outlook, risks and unusual items
- The filing provides no specific full-year revenue or earnings guidance. Management expects to invest in brands, digital capabilities, talent, and growth, and use cash flows for debt repayment and general corporate purposes.
- Inflation in raw materials, packaging, transportation, and other supply-chain inputs remains a risk; pricing and efficiency initiatives have partly offset it. Foreign exchange movements also reduced reported sales.
- Key risks include competition and private-label products, reliance on large retailers, supply-chain disruption, changing consumer preferences, cybersecurity and privacy, product safety and reputation, and substantial indebtedness.
- Legal matters include Tylenol claims alleging prenatal acetaminophen exposure caused developmental disorders; Kenvue says it cannot reasonably estimate potential liability at this stage. The filing also discusses Zantac-related indemnification claims and other product and environmental litigation. Legal accruals are recorded where probable and estimable, but possible losses beyond accrued amounts could not be estimated.
- J&J retained and agreed to indemnify U.S. and Canadian talc-related liabilities; Kenvue remains responsible for relevant talc liabilities outside those countries. Management does not expect the talc-powder transition to cornstarch products to have a material impact.
- A $0.20-per-share third-quarter dividend was declared on July 20, payable September 7, 2023. Disclosure controls were reported effective.
Important facts for investors to verify
- Whether standalone costs, including separation expenses and transition-service arrangements with J&J, continue to affect margins as anticipated.
- Debt-service capacity and refinancing exposure, including commercial-paper maturities, interest costs, and compliance with debt covenants.
- Whether working-capital-supported operating cash flow is sustainable, and how capital spending and the dividend affect liquidity.
- Progress and terms of the J&J exchange offer, remaining deferred-business transfers, and the impact of tax and separation agreements.
- Developments in Tylenol, Zantac, and other litigation, including any changes in indemnification coverage, accruals, or estimable exposure.