Kenvue Inc. — Q3 2023 Form 10-Q
Reporting period: Fiscal quarter and nine months ended October 1, 2023; comparisons are to periods ended October 2, 2022. Unaudited results. Kenvue completed its IPO in May and became fully independent after J&J’s exchange offer in August. Prior-period results reflect operations within J&J, including allocated corporate costs, so comparisons are not wholly on a standalone basis.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $3.915B | $3.789B | $11.778B | $11.183B |
| Gross profit | $2.250B | $2.125B | $6.600B | $6.239B |
| Gross margin | 57.5% | 56.1% | 56.0% | 55.8% |
| Operating income | $710M | $763M | $2.052B | $2.144B |
| Net income | $438M | $586M | $1.337B | $1.703B |
| Diluted EPS | $0.23 | $0.34 | $0.73 | $0.99 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $2.218B | $1.881B |
| Capital expenditures | Not stated for quarter | Not stated for quarter | $246M | $216M |
Q3 sales rose 3.3%; organic growth was 3.6%, with 7.1% price/mix offset by a 3.5% volume decline. Nine-month sales increased 5.3%; organic growth was 7.5%, comprising 8.4% price/mix and a 0.9% volume decline. Foreign exchange reduced reported sales growth by $13M in Q3 and $242M over nine months.
Q3 SG&A was $1.531B, up 11.3%, and 39.1% of sales; higher standalone-function and transition-service costs and $133M of separation costs contributed. Nine-month SG&A rose 11.1% to $4.555B, including $333M of separation costs, up $224M year over year. Net interest expense was $100M in Q3 and $154M for nine months, versus none in the prior-year periods. Nine-month effective tax rate was 27.1%, versus 19.9%.
Segment sales and adjusted operating income (management’s non-GAAP segment measure): Q3 Self Care sales were $1.613B and adjusted operating income $583M; Skin Health and Beauty $1.119B and $167M; Essential Health $1.183B and $309M. Nine-month segment adjusted operating income was $1.741B, $517M, and $770M, respectively. Q3 Skin Health and Beauty income fell 32.1%; nine-month Self Care income rose 12.0%, while Skin Health and Beauty fell 16.1% and Essential Health fell 6.2%.
Balance sheet, debt and liquidity
- At October 1, cash and equivalents were $1.062B; current assets were $5.894B and current liabilities $5.161B.
- Total debt was $8.198B: $7.685B of long-term debt and $513M of commercial paper. Senior notes had a 5.1% weighted-average effective rate; commercial paper’s rate was 5.2% and average maturity was under 90 days.
- The $4.0B revolving credit facility was undrawn. Kenvue reported compliance with debt covenants and no defaults.
- Nine-month operating cash flow was $2.218B; investing cash outflow was $223M and financing cash outflow was $2.144B. Financing reflected the $13.8B distribution to J&J, partly offset by IPO and debt proceeds. Ending cash was $1.062B.
- Management believes cash, operating cash generation, borrowing capacity and capital-market access are adequate for obligations, including for at least the next 12 months. The filing cautions that future financing may not be available on acceptable terms.
Changes, outlook and risks
- Revenue growth was led by Self Care. Q3 volume fell overall despite positive Self Care volume; Skin Health and Beauty faced China softness and effects of prior U.S. product discontinuations. Essential Health growth relied on pricing and premiumization amid volume declines.
- Gross margin improved, supported by pricing and supply-chain savings, despite inflation and unfavorable transactional currency effects. Management said higher energy and labor costs persist.
- Standalone transition costs and new borrowing weighed on reported earnings. Management expects non-recurring separation costs to continue through at least fiscal 2024. No specific sales or earnings guidance is provided in this filing.
- In Q3 Kenvue changed its GILTI tax accounting from the deferred method to the period-cost method. The change increased reported nine-month net income by $127M versus the prior accounting method; the filing also recasts comparative tax effects.
- Material litigation and product risks include new U.S. and Canadian claims following an FDA advisory committee’s conclusion that available data do not support oral phenylephrine’s efficacy at the recommended dose; the FDA had not yet decided on regulatory action. Kenvue says potential liability cannot currently be reasonably estimated. The filing also discusses acetaminophen-related claims and Zantac-related indemnity disputes.
- J&J retains and indemnifies U.S. and Canadian talc-related liabilities under the separation agreement; Kenvue remains responsible for talc-related liabilities outside those countries. Kenvue says it cannot estimate potential liability for certain proceedings and that one or more matters could materially affect results or cash flows in a period.
- Other cited exposures include inflation, foreign exchange, retailer concentration, supply-chain disruption, cybersecurity, regulatory change, and potential future effects of global minimum-tax rules. A $0.20-per-share Q4 dividend was declared after quarter-end.
Investor verification priorities
- Track whether organic growth converts to volume growth, particularly in Skin Health and Beauty and Essential Health, and whether pricing remains sustainable.
- Assess the persistence and cash impact of separation and standalone costs, transition-service arrangements, and the expected duration of J&J-related dependencies.
- Review debt service, commercial-paper refinancing, interest costs, and liquidity relative to the dividend and future investment needs.
- Monitor outcomes and potential exposure from phenylephrine, acetaminophen, Zantac, and international talc matters; verify the scope and collectability of J&J indemnification.
- Separate operating trends from accounting and unusual items, including the GILTI accounting change, separation costs, currency impacts, and share-award conversion effects.