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Kenvue Separation | 9 Months Ended
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Oct. 01, 2023
Discontinued Operations and Disposal Groups [Abstract] |
Kenvue Separation | NOTE 12— KENVUE SEPARATION On May 8, 2023, Kenvue, completed an initial public offering (the IPO) resulting in the issuance of 198,734,444 shares of its common stock, par value $0.01 per share (the “Kenvue Common Stock”), at an initial public offering of $22.00 per share for net proceeds of $4.2 billion. The excess of the net proceeds from the IPO over the net book value of the Johnson & Johnson divested interest was $2.5 billion and was recorded to additional paid-in capital. As of the closing of the IPO, Johnson & Johnson owned approximately 89.6% of the total outstanding shares of Kenvue Common Stock and at July 2, 2023, the non-controlling interest of $1.3 billion associated with Kenvue was reflected in equity attributable to non-controlling interests in the consolidated balance sheet in the fiscal second quarter. On August 23, 2023, Johnson & Johnson completed the disposition of an additional 80.1% ownership of Kenvue Common Stock through an exchange offer, which resulted in Johnson & Johnson acquiring 190,955,436 shares of the Company’s common stock in exchange for 1,533,830,450 shares of Kenvue Common Stock. The $31.4 billion of Johnson & Johnson common stock received in the exchange offer is recorded in Treasury stock. Following the exchange offer, the Company owns 9.5% of the total outstanding shares of Kenvue Common Stock that was recorded in other assets within continuing operations at the fair market value of $4.3 billion as of August 23, 2023. Johnson & Johnson divested net assets of $11.6 billion as of August 23, 2023, and the accumulated other comprehensive loss attributable to the Consumer Health business at that date was $4.3 billion. Additionally, at the date of the exchange offer, Johnson & Johnson decreased the non-controlling interest by $1.2 billion to record the deconsolidation of Kenvue. This resulted in a non-cash gain on the exchange offer of $21.0 billion that was recorded in Net earnings from discontinued operations, net of taxes in the consolidated statements of earnings for the fiscal third quarter of 2023. This one-time gain includes a gain of $2.8 billion on the Kenvue Common Stock retained by Johnson & Johnson. The gain on the exchange offer qualifies as a tax-free transaction for U.S. federal income tax purposes. Also in connection with the separation, Johnson & Johnson and Kenvue entered into a separation agreement and also entered into various other agreements that provide for certain transactions to effect the transfer of the assets and liabilities of the Consumer Health business to Kenvue and to govern various interim and ongoing relationships between Kenvue and Johnson & Johnson following the completion of the Kenvue IPO, including transition services agreements (TSAs), transition manufacturing agreements (TMAs), trademark agreements, intellectual property agreements, an employee matters agreement, and a tax matters agreement. Under the TSAs, Johnson & Johnson will provide Kenvue various services and, similarly, Kenvue will provide Johnson & Johnson various services. The provision of services under the TSAs generally will terminate within 24 months following the Kenvue IPO. Additionally, Johnson & Johnson and Kenvue entered into TMAs pursuant to which Johnson & Johnson will manufacture and supply to Kenvue certain products and, similarly, Kenvue will manufacture and supply to Johnson & Johnson certain products. The terms of the TMAs range in initial duration from 3 months to 5 years. Amounts related to the TSAs and TMAs included in the consolidated statements of earnings were immaterial for the fiscal third quarter and fiscal nine months ended October 1, 2023. Additionally, the amounts due to and from Kenvue for the above agreements was not material as of October 1, 2023. The results of the Consumer Health business (previously reported as a separate business segment), as well as the associated gain, have been reflected as discontinued operations in the Company’s consolidated statements of earnings as Net earnings from discontinued operations, net of taxes through August 23, 2023, the date of the exchange offer. Prior periods have been recast to reflect this presentation. As a result of the separation of Kenvue, Johnson & Johnson incurred separation costs of $330 million and $912 million in the fiscal third quarter and fiscal nine months ended October 1, 2023, respectively, and $249 million and $619 million in the fiscal third quarter and fiscal nine months ended October 2, 2022, respectively, which are also included in Net earnings from discontinued operations, net of taxes. These costs were primarily related to external advisory, legal, accounting, contractor and other incremental costs directly related to separation activities. As of January 1, 2023, the assets and liabilities associated with the Consumer Health business were classified as assets and liabilities of discontinued operations in the consolidated balance sheets. Details of Net Earnings from Discontinued Operations, net of taxes are as follows:
|  | Fiscal Third Quarter Ended |  | Fiscal Nine Months Ended
(Dollars in Millions) |  | October 1, 2023(1) |  | October 2, 2022 |  | October 1, 2023(1) |  | October 2, 2022
Sales to customers |  | $ | 2,173 |  |  | 3,795 |  |  | 10,036 |  |  | 11,186 |
Cost of products sold |  | 911 |  |  | 1,635 |  |  | 4,369 |  |  | 4,812 |
Gross profit |  | 1,262 |  |  | 2,160 |  |  | 5,667 |  |  | 6,374 |
Selling, marketing and administrative expenses |  | 584 |  |  | 1,114 |  |  | 3,085 |  |  | 3,346 |
Research and development expense |  | 24 |  |  | 112 |  |  | 258 |  |  | 337 |
Interest Income |  | (37) |  |  | — |  |  | (117) |  |  | — |
Interest expense, net of portion capitalized (Note 4) |  | 67 |  |  | — |  |  | 199 |  |  | — |
Other (income) expense, net |  | 406 |  |  | 267 |  |  | 1,018 |  |  | 649 |
Gain on separation of Kenvue |  | (20,984) |  |  | — |  |  | (20,984) |  |  | — |
Restructuring |  | — |  |  | 17 |  |  | — |  |  | 37 |
Earnings from Discontinued Operations Before Provision for Taxes on Income |  | 21,202 |  |  | 650 |  |  | 22,208 |  |  | 2,005 |
(Benefit from)/Provision for taxes on income (Note 5) |  | (517) |  |  | 502 |  |  | 298 |  |  | 727 |
Net earnings from Discontinued Operations |  | 21,719 |  |  | 148 |  |  | 21,910 |  |  | 1,278 |
(1) The Company ceased consolidating the results of the Consumer Health business on August 23, 2023, the date of the exchange offer, but continued to reflect any separation costs incurred as part of discontinued operations through the end of the fiscal third quarter. The following table presents depreciation, amortization and capital expenditures of the discontinued operations related to Kenvue:
|  | Fiscal Nine Months Ended
(Dollars in Millions) |  | October 1, 2023 |  | October 2, 2022
Depreciation and Amortization |  | 383 |  |  | 482 |
Capital expenditures |  | 162 |  |  | 178 |
Details of assets and liabilities of discontinued operations are as follows:
| January 1, 2023 |
Assets |  |
Current assets |  |
Cash and cash equivalents | $ | 1,238 |  |
Accounts receivable trade, less allowances for doubtful accounts | 2,121 |  |
Inventories | 2,215 |  |
Prepaid expenses and other receivables | 256 |  |
Total current assets of discontinued operations | 5,830 |  |
Property, plant and equipment, net | 1,821 |  |
Intangible assets, net | 9,836 |  |
Goodwill | 9,184 |  |
Deferred taxes on income | 176 |  |
Other assets | 390 |  |
Total noncurrent assets of discontinued operations | $ | 21,407 |  |
Liabilities |  |
Loans and notes payable | $ | 15 |  |
Accounts payable | 1,814 |  |
Accrued liabilities | 737 |  |
Accrued rebates, returns and promotions | 838 |  |
Accrued compensation and employee related obligations | 279 |  |
Accrued taxes on income | (93) |  |
Total current liabilities of discontinued operations | 3,590 |  |
Long-term debt | 2 |  |
Deferred taxes on income | 2,383 |  |
Employee related obligations | 225 |  |
Other liabilities | 291 |  |
Total noncurrent liabilities of discontinued operations | $ | 2,901 |  |

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