Alcon, Inc. — FY 2009 Form 20-F
Reporting period: Fiscal year ended December 31, 2009. This is an annual report, not a standalone fourth-quarter filing; quarterly figures are included. Financial statements are prepared under U.S. GAAP. Alcon develops and sells ophthalmic pharmaceuticals, surgical equipment and devices, and consumer eye-care products in more than 180 countries.
Key financial results
| Metric | FY 2009 | FY 2008 | Change |
|---|---|---|---|
| Sales | $6.499 billion | $6.294 billion | +3.3% reported; +6.3% constant currency |
| Gross profit / margin | $4.885 billion / 75.2% | $4.822 billion / 76.6% | Margin down 1.4 percentage points |
| Operating income / margin | $2.261 billion / 34.8% | $2.213 billion / 35.2% | +2.2%; margin down 0.4 points |
| Net earnings / margin | $2.007 billion / 30.9% | $2.047 billion / 32.5% | -2.0% |
| Diluted EPS | $6.66 | $6.79 | -1.9% |
| Operating cash flow | $2.416 billion | $2.032 billion | +$384 million |
| Cash and cash equivalents | $3.007 billion | $2.449 billion | +$558 million |
| Short-term borrowings and current long-term debt | $607 million | $1.060 billion | Down $452 million |
| Long-term debt, excluding current maturities | $56 million | $61 million | Down $5 million |
| Working capital | $3.858 billion | $3.029 billion | +$829 million |
At year-end, total assets were $8.686 billion and shareholders’ equity was $5.905 billion. Cash exceeded reported short- and long-term debt by approximately $2.3 billion. The company paid $1.048 billion in dividends ($3.50 per share) and used $342 million for capital expenditures. Operating cash flow funded debt repayment, investment and shareholder distributions.
Fourth-quarter figures included in the filing
Q4 2009 sales were $1.715 billion, operating income was $537 million and net earnings were $458 million, compared with $1.498 billion, $573 million and $424 million, respectively, in Q4 2008. Thus, sales rose about 14.5%, operating income fell about 6.3%, and net earnings rose about 8.0%. Q4 2009 net earnings included $30 million of additional tax reserves; quarterly results are unaudited.
Material changes versus the prior year
- International sales were $3.585 billion, up 2.8% reported and 8.3% in constant currency. Unfavorable foreign exchange reduced total sales growth by 3.0 percentage points.
- Pharmaceutical sales grew 4.5% reported (7.6% constant currency); surgical sales grew 4.0% (7.1% constant currency). Consumer eye-care sales declined 3.2% reported and were approximately flat in constant currency.
- Glaucoma sales rose 17.4%, while infection/inflammation sales declined 5.1%, largely reflecting generic competition for TobraDex. Advanced-technology intraocular lens sales grew 29.3%; refractive sales fell 9.5% amid a weak economy.
- Gross margin declined due to generic competition, currency effects and higher royalties, partly offset by manufacturing efficiencies and product/geographic mix. SG&A fell 1.3%; R&D increased 7.4% to $665 million, or 10.2% of sales.
- Net earnings fell despite higher operating income, primarily because 2008 included a $236 million tax benefit tied to Summit Autonomous and other tax items. The 2009 effective tax rate was 13.2%, versus 1.7% in 2008.
Outlook, significant events and risks
- Ownership and proposed merger: On January 4, 2010, Novartis announced exercise of its option to buy Nestlé’s remaining approximately 156 million Alcon shares for a weighted average $180 per share, subject to regulatory approvals. On completion, Novartis would own approximately 77%. Novartis proposed a merger offering 2.8 Novartis shares per publicly held Alcon share; Alcon’s Independent Director Committee rejected the proposal on January 20, 2010, citing unacceptable price and terms. Related minority-shareholder lawsuits are pending.
- Guidance and investment: The filing gives no quantified full-year 2010 sales or earnings guidance. Management expects glaucoma products to contribute to sales growth and plans at least $3.0 billion of R&D investment over the next five years. A Singapore pharmaceutical plant was under construction, with operations planned for 2012.
- Acquisitions and restructuring: ESBATech was acquired for $150 million cash, with potential milestone payments up to $439 million; $71 million was recorded as their estimated fair value. A 260-position staffing reduction generated a $19 million pretax charge and was expected to produce approximately $40 million of annualized savings.
- Contingencies: Generic challengers are litigating patents covering key products, including Patanol/Pataday, TRAVATAN and Vigamox. Alcon also faces a Synergetics antitrust claim seeking more than $100 million and an Elan patent case involving Azopt that management says could materially affect sales and profits if adverse. Management believes aggregate litigation liability will not materially harm results, but outcomes are uncertain.
- Operating and financial risks: Risks include pricing and reimbursement pressure, generic competition and patent challenges, foreign-exchange exposure, single-source suppliers and manufacturing sites, regulatory approval delays, and product liability. Alcon self-insures almost all property, casualty, business-interruption and liability risks through captive subsidiaries. Change of control could accelerate certain equity awards, pension obligations and other liabilities; the loss of Nestlé-related synergies and services could also have an impact.
- Dividend: The board proposed a CHF 3.95 per-share dividend for shareholder approval, expected to be paid in June 2010 if approved. Swiss law requires dividends to be declared in Swiss francs.
Most important facts for investors to verify
- Regulatory status and completion terms of Novartis’s purchase of Nestlé’s stake, and any subsequent merger or litigation developments.
- Whether underlying earnings and cash generation remain strong after separating out the unusually low 2008 tax expense and the 2009 tax-reserve increase.
- Progress and outcomes in generic patent challenges, particularly for glaucoma and allergy franchises, and the resulting timing of potential generic entry.
- Whether gross-margin pressure, currency headwinds and consumer eye-care weakness persist, and whether reported growth tracks constant-currency growth.
- Funding and potential change-of-control effects on pension obligations, employee awards, credit facilities and Nestlé-provided services.
KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting as of December 31, 2009. Management reported effective disclosure controls.