Bausch & Lomb Corp quarterly report, Q2 FY2023

Bausch + Lomb Corporation — Q2 2023 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2023; comparisons are with the same 2022 periods. Amounts are in U.S. dollars unless stated otherwise. The company is a global eye-health business with Vision Care, Pharmaceuticals and Surgical segments. Bausch Health Companies (BHC) held approximately 88.5% of its shares as of July 28, 2023.

Financial performance and position

Metric	Q2 2023	Q2 2022	Six months 2023	Six months 2022
Revenue	$1,035m	$941m	$1,966m	$1,830m
Operating income	$43m	$56m	$41m	$110m
Net income (loss) attributable to Bausch + Lomb	$(32)m	$5m	$(122)m	$25m
EPS, basic and diluted	$(0.09)	$0.01	$(0.35)	$0.07
Operating cash flow	Not separately presented	Not separately presented	$(80)m	$159m

• Q2 revenue rose 10% (12% on a constant-currency basis); first-half revenue rose 7% (10% constant currency). Growth reflected higher volumes and pricing, partly offset by unfavorable foreign exchange.
• Q2 operating margin was approximately 4.2%, versus 6.0% a year earlier; first-half operating margin was approximately 2.1%, versus 6.0%. Q2 net margin was approximately (3.1%); first-half net margin approximately (6.2%).
• Q2 segment revenue: Vision Care $646m (+10%), Pharmaceuticals $194m (+15%) and Surgical $195m (+6%). First-half segment revenue was $1,233m (+7%), $355m (+10%) and $378m (+6%), respectively. First-half segment profit was $321m for Vision Care, $114m for Pharmaceuticals and $20m for Surgical.
• At June 30, cash and cash equivalents were $384m; current assets $2,315m and current liabilities $1,325m (current ratio approximately 1.75). Total assets were $11,315m and total equity $7,030m.
• Total debt was approximately $2,629m, including $2,475m principal outstanding under the term facility and $200m drawn on the revolver; reported long-term debt was $2,604m plus $25m current. Cash less total debt was approximately $2,245m. Weighted-average stated borrowing rate was 8.51%; term-loan rate was 8.59%.
• Six-month investing cash outflow was $92m and financing cash inflow was $181m. Cash and restricted cash totaled $392m at period end. Operating cash use included higher receivables and inventory, payment timing, standalone-company costs and increased interest payments.

Material changes and management commentary

• Revenue gains were outweighed below the operating line by higher SG&A, restructuring and other expenses, interest expense and foreign-exchange losses. Q2 interest expense increased to $58m from $44m; first-half expense increased to $108m from $64m. First-half SG&A increased $124m to $835m, including standalone-company dis-synergies, business transformation and higher distribution costs.
• Cost of goods sold increased 11% in Q2 and 9% in the first half. First-half cost of goods sold was 40.2% of product sales, compared with 39.8% a year earlier; management cited inflation, supply shortages, ramp-up costs for daily SiHy lenses and distribution-system disruption.
• A system upgrade at the Lynchburg distribution facility slowed order processing and weighed on contact-lens sales. Management expected processing to normalize in the second half of 2023.
• Six-month operating cash flow deteriorated by $239m year over year. Management cited working-capital needs, increased inventory, standalone expenses and interest payments.
• The company was in compliance with its debt financial covenant at June 30 and expected to remain compliant and meet debt service obligations for the following 12 months, based on its forecast. Revolver availability was $275m at June 30; by August 2, borrowings had risen to $250m and availability declined to $225m.

Outlook, transactions and risks

• The filing provides no formal full-year revenue or earnings guidance. Management expected supply-chain challenges to continue through 2023, with uncertain duration and potential effects on sales and margins. It cited inflation, pricing constraints, foreign exchange, interest rates, China demand and Russia-related sanctions as risks.
• Management planned to launch MIEBO in the U.S. in Q3 2023 following FDA approval in May. A $45m milestone payment was accrued at June 30, payable in connection with launch.
• The company agreed to acquire XIIDRA and other ophthalmology assets from Novartis for $1.75bn upfront, plus potential milestones of up to $750m. Closing was expected by year-end 2023, subject to regulatory and other conditions; the company intended to finance the upfront payment with new debt. The filing identifies a possible $100m reverse termination fee in certain circumstances and risks from added leverage, integration and failure to obtain approvals or expected benefits.
• After quarter-end, the company completed its acquisition of the Blink product line for $107m. The AcuFocus acquisition closed in January 2023 for $35m upfront, with possible additional sales-based payments.
• The planned separation from BHC remained subject to targeted debt leverage ratios, approvals and other conditions; completion and timing were not assured. The filing identifies potential separation costs and dis-synergies.
• Legal matters include generic-pricing antitrust litigation, intellectual-property disputes and product-liability cases. Certain Shower to Shower claims are subject to indemnification by Johnson & Johnson; related bankruptcy proceedings and injunctions were evolving. The company recorded $4m in accrued current loss contingencies and said outcomes or losses for other matters could not be reasonably predicted or estimated.
• Other notable items: the Canadian deferred-tax valuation allowance rose to $132m from $54m at year-end; no goodwill impairment was recorded. Disclosure controls were assessed as effective, with no material change in internal control reported for the quarter.

Key facts investors should verify

• Whether Lynchburg order-processing performance normalized and contact-lens demand recovered in the second half.
• Whether revenue growth translated into improved operating margins and operating cash flow, given higher standalone costs, inflation, chargebacks and supply constraints.
• Debt financing, closing conditions, total purchase economics and integration progress for XIIDRA; also the effects of the $107m Blink purchase and resulting leverage.
• Revolver utilization, borrowing costs, covenant headroom and ability to fund debt service, capital spending and acquisition commitments.
• Progress and potential liabilities tied to the BHC separation, litigation and indemnification arrangements, as well as the timing and commercial uptake of MIEBO.