Alcon Inc. — FY2019 Form 20-F
Period and basis: Fiscal year ended December 31, 2019; this is an annual report, not a standalone Q4 filing, and the filing does not provide clear standalone Q4 results. Financial statements are in U.S. dollars and prepared under IFRS as issued by the IASB. Alcon became independent after its April 9, 2019 spin-off from Novartis; 2018 and earlier results are carved-out historical statements and may not represent results as a standalone company.
Key financial results
Amounts below are $ millions except per-share data and percentages.
| Metric | 2019 | 2018 | Change / context |
|---|---|---|---|
| Net sales to third parties | 7,362 | 7,149 | +3% reported; +5% constant currency |
| Gross profit | 3,662 | 3,192 | Gross margin 49.7%, versus 44.6% |
| Operating income/(loss) | (187) | (248) | Operating margin (2.5%), versus (3.5%) |
| Core operating income (non-IFRS) | 1,265 | 1,212 | +4% reported; +11% constant currency |
| Core operating margin (non-IFRS) | 17.2% | 17.0% | Up 0.2 percentage points |
| Net income/(loss) | (656) | (227) | Basic and diluted EPS: $(1.34), versus $(0.46) |
| Core net income / core diluted EPS (non-IFRS) | 925 / $1.89 | 974 / $2.00 | Core EPS down 6% reported; +1% constant currency |
| Operating cash flow | 920 | 1,140 | Down $220 |
| Capital expenditures: property, plant and equipment | 553 | 524 | — |
| Free cash flow (non-IFRS) | 367 | 616 | Down $249 |
| Cash and cash equivalents | 822 | 227 | At year-end |
| Total financial debt | 3,479 | 47 | At year-end |
| Net debt/(liquidity) (non-IFRS) | 2,656 net debt | 152 net liquidity | Debt increased primarily with spin-off financing |
Segment sales: Surgical generated $4,174 million (+4% reported; +7% constant currency), including implantables $1,210 million, consumables $2,304 million and equipment/other $660 million. Vision Care generated $3,188 million (+1% reported; +3% constant currency), including contact lenses $1,969 million and ocular health $1,219 million. Surgical segment contribution was $923 million, up 14% reported; Vision Care contribution was $563 million, down 5% reported. Segment contribution is not the same as IFRS operating income.
Liquidity and obligations: Current financial debt was $261 million and non-current financial debt $3,218 million. The $1.0 billion committed revolving facility was undrawn at year-end. Contractual cash obligations totaled $6,175 million, including $3,508 million of financial debt, $1,083 million of interest and $449 million of lease payments. Management stated it believed liquidity was adequate. These amounts are not a measure of immediately payable obligations.
Material changes and unusual items
- Sales rose 5% at constant currency. Surgical growth reflected advanced-technology IOL demand, including PanOptix launches, and consumables pull-through from the installed equipment base. Vision Care growth benefited from DAILIES TOTAL1 and Systane, partly offset by other contact lens declines and lower contact lens care demand as consumers shifted to daily lenses.
- IFRS operating loss narrowed to $187 million from $248 million, but remained a loss. 2019 included $237 million of separation costs, $72 million of spin-readiness costs, $52 million of transformation costs, $1,040 million of intangible amortization and $32 million of legal items among adjustments used to calculate core operating income.
- Core net income declined despite higher core operating income, mainly because of higher interest and tax expense. Interest expense rose to $113 million from $24 million as Alcon incurred standalone debt. Tax expense was $324 million despite a pretax loss; the year included $304 million of non-cash tax expense from Swiss tax reform, plus other tax remeasurements and items.
- 2018 included a $282 million net pre-tax CyPass withdrawal charge: $337 million impairment and $11 million withdrawal costs, partly offset by a $66 million contingent-consideration liability reduction. No intangible-asset impairment charge was recorded in 2019.
- Operating cash flow fell to $920 million, primarily reflecting separation and spin-readiness costs, a legal settlement and interest payments. Investing outflows were $1,011 million, including $553 million of property, plant and equipment purchases, $123 million of intangible purchases and $283 million for PowerVision.
- Alcon refinanced $2.0 billion of bridge and term loans in September 2019 with senior notes due 2026, 2029 and 2049, carrying coupons of 2.750%, 3.000% and 3.800%, respectively. Remaining facilities borrow at variable benchmark rates; the filing identifies LIBOR transition as a risk.
Outlook, management commentary and risks
- Management described a growth plan focused on near-term product launches, innovation, market expansion and operating efficiency. Alcon estimated the markets it serves would grow approximately 4%–5% annually from 2019 to 2024; these are market estimates, not company financial guidance.
- The multi-year transformation program announced in November 2019 is expected to incur approximately $300 million in charges by 2023. Management also stated expected annualized savings of $200–$225 million by 2023. Separation costs were previously estimated at $500 million. Results and savings are uncertain.
- Research and development spending was $656 million, or 9% of sales. Alcon reported more than 110 pipeline projects, over 35 with positive proof of concept or under regulatory review.
- Management identified COVID-19 outbreak risks in China and potentially elsewhere, including reduced surgical procedures and customer demand; the longer-term impact was difficult to assess at the filing date. Other material risks include pricing and reimbursement pressure, competition, product quality or recalls, supply-chain and single-source supplier dependence, regulatory approval, ERP implementation, cybersecurity, foreign exchange, debt service, and the transition to standalone operations.
- Significant proceedings disclosed include U.S. DOJ and SEC investigations concerning accounting, internal controls and business practices in Asia and Russia, and contact-lens antitrust class actions. Novartis agreed to indemnify Alcon for defined direct monetary liabilities within the current scope of the Asia/Russia investigation. The filing does not state a clear possible-loss amount for these proceedings.
- A Swiss Fribourg tax-incentive claw-back could be up to CHF 1.3 billion if specified operating, tax-residency and employment conditions are not met; the obligation declines annually and is due to expire December 31, 2022. The filing says Alcon intends to comply.
- The Board proposed a CHF 0.19-per-share dividend for shareholder approval at the 2020 AGM; no dividend had been paid since Alcon’s formation. Subsequent to year-end, the revolving facility was extended to March 2025 and remained undrawn as of February 25, 2020.
Most important facts for investors to verify
- Review the full audited statements and notes, especially the reconciliation of IFRS results to non-IFRS core measures and the treatment of recurring amortization and separation/transformation costs.
- Confirm the stand-alone run rate of corporate, IT and separation expenses, and whether the stated transformation savings and timetable are being achieved.
- Track cash conversion, capital spending, free cash flow, debt repayment capacity and variable-rate exposure, including the planned LIBOR replacement.
- Assess whether Surgical growth can offset slower Vision Care growth, and monitor product launches, daily-lens mix, pricing and margins.
- Monitor developments and potential financial exposure from the Asia/Russia investigation, contact-lens litigation and the Swiss tax-incentive conditions.
- Consider comparability limitations: pre-spin results were carved out from Novartis, and the 2019 financial statements received a 2019 audit opinion while prior-year statements were audited by the predecessor firm.