Business context and reporting period
Bausch Health Companies Inc. is a multinational specialty pharmaceutical and medical-device company focused primarily on eye health, gastrointestinal products and dermatology. This unaudited Form 10-Q covers the three and nine months ended September 30, 2021; amounts are in U.S. dollars unless noted. The company reported five segments: Bausch + Lomb, Salix, International Rx, Ortho Dermatologics and Diversified Products.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $2.111 billion | $2.138 billion | $6.238 billion | $5.814 billion |
| Operating income | $574 million | $460 million | $83 million | $681 million |
| Net income (loss) attributable to Bausch Health | $188 million | $71 million | $(1.017) billion | $(407) million |
| Diluted EPS | $0.52 | $0.20 | $(2.84) | $(1.15) |
| Operating cash flow | Not separately presented for the quarter | $1.402 billion | $717 million |
- Q3 revenue fell 1% year over year; nine-month revenue rose 7%, reflecting volume recovery as COVID-related restrictions eased and favorable foreign exchange, partly offset by lower realized pricing and the Amoun divestiture.
- Nine-month operating income fell $598 million. Major factors included a $469 million Ortho Dermatologics goodwill impairment, $213 million of asset impairments and held-for-sale losses, higher SG&A and litigation-related expense. Nine-month net loss also reflects these items and lower tax benefits versus 2020.
- Q3 operating income improved by $114 million, including a favorable $201 million year-over-year change in other income/expense, primarily due to $213 million of litigation insurance recoveries, partly offset by the Amoun sale loss.
- Cash from operating activities increased $685 million year over year for the nine-month period. Investing activities provided $489 million, including $669 million of net proceeds from asset and business sales, primarily Amoun. Financing activities used $1.788 billion, principally for debt repayments.
- At September 30, cash and cash equivalents were $690 million; restricted cash was $1.214 billion, including $1.210 billion held in escrow for the U.S. securities litigation settlement. Current assets were $5.324 billion and current liabilities $5.437 billion.
- Long-term debt, net of discounts and issuance costs, was $22.358 billion; contractual principal was $22.585 billion. The weighted-average stated interest rate was 5.91%. Debt principal maturities include $9.723 billion in 2025. The company had $1.171 billion of revolver availability at September 30, before an October net draw of $290 million.
Material changes versus the prior comparable period
- For the first nine months, segment revenue increased at Bausch + Lomb (12%), Salix (10%), International Rx (5%) and Ortho Dermatologics (7%); Diversified Products declined 11%. Segment profit rose 6% overall, but its margin declined to 44% from 45%.
- Q3 segment revenue rose at Bausch + Lomb and Salix, but fell 12% at International Rx and 19% at Diversified Products. Bausch + Lomb segment profit declined 10% in the quarter, while Salix segment profit rose 5%.
- SG&A increased 12% year to date, including higher separation-related and IPO-related costs and the return of selling and promotional spending cut during 2020. R&D rose 5%.
- The company completed the Amoun sale on July 26, 2021, for approximately $740 million gross consideration. It used proceeds and cash on hand for debt repayment. It also refinanced $1.6 billion of 7.00% secured notes due 2024 with 4.875% secured notes due 2028.
Outlook, risks and unusual items
- Management expected a gradual recovery, with revenue likely returning to pre-pandemic levels for many businesses and geographies in 2021 and the remainder in 2022. It cautioned that the remainder-of-2021 revenue growth rate would likely be below the 7% year-to-date rate. No numerical full-year revenue or earnings guidance is provided in the filing.
- The company expected operating expenses for the remainder of 2021 to exceed the comparable 2020 period as it restored promotional and selling activity. Management stated that cash and operating cash generation should meet liquidity needs for at least 12 months and service debt through 2024; it expected covenant compliance and debt-service capacity over the following 12 months.
- Bausch Health intended to pursue a Solta Medical IPO as early as December 2021 or January 2022, and a Bausch + Lomb IPO as early as 30 days afterward, subject to market conditions and approvals. The separation was expected after customary lock-ups and achievement of targeted debt leverage ratios. Structure, capitalization and timing remained unsettled; completion was not assured. Proceeds were intended, to the extent possible, for debt reduction.
- Legal exposure remains significant: accrued current loss contingencies were $2.061 billion. The $1.210 billion U.S. securities settlement remained subject to an appeal at the reporting date. A proposed $300 million Glumetza antitrust class settlement had preliminary court approval; approximately $300 million was deposited into escrow in October. The filing says $1.738 billion of accrued contingencies had been paid or was expected to be payable during the remainder of 2021, but timing for the balance was not reliably estimable.
- The IRS had proposed disallowing a 2017 U.S. capital loss deduction. The company estimated a worst-case additional tax liability of up to $2.1 billion, excluding penalties and interest, if it were unsuccessful; it intended to contest the matter and recorded no provision. Unrecognized tax benefits totaled $1.117 billion.
- A third-party sterilization supplier data issue prompted containment or recall of certain lens-care products. The company reported $8 million of manufacturing variances and $6 million of returns, said the affected products were not considered unsafe, and expected no additional charges at that time.
- Principal risks include substantial debt and covenant compliance, litigation and tax outcomes, generic competition and pricing pressure, COVID-19 and variant-related disruption, inflation and interest-rate exposure, supplier and manufacturing disruption, and execution and costs of the proposed transactions. Management also discontinued providing long-term 2019–2022 CAGR estimates, saying the planned transactions made them no longer meaningful.
Most important facts for investors to verify
- Cash availability: distinguish $690 million of cash and equivalents from restricted cash, including the $1.210 billion litigation escrow, and track the October revolver draw and settlement deposits.
- Debt reduction and refinancing progress, the 2025 maturity concentration, interest costs and continued compliance with the 4.00:1.00 first-lien net leverage covenant.
- Final court approval and payment status of the Glumetza settlement, the securities-settlement appeal and the timing and amount of other legal liabilities.
- Whether the Solta and Bausch + Lomb transactions proceed, their final structure, capitalization, leverage targets, costs and use of proceeds.
- Revenue and margin trends after pandemic recovery, including generic erosion, pricing deductions, the supplier issue and the performance of Ortho Dermatologics and Diversified Products.
- Developments in the IRS capital-loss dispute and potential effects of tax-law changes on the company’s tax liability.