Bausch + Lomb Corporation — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Amounts are U.S. dollars. Bausch + Lomb is a global eye-health company with Vision Care, Ophthalmic Pharmaceuticals and Surgical segments. It completed its IPO in May but remained controlled by Bausch Health Companies Inc. (BHC), which held approximately 88.7% of its shares at quarter-end.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $941 million | $934 million | $1.830 billion | $1.815 billion |
| Operating income | $56 million | $58 million | $110 million | $143 million |
| Net income attributable to Bausch + Lomb | $5 million | $44 million | $25 million | $71 million |
| Basic and diluted EPS | $0.01 | $0.13 | $0.07 | $0.20 |
| Operating cash flow | Not stated for the quarter | $159 million | $438 million |
- Growth and margins: Q2 revenue increased 1% reported and 6% organically; first-half revenue rose 1% reported and 5% organically. Q2 operating margin was approximately 6.0%, versus 6.2% a year earlier. First-half operating margin was approximately 6.0%, versus 7.9%. Total segment profit was $208 million in Q2 (22% of revenue), compared with $212 million (23%) a year earlier; first-half segment profit was $422 million (23%), down from $449 million (25%).
- Cash flow and investment: First-half operating cash flow fell $279 million year over year, which management attributed chiefly to operating-asset and liability timing, deferred taxes and lower operating results. Investing cash outflow was $76 million, including $76 million of property and equipment purchases. Management expected about $149 million of capital expenditure payments in the second half of 2022.
- Liquidity and debt: Cash and cash equivalents were $437 million at June 30, up from $174 million at year-end; including restricted cash, the total was $446 million. The May credit agreement provided a $2.5 billion term loan and a $500 million revolving facility, which remained undrawn. Term debt was $2.5 billion principal ($2.442 billion net of issuance costs), bears floating-rate interest, and matures in 2027. The stated term-loan rate was 4.55% at June 30. The company reported compliance with its debt covenant and expected to meet debt service obligations over the following 12 months.
- Balance sheet: Total assets were $11.002 billion and total liabilities $4.031 billion. Current assets were $2.001 billion versus current liabilities of $1.273 billion.
Material changes and drivers
- Segment trends: Q2 Vision Care revenue rose 6% to $589 million and segment profit rose 20% to $145 million, reflecting volume and pricing gains, partly offset by currency and inflation. Ophthalmic Pharmaceuticals revenue fell 13% to $168 million and profit fell 33% to $52 million, amid generic competition, lower pricing and foreign exchange. Surgical revenue was nearly flat at $184 million; profit declined 15% to $11 million.
- Profit pressure: First-half operating income declined $33 million. Higher SG&A (+$35 million) and R&D (+$14 million), plus lower contribution from product sales, more than offset lower amortization and other expense. Management cited inflation-related manufacturing costs, higher selling and professional fees, and medical-device regulatory costs. First-half interest expense was $64 million, compared with none in the prior-year period.
- Sales deductions: Provisions reducing gross product sales were 28.2% of gross sales in Q2 versus 26.8% a year earlier, and 27.4% for the first half versus 25.8%. The increase was primarily due to generic-product chargebacks and competitive pricing.
- Currency and China: First-half revenue included a $75 million unfavorable foreign-exchange impact. China revenue decreased to $158 million from $183 million in the first half, with COVID-related lockdowns affecting demand and distribution.
Outlook, risks and unusual items
- No specific full-year revenue or earnings guidance is provided. Management said available liquidity should meet current needs for the next 12 months, while cautioning that financing access and future liquidity are not assured. For July–December 2022, it expected approximately $74 million of term-loan interest, $13 million of mandatory amortization and $6 million of pension and postretirement payments.
- Management expected higher year-over-year manufacturing variances from inflation and higher standalone SG&A costs as the company assumes functions previously supported by BHC. Transition services from BHC generally run for six to twelve months. The proposed full separation/spinoff from BHC remained conditional on lock-up expiry, leverage targets, market conditions and required approvals; completion was not assured.
- The B+L IPO was a sale by BHC: Bausch + Lomb received no proceeds. The company used term-loan proceeds and cash to repay a $2.2 billion BHC promissory note, pay $229 million in return of capital to BHC and affiliates, and pay $47 million of related interest. Its restricted-subsidiary status under BHC debt documents could constrain its actions until BHC designates it unrestricted.
- Key risks include generic competition and patent litigation, product and regulatory matters, inflation, floating-rate debt, foreign exchange, COVID-related disruption in China, and the Russia-Ukraine conflict. Management said the conflict had not materially affected operations to date but could disrupt sales, supply, collections and costs. Recorded current legal loss contingencies were $2 million; the company said outcomes or potential losses in other matters could not generally be estimated.
- Management performed interim goodwill tests after market and interest-rate volatility; each reporting unit’s estimated fair value exceeded carrying value by more than 25%, with no impairment recorded. A 100-basis-point rate change was estimated to affect annual pretax earnings and cash flows by about $25 million.
- Subsequent events: CEO Joseph C. Papa stepped down as board chair in July but was to remain CEO pending a successor; the board began a CEO search. A July executive retention program included additional severance protection and 35,000 RSUs per eligible named executive officer, with expense to begin in Q3. The filing also reports immaterial out-of-period accounting corrections.
Investor verification points
- Track whether Vision Care growth can offset continuing weakness in Ophthalmic Pharmaceuticals and whether sales deductions, generic competition and manufacturing inflation ease.
- Verify cash conversion and capital spending against management’s second-half estimates, and monitor floating-rate interest expense, debt amortization and covenant headroom.
- Assess the cost and operational effects of becoming standalone, the duration and terms of BHC transition arrangements, and the conditions and timing for any separation from BHC.
- Follow CEO succession, executive retention costs, material litigation and patent outcomes, and any developments in COVID-related China disruption or Russia-Ukraine exposure.
- Interpret year-over-year comparisons with care: pre-IPO periods include BHC cost allocations and the business’s historical results may not represent its costs or performance as a standalone company.