Bausch Health Companies Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Amounts are in U.S. dollars unless stated otherwise. The filing is unaudited and reports the company and its subsidiaries, including its approximately 89%-owned Bausch + Lomb business.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $2.046B | $2.111B | $5.931B | $6.238B |
| Operating income | $244M | $574M | $690M | $83M |
| Net income (loss) attributable to Bausch Health | $399M | $188M | $185M | $(1.017)B |
| Diluted EPS | $1.10 | $0.52 | $0.51 | $(2.84) |
| Net cash from (used in) operating activities | Not separately stated for Q3 in the provided filing text | $(1.203)B | $1.402B |
Q3 operating margin was approximately 11.9%, versus 27.2% a year earlier; nine-month operating margin was approximately 11.6%, versus 1.3%. The nine-month improvement in operating income primarily reflects lower impairment and other charges compared with 2021, rather than revenue growth. Net income in 2022 also benefited materially from debt-extinguishment gains.
For the nine months, product sales were $5.871B and cost of goods sold was $1.691B; cost of goods sold was 28.8% of product sales, compared with 28.2% in 2021. Interest expense was $1.157B, up $74M year over year. The company reported a $570M Q3 gain on its debt exchange; nine-month debt-extinguishment gain was $683M.
Balance sheet, liquidity and debt
- At September 30, cash and cash equivalents were $486M; current assets were $4.010B and current liabilities were $3.831B. The cash balance included $297M held by Bausch + Lomb entities, generally unavailable to Bausch Health absent a dividend.
- Long-term debt was $21.215B net of premiums, discounts and issuance costs; contractual principal was $19.574B. Debt fair value was reported as $13.450B. The stated weighted-average interest rate was 7.24%, up from 5.88% at year-end 2021.
- Cash, cash equivalents, restricted cash and other settlement deposits totaled $497M at period-end, down from $2.119B at the start of the year. Operating cash use included $1.572B of accrued legal-settlement payments.
- The company said it expected its liquidity sources to cover current needs for at least 12 months after the filing date and expected to remain in compliance with its financial maintenance covenant and meet debt service obligations over that period. At September 30, it reported covenant compliance.
Material changes and business developments
- Revenue declined 3% in Q3 and 5% for the nine-month period. Management attributed the nine-month decline mainly to foreign exchange headwinds ($186M), the Amoun divestiture and discontinuations ($172M), and lower volume ($79M), partly offset by $130M of higher net realized pricing.
- Q3 segment revenue increased 3% at Salix, while International declined 8%, Solta Medical 3%, Diversified Products 18%, and Bausch + Lomb 1%. For the nine months, Bausch + Lomb revenue was broadly flat; Diversified Products declined 15% and International declined 18%.
- In May 2022, Bausch Health completed the Bausch + Lomb IPO, receiving approximately $675M net and retaining about 89% ownership. The proposed separation remains subject to targeted debt leverage ratios and shareholder and other approvals; the filing gives no definite completion date. The Solta IPO plan was suspended in June 2022.
- On September 30, the company exchanged $5.594B of existing unsecured notes for $3.125B of new secured notes, reducing contractual principal by $2.469B and extending some maturities. The new notes carry stated coupons of 11%, 14% and 9%. The transaction generated a $570M accounting gain and an $1.835B recorded debt premium; accordingly, reported future interest expense will not reflect the notes’ stated coupons in a straightforward way.
Outlook, risks and unusual items
- Xifaxan litigation and concentration: Xifaxan generated $1.216B in revenue during the first nine months and represented about 80% of Salix revenue. A court found certain patents covering Xifaxan’s IBS-D use and composition invalid, while finding patents for the hepatic encephalopathy use valid and infringed. The company appealed. Salix goodwill headroom was less than 5%; no impairment was recorded, but a future impairment could be material.
- Other impairment: The company recorded $119M of Q3 goodwill impairment for Ortho Dermatologics, bringing 2022 nine-month goodwill impairment to $202M. Higher interest rates, inflation and revised business assumptions were cited.
- Debt and ratings: The high-coupon secured notes, substantial debt, floating-rate exposure and covenant requirements are material risks. Ratings agencies downgraded Bausch Health following the exchange offer; the filing also warns downgrades could raise borrowing costs or limit access to capital.
- Legal and tax exposure: Accrued current loss contingencies were $323M. The company paid $1.572B of accrued legal settlements in the first nine months. Separately, it disclosed a potential worst-case additional U.S. tax liability of up to $2.1B, excluding penalties and interest, if its 2017 capital-loss deduction is disallowed; the company disputes the IRS position and recorded no provision for this contingency.
- Operating environment: Management cited inflation-related manufacturing costs, currency movements, generic competition, COVID-19 restrictions in China and possible Russia-Ukraine-related supply, demand, collection and cybersecurity disruption. No specific full-year financial guidance is provided in the supplied filing text.
- The filing also reports a non-compliant Health Canada rating for the Laval pharmaceutical manufacturing facility, without operating restrictions, and states that production continued without interruption. Management concluded disclosure controls were effective and reported no material changes to internal control over financial reporting during Q3.
Important facts for investors to verify
- Progress and outcome of the Xifaxan patent appeal, potential generic-entry timing, and any resulting effect on Salix forecasts, intangible assets or goodwill.
- Cash generation after the large legal-settlement payments, and how much liquidity is accessible to Bausch Health versus held within Bausch + Lomb.
- Debt maturities, interest costs, covenant headroom and the implications of the 11% and 14% secured notes and debt-exchange accounting.
- Conditions, approvals and leverage targets for the Bausch + Lomb separation, and any legal challenges that could delay or prevent it.
- Resolution of the IRS dispute over the 2017 capital loss and developments in other material litigation and regulatory matters.