Bausch + Lomb Corporation — Q3 2022 Form 10-Q
Period: Quarter and nine months ended September 30, 2022. Amounts are in U.S. dollars unless stated otherwise. Bausch + Lomb is a global eye-health company with Vision Care, Ophthalmic Pharmaceuticals and Surgical segments. It began trading publicly in May 2022; parent Bausch Health Companies Inc. (BHC) retained approximately 88.7% ownership at quarter-end.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $942m | $949m | $2,772m | $2,764m |
| Operating income | $46m | $94m | $156m | $237m |
| Net income (loss) attributable to Bausch + Lomb | $(18)m | $60m | $7m | $131m |
| EPS, basic and diluted | $(0.05) | $0.17 | $0.02 | $0.37 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $186m | $711m |
Revenue was nearly flat for the first nine months, while reported operating income fell 34% and attributable net income fell 95%. Q3 operating margin was approximately 4.9% versus 9.9% a year earlier; nine-month operating margin was 5.6% versus 8.6%. Cost of goods sold was 39.5% of product sales in Q3 and 39.7% for the nine months, compared with 38.4% and 38.5%, respectively, indicating lower gross margins.
Q3 revenue declined 1%, principally from a $55m unfavorable foreign-exchange impact, partly offset by $25m higher volumes and $24m higher net pricing. Nine-month revenue increased $8m: volume and pricing gains were offset by $130m of currency headwinds and product divestitures/discontinuations. Organic revenue growth, a company-defined non-GAAP measure, was 5% for both the quarter and nine-month period.
Segment results were mixed. Nine-month Vision Care revenue rose 2% to $1,747m and segment profit rose 9% to $471m. Ophthalmic Pharmaceuticals revenue declined 6% to $495m and profit fell 32% to $142m, reflecting generic competition, lower pricing and launch-related costs. Surgical revenue increased 2% to $530m, while segment profit fell 36% to $35m amid higher selling and R&D expenses. Segment profit is a company-defined measure, not operating income.
Cash, debt and liquidity
- Cash and cash equivalents were $287m at September 30, 2022, versus $174m at December 31, 2021; including restricted cash, the balance was $297m.
- Nine-month operating cash flow was $186m, down $525m year over year, primarily due to working-capital changes, weaker operating results and deferred-tax movements. Capital spending was $125m; cash flow after capital spending was approximately $61m.
- Long-term debt was $2,413m on the balance sheet, plus a $25m current portion. The term-loan principal was $2,494m (reported net of issuance costs at $2,438m), with a 6.10% stated rate at quarter-end and maturity in May 2027. The $500m revolving facility had no borrowings, $9m of letters of credit and $491m available.
- Management reported covenant compliance and expected to meet debt service and remain compliant over the following 12 months. The company was also a restricted subsidiary under BHC debt agreements; BHC’s $17.08bn of debt is not presented as Bausch + Lomb debt, but the restricted-subsidiary status limits certain actions.
Material developments, outlook and risks
- Profitability was pressured by inflation, manufacturing inefficiencies and ramp-up costs for daily silicone-hydrogel lenses, increased freight and separation-related and standalone-company costs. SG&A rose $68m and R&D rose $28m in the nine-month comparison. Interest expense was $99m, including $47m on the BHC purchase note that was repaid in May.
- Management said inflation and supply-chain challenges were expected to continue through 2022, with uncertain duration and potential adverse effects on revenue and margins. Q4 cash requirements were estimated at $44m of interest, $6m of mandatory debt amortization and $75m of capital expenditure payments.
- No specific full-year revenue or earnings guidance is provided in the filing. Management cited a pipeline of more than 60 projects, but approvals, launches, uptake and commercial returns remain uncertain.
- The planned separation from BHC remained conditional on targeted leverage ratios, market conditions and required approvals; the filing gives no assurance it will be completed. BHC continues to control the company. The CEO departed under a July separation agreement, and the company described retention measures while seeking a successor.
- China lockdowns weighed on first-half contact-lens and consumer-eye-care demand; management said the impact began to normalize in Q3. Russia/Ukraine-related disruption, sanctions, foreign-exchange volatility and collection risks could affect regional business. The company reported Russia revenue of $90m and Ukraine revenue of $5m for the nine months.
- Generic competition and patent litigation pose risks, including disputes involving PreserVision, Lumify and other products. The company also faces antitrust, product-liability and other proceedings; it recorded $2m of probable and estimable current legal contingencies but said outcomes and potential losses on other matters could not generally be estimated. Certain Shower to Shower claims are subject to indemnification by Johnson & Johnson.
- Variable-rate debt was $2,494m; management estimated that a 100-basis-point rate change would affect annual pretax earnings and cash flow by approximately $25m. Credit ratings were downgraded during 2022; the filing reported Moody’s B1 with negative outlook, S&P CCC+ with positive outlook and Fitch B- with rating watch evolving as of November 2, 2022.
Important facts for investors to verify
- Whether operating performance and cash conversion improve as inflation, manufacturing costs and working capital evolve.
- Debt pricing, covenant headroom, refinancing needs and the effects of further rating changes or interest-rate increases.
- Progress and conditions for the BHC separation, including leverage targets, approvals and any effect of related litigation.
- Whether generic competition, chargebacks and pricing pressure continue to weigh on Ophthalmic Pharmaceuticals and key branded products.
- Pipeline approval and launch milestones, and the potential financial impact of legal contingencies, currency movements and geopolitical or China-related disruption.