Alcon (ALC) 6-KAlcon Reports Third Quarter 2022 Results

Alcon Reports Third Quarter 2022 Results

Ad Hoc Announcement Pursuant to Art. 53 LR

“Our third quarter results reflect the continued strong operational performance of the business in an extremely challenging macroeconomic environment," said David J. Endicott, Alcon's Chief Executive Officer. "Demand for our products was robust, and we saw particularly strong growth in our international markets.”

Mr. Endicott continued, “We have built a solid foundation and our business fundamentals are strong. Our positive results demonstrate that our investments in transformation, infrastructure and innovation continue to pay off. We are pleased with our margin expansion and operating leverage, despite the headwinds of a strong US dollar. Looking forward, we will continue to focus on advancing our innovation engine, driving commercial execution and creating long-term shareholder value."

Sales for the third quarter of 2022 were $2.1 billion, an increase of 2% on a reported basis and 9% on a constant currency basis, compared to the third quarter of 2021. Sales benefited from continued recovery across international markets and product innovation, but were negatively impacted by foreign currency.

The following table highlights net sales by segment for the third quarter and first nine months of 2022:

Surgical growth driven by improvements across international markets

Vision Care benefited from silicone hydrogel contact lenses and Systane artificial tears, significantly offset by supply chain challenges in contact lens care

Operating income

Third quarter 2022 operating income was $205 million and operating margin was 9.7%. Operating margin increased 11.3 percentage points on a constant currency basis as the prior year was impacted by an impairment of an intangible asset and an increase in legal items, partially offset by a benefit from fair value adjustments to contingent consideration liabilities. The current year period benefited from improved operating leverage from higher sales and favorability from incentive compensation, partially offset by increased inflationary impacts. There was a negative 2.6% impact on operating margin from currency.

Core operating margin for the nine months ended September 30, 2022 of 18.7% increased 2.4 percentage points on a constant currency basis versus the prior year period. Foreign currency had a negative 1.7% impact on the current year period core operating margin.

Diluted earnings per share (EPS)

Diluted earnings per share for the nine months ended September 30, 2022 of $0.87 increased 81%, or 146% on a constant currency basis. Core diluted earnings per share of $1.82 increased 14%, or 32% on a constant currency basis.

Balance sheet and cash flow highlights

The Company ended the first nine months of 2022 with a cash position of $1.2 billion. Cash flows from operations for the nine months ended September 30, 2022 totaled $872 million, compared to cash flows from operations of $958 million in the prior year. The current year includes increased cash outflows from changes in net working capital, the timing of tax payments and a legal settlement payment, partially offset by higher sales.

Expected acquisition of Aerie Pharmaceuticals, Inc.

On August 22, 2022, Alcon and Aerie Pharmaceuticals, Inc. announced the companies had entered into a definitive merger agreement through which Alcon will acquire Aerie.

The purchase price of $15.25 per share represents an equity value of approximately $770 million. Alcon will also assume net debt of approximately $160 million for total purchase consideration of approximately $930 million. The transaction was approved by the board of directors of each company. The transaction is anticipated to close in the fourth quarter of 2022, subject to the approval of Aerie’s shareholders and the satisfaction of customary closing conditions. During the third quarter, Alcon executed a $900 million bridge loan facility agreement that is restricted for use in funding the planned acquisition of Aerie. The bridge loan facility remained undrawn as of November 15, 2022.

Transformation update

In the fourth quarter of 2019, the Company announced a multi-year transformation program to drive efficiency gains. The transformation program was originally projected to deliver annual run-rate savings of approximately $200 to $225 million, to be reinvested into key growth drivers. The original projected cost of the program was approximately $300 million.

The Company has now identified additional transformation initiatives to deliver incremental efficiencies. As such, the Company now expects incremental run-rate savings of approximately $100 million, with incremental program costs of approximately $125 million. The incremental savings will be used to help offset the negative impacts from macroeconomic headwinds. The Company continues to expect to complete the program by year-end 2023.

The Company updated its 2022 outlook as per the table below. This outlook assumes that the 2022 global market grows at slightly above historical rates, that inflation stays at current levels throughout the remainder of the year, that the supply chain does not materially deteriorate and that the US dollar holds steady at mid-October 2022 foreign exchange rates. This outlook excludes any impact from the planned acquisition of Aerie Pharmaceuticals, Inc.

The Company will host a conference call on November 16, 2022 at 2:00 p.m. Central European Time / 8:00 a.m. Eastern Time to discuss its third quarter 2022 earnings results. The webcast can be accessed online through Alcon's Investor Relations website, investor.alcon.com. Listeners should log on approximately 10 minutes in advance. A replay will be available online within 24 hours after the event.

The Company's interim financial report and supplemental presentation materials can be found online through Alcon's Investor Relations website at the beginning of the conference, or by clicking on the link:

https://investor.alcon.com/news-and-events/events-and-presentations/event-details/2022/Alcons-Third-Quarter-2022-Earnings-Conference-Call/default.aspx

Cautionary Note Regarding Forward-Looking Statements

This press release contains, and our officers and representatives may from time to time make, certain “forward-looking statements” within the meaning of the safe harbor provisions of the US Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as “anticipate,” “intend,” “commitment,” “look forward,” “maintain,” “plan,” “goal,” “seek,” “target,” “assume,” “believe,” “project,” “estimate,” “expect,” “strategy,” “future,” “likely,” “may,” “should,” “will” and similar references to future periods. Examples of forward-looking statements include, among others, statements we make regarding our liquidity, revenue, gross margin, operating margin, effective tax rate, foreign currency exchange movements, earnings per share, our plans and decisions relating to various capital expenditures, capital allocation priorities and other discretionary items such as our transformation program, market growth assumptions, our proposed acquisition of Aerie, and generally, our expectations concerning our future performance and the effects of the COVID-19 pandemic on our businesses.

Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties and risks that are difficult to predict such as: cybersecurity breaches or other disruptions of our information technology systems; compliance with data privacy, identity protection and information security laws; our ability to comply with the US Foreign Corrupt Practices Act of 1977 and other applicable anti-corruption laws, particularly given that we have entered into a three-year Deferred Prosecution Agreement with the U.S. Department of Justice; our success in completing and integrating strategic acquisitions; the completion of the proposed Aerie transaction on anticipated terms and timing, including obtaining stockholder and regulatory approvals, anticipated tax treatment, unforeseen liabilities, future capital expenditures, revenues, expenses, earnings, synergies, economic performance, indebtedness, financial condition, losses, future prospects, business and management strategies for the management and other conditions to the completion of the transaction; the possibility that various closing conditions for the Aerie transaction may not be satisfied or waived, including that a governmental entity may prohibit, delay or refuse to grant approval for the consummation of the transaction; transaction costs of the Aerie transaction; our ability to execute and achieve the expected benefits of our transformation program; the impact of a disruption in our global supply chain or important facilities; the effect of the COVID-19 pandemic as well as other viral or disease outbreaks; global and regional economic, financial, legal, tax, political and social change; Russia’s war on Ukraine and the resulting global response; the commercial success of our products and our ability to maintain and strengthen our position in our markets; the success of our research and development efforts, including our ability to innovate to compete effectively; pricing pressure from changes in third party payor coverage and reimbursement methodologies; ongoing industry consolidation; our ability to properly educate and train healthcare providers on our products; the impact of unauthorized importation of our products from countries with lower prices to countries with higher prices; our reliance on outsourcing key business functions; changes in inventory levels or buying patterns of our customers; our ability to attract and retain qualified personnel; our ability to service our debt obligations; the need for additional financing through the issuance of debt or equity; our ability to protect our intellectual property; the effects of litigation, including product liability lawsuits and governmental investigations; our ability to comply with all laws to which we may be subject; effect of product recalls or voluntary market withdrawals; the implementation of our enterprise resource planning system; the accuracy of our accounting estimates and assumptions, including pension and other post-employment benefit plan obligations and the carrying value of intangible assets; the ability to obtain regulatory clearance and approval of our products as well as compliance with any post-approval obligations, including quality control of our manufacturing; legislative, tax and regulatory reform; the ability of Alcon Pharmaceuticals Ltd. to comply with its investment tax incentive agreement with the Swiss State Secretariat for Economic Affairs in Switzerland and the Canton of Fribourg, Switzerland; our ability to manage environmental, social and governance matters to the satisfaction of our many stakeholders, some of which may have competing interests; the impact of being listed on two stock exchanges; the ability to declare and pay dividends; the different rights afforded to our shareholders as a Swiss corporation compared to a U.S.

corporation; and the effect of maintaining or losing our foreign private issuer status under U.S. securities laws.

Additional factors are discussed in our filings with the United States Securities and Exchange Commission, including our Form 20-F. Should one or more of these uncertainties or risks materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated. Therefore, you should not rely on any of these forward-looking statements. Forward-looking statements in this press release speak only as of the date of its filing, and we assume no obligation to update forward-looking statements as a result of new information, future events or otherwise.

Alcon uses certain non-IFRS metrics when measuring performance, including when measuring current period results against prior periods, including core results, percentage changes measured in constant currencies, free cash flow, and net (debt)/liquidity.

Because of their non-standardized definitions, the non-IFRS measures (unlike IFRS measures) may not be comparable to the calculation of similar measures of other companies. These supplemental non-IFRS measures are presented solely to permit investors to more fully understand how Alcon management assesses underlying performance. These supplemental non-IFRS measures are not, and should not be viewed as, a substitute for IFRS measures.

Alcon core results, including core operating income and core net income, exclude all amortization and impairment charges of intangible assets, excluding software, net gains and losses on fund investments and equity securities valued at fair value through profit and loss ("FVPL"), fair value adjustments of financial assets in the form of options to acquire a company carried at FVPL, obligations related to product recalls, and certain acquisition related items. The following items that exceed a threshold of $10 million and are deemed exceptional are also excluded from core results: integration and divestment related income and expenses, divestment gains and losses, restructuring charges/releases and related items, legal related items, gains/losses on early extinguishment of debt or debt modifications, past service costs for post-employment benefit plans, impairments of property, plant and equipment and software, as well as income and expense items that management deems exceptional and that are or are expected to accumulate within the year to be over a $10 million threshold.

Taxes on the adjustments between IFRS and core results take into account, for each individual item included in the adjustment, the tax rate that will finally be applicable to the item based on the jurisdiction where the adjustment will finally have a tax impact. Generally, this results in amortization and impairment of intangible assets and acquisition-related restructuring and integration items having a full tax impact. There is usually a tax impact on other items, although this is not always the case for items arising from legal settlements in certain jurisdictions.

Alcon believes that investor understanding of its performance is enhanced by disclosing core measures of performance because, since they exclude items that can vary significantly from period to period, the core measures enable a helpful comparison of business performance across periods. For this same reason, Alcon uses these core measures in addition to IFRS and other measures as important factors in assessing its performance.

A limitation of the core measures is that they provide a view of Alcon operations without including all events during a period, such as the effects of an acquisition, divestment, or amortization/impairments of purchased intangible assets and restructurings.

The forward-looking guidance included in this press release cannot be reconciled to the comparable IFRS measures without unreasonable efforts, because we are not able to predict with reasonable certainty the ultimate amount or nature of exceptional items in the fiscal year. These items are uncertain, depend on many factors and could have a material impact on our IFRS results for the guidance period.

Net (debt)/liquidity

Three months ended September 30, 2021

Refer to the associated explanatory footnotes at the end of the 'Reconciliation of IFRS results to core results' tables.

Nine months ended September 30, 2021

For the three and nine months ended September 30, 2021, includes an increase in provisions for legal matters.

For the three months ended September 30, 2021, Gross profit includes fair value adjustments to contingent consideration liabilities. Research & development includes fair value adjustments to contingent consideration liabilities of $41 million, partially offset by $2 million for the amortization of option rights. Other expense includes fair value adjustments of financial assets.

For the nine months ended September 30, 2022, Gross profit includes fair value adjustments to contingent consideration liabilities, partially offset by the amortization of inventory fair value adjustments related to a recent acquisition. Research & development includes fair value adjustments to contingent consideration liabilities. Other expense includes acquisition and integration related expenses and fair value adjustments of financial assets.

For the nine months ended September 30, 2021, Gross profit includes fair value adjustments to contingent consideration liabilities. Research & development includes fair value adjustments to contingent consideration liabilities of $41 million, partially offset by $10 million for the amortization of option rights. Other income and Other expense include fair value adjustments of financial assets.

For the three months ended September 30, 2021, total tax adjustments of $82 million include tax associated with operating income core adjustments and discrete tax items. Tax associated with operating income core adjustments of $349 million totaled $80 million with an average tax rate of 22.9%.

For the nine months ended September 30, 2022, total tax adjustments of $100 million include tax associated with operating income core adjustments, partially offset by discrete tax items. Tax associated with operating income core adjustments of $567 million totaled $103 million with an average tax rate of 18.2%.

For the nine months ended September 30, 2021, total tax adjustments of $146 million include tax associated with operating income core adjustments of $697 million with an average tax rate of 20.9%.

About Alcon