S-1 1 d502777ds1.htm FORM S-1 Form S-1
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As filed with the Securities and Exchange Commission on March 22, 2013

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

WP PRISM INC.*

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   3851  

26-1188111

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

Global Eye Health Center

1400 North Goodman Street

Rochester, NY 14609

(585) 338-6000

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

A. Robert D. Bailey, Esq.

Executive Vice President, General Counsel and Secretary

WP Prism Inc.

Global Eye Health Center

1400 North Goodman Street

Rochester, NY 14609

(585) 338-6247

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

(Copies of all communications, including communications sent to agent for service)

 

Jeffrey D. Karpf, Esq.

Cleary Gottlieb Steen & Hamilton LLP

One Liberty Plaza

New York, NY 10006

(212) 225-2000

 

William V. Fogg, Esq.

Craig F. Arcella, Esq.

Cravath, Swaine & Moore LLP

Worldwide Plaza

825 Eighth Avenue

New York, NY 10019

(212) 474-1131

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box:  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

 

Proposed

Maximum

Aggregate

Offering Price (1)(2)

  Amount of
Registration Fee (3)

Common stock, par value $0.01 per share

  $100,000,000   $ 13,640

 

 

(1) Includes shares to be sold upon exercise of the underwriters’ overallotment option.
(2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended (the “Securities Act”).
(3) Calculated pursuant to Rule 457(o) under the Securities Act.

 

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

* WP Prism Inc. is the registrant filing this Registration Statement with the Securities and Exchange Commission. Prior to the date of the effectiveness of the Registration Statement, WP Prism Inc. will be renamed Bausch & Lomb Holdings Incorporated. The securities issued to investors in connection with this offering will be shares of common stock in Bausch & Lomb Holdings Incorporated.

 

 

 


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The information in this prospectus is not complete and may be changed. Neither we nor the selling stockholders may sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion

Preliminary Prospectus dated March 22, 2013

PROSPECTUS

             Shares

 

LOGO

Bausch & Lomb Holdings Incorporated

Common Stock

 

 

This is an initial public offering of common stock of Bausch & Lomb Holdings Incorporated. We are selling              shares of our common stock. After this offering, affiliates of Warburg Pincus, LLC and certain other investors, including members of our management, will own approximately     % of our common stock, or     % if the underwriters’ overallotment option is fully exercised.

No public market currently exists for our common stock. The estimated initial public offering price is between $         and $         per share. We intend to apply to list our common stock on the              under the symbol “            ”.

 

 

Investing in our common stock involves risks. See “Risk Factors” beginning on page 13.

 

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

     Per Share      Total  

Public offering price

   $                    $                

Underwriting discount

   $         $     

Proceeds to us (before expenses)

   $         $     

The selling stockholders identified in this prospectus have granted the underwriters the right to purchase for a period of 30 days up to              additional shares of our common stock at the public offering price, less the underwriting discount, for the purpose of covering overallotments. We will not receive any proceeds from the sale of shares by the selling stockholders.

The underwriters expect to deliver the shares of common stock to investors on or about                     , 2013.

 

 

 

J.P. Morgan    BofA Merrill Lynch    Citigroup

 

Barclays    Credit Suisse    Goldman, Sachs & Co.    Morgan Stanley    UBS Investment Bank

 

 

The date of this prospectus is                     , 2013.


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We are responsible for the information contained in this prospectus and in any related free-writing prospectus we may prepare or authorize to be delivered to you. Neither we, the selling stockholders nor the underwriters have authorized anyone to give you any other information, and neither we, the selling stockholders nor the underwriters take any responsibility for any other information that others may give you. Neither we, the selling stockholders nor the underwriters are making an offer of these securities in any jurisdiction where the offer is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front of this prospectus, regardless of the time of delivery of this prospectus or any sale of our common stock.

 

 

TABLE OF CONTENTS

 

Prospectus Summary

     1   

Risk Factors

     13   

Special Note Regarding Forward-Looking Statements

     38   

Use of Proceeds

     40   

Dividend Policy

     41   

Capitalization

     42   

Dilution

     44   

Selected Historical Consolidated Financial Data

     46   

Unaudited Pro Forma Condensed Consolidated Financial Information

     48   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     56   

Business

     87   

Management

     116   

Compensation Discussion and Analysis

     124   

Certain Relationships and Related Party Transactions

     147   

Principal and Selling Stockholders

     150   

Description of Capital Stock

     153   

Shares Eligible for Future Sale

     156   

Material U.S. Federal Income and Estate Tax Considerations to Non-U.S. Holders

     158   

Underwriting (Conflicts of Interest)

     161   

Legal Matters

     169   

Experts

     169   

Glossary of Industry and Other Terms

     170   

Where You Can Find More Information

     172   

Index to Financial Statements

     F-1   

 

 

We have a number of registered marks in various jurisdictions (including the United States), and we have applied to register a number of other marks in various jurisdictions. The trademarks of Bausch & Lomb Holdings Incorporated and its subsidiary companies are italicized throughout this prospectus. See “Business—Intellectual Property.” All other brands or product names are trademarks of their respective owners.

 

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. It may not contain all the information that may be important to you. You should read the entire prospectus carefully, including the section entitled “Risk Factors” and our financial statements and the related notes included elsewhere in this prospectus, before making an investment decision to purchase shares of our common stock.

Unless the context suggests otherwise, references in this prospectus to “Bausch + Lomb,” the “Company,” “we,” “us,” and “our” refer to Bausch & Lomb Holdings Incorporated and its consolidated subsidiaries. See “—Corporate and Other Information” below for more information. References in this prospectus to “Warburg Pincus” refer to Warburg Pincus, LLC. For certain industry and other terms, investors are referred to the section entitled “Glossary of Industry and Other Terms” beginning on page 170. The historical financial statements of Bausch & Lomb Holdings Incorporated included in this prospectus have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”).

Our Company

We are a leading global eye health company. We are solely focused on protecting, enhancing, and restoring people’s eyesight. Over our 160-year history, Bausch + Lomb has become one of the most widely recognized and respected eye health brands in the world. We globally develop, manufacture and market one of the most comprehensive product portfolios in our industry. Our ability to deliver a broad, complementary portfolio of products to eye care professionals, patients and consumers enables us to address a full spectrum of eye health needs.

Through our three business units—pharmaceuticals, vision care and surgical—we offer products such as branded and generic prescription ophthalmic pharmaceuticals, over-the-counter (“OTC”) ophthalmic medications, ophthalmic nutritional products, contact lenses and lens care solutions, as well as products that are used in cataract, vitreoretinal, refractive and other ophthalmic surgical procedures. Our sales organization of over 3,700 employees markets our diversified product portfolio of more than 300 products in over 100 countries. For the year ended December 29, 2012, we generated net sales of $3.0 billion, a net loss of $68.3 million and Adjusted EBITDA of $643.1 million. See “—Summary Historical Consolidated Financial Data” for our definition of Adjusted EBITDA, why we present Adjusted EBITDA and a reconciliation of our Adjusted EBITDA to net loss.

The global eye health market is large, dynamic and growing. A leading independent consulting firm estimates that this market will grow from $36 billion of sales in 2011 to more than $48 billion of sales in 2017, at a compound annual growth rate (“CAGR”) of approximately 5%. We believe growth will be driven by multiple factors and trends, including an aging global population, the rapid growth of the middle class in emerging markets, the increasing global prevalence of diabetes, which has a strong correlation with severe ocular conditions, advancements in technology and innovation, which create opportunity to address previously undertreated conditions, and the resilience of the eye health market to volatility and government reimbursement pressures. As a result, there is growing demand for eye health products and services across each of the three business segments in which we compete.

 

 

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Our Ongoing Business Transformation

Since 2007, we have been executing an operational and financial transformation. This transformation began with our acquisition by investment funds affiliated with or managed by Warburg Pincus, LLC and Welsh, Carson, Anderson & Stowe (the “Principal Stockholders”). It was accelerated with the arrival of our current management team in 2010 and the implementation of a multi-year turnaround plan that we refer to as the “Action Agenda,” which consists of three distinct phases: “Strengthen and Build,” “Accelerate,” and “Breakthrough.” We are currently in the Accelerate phase—about midway through our turnaround plan. As a result of our work to date, we have strengthened our business, increased revenue growth and expanded margins by:

 

   

Developing a unified and streamlined global business model

 

   

Investing in global commercial and manufacturing capabilities

 

   

Expanding geographically in developed and emerging markets

 

   

Creating a differentiated approach to new product innovation

Through these and other actions, we have generated net sales growth at a CAGR of 9% and Adjusted EBITDA growth at a CAGR of 17% over the two years ended December 29, 2012. We believe our investments in sales, marketing and new product development provide the foundation upon which we will further drive the continued transformation of our company.

Our Competitive Strengths

We believe our sole focus on eye health and our following strengths provide us with a number of long-term competitive advantages:

 

   

Diversified revenues and limited public pay exposure. Our product portfolio contains more than 300 products and our net sales in 2012 were balanced across several geographies. Our varied distribution channels ranging from individual eye health practitioners to pharmacies to hospitals help us reach a broad set of customers. As a result, no one product, geography or customer comprises a significant part of our business. In addition, in 2012 approximately 80% of our net sales were private (non-governmental) pay.

 

   

Global reach, scale and emerging market strength. We have an industry-leading global footprint with a worldwide sales organization of more than 3,700 employees and products sold in more than 100 countries around the world. Emerging markets represented 25% of our net sales for 2012 and we believe we are well-positioned in several principal emerging markets, including Brazil, China, India and Russia.

 

   

Strong pipeline and sustainable new product flow. As a result of our new approach to innovation, we believe we have created the strongest pipeline of products in the history of our company. We have been able to build a balanced and robust pipeline of late, mid, and early stage programs across all three of our business units, and we expect our new approach to maximize our return on the capital we invest in innovation.

 

   

Globally recognized brand with 160-year heritage. Bausch + Lomb has long been associated with the most significant advances in eye health, and we believe our brand is synonymous with eye care among consumers and professionals around the world. Over the past several years, we have continued to invest in our company and product brands.

 

   

Proven executive leadership and a highly motivated workforce. Over the last few years, we have assembled a very experienced and accomplished senior management team and other executives

 

 

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comprised of Bausch + Lomb, industry and regional veterans and have refocused our workforce on customers and modeled and rewarded high-performance behaviors. Our senior management team consists of 15 executives who each have, on average, 20 years of healthcare industry experience.

Our Growth Strategy

We intend to continue to grow our business by pursuing the following core strategies:

 

   

Increase global reach of existing product portfolio. We will continue our efforts to bring all three of our business units into commercially viable markets where one or more of our business units already have critical infrastructure in place. We also intend to use our growing global regulatory and commercial capabilities to accelerate the approvals and launches of new and existing products in markets where they have significant potential.

 

   

Leverage the shared strengths of our business units. We will continue to leverage the combined expertise, market presence and customer relationships of our three business units to maximize product development and sales and marketing opportunities. Recently launched initiatives, such as a single Customer Relationship Management (“CRM”) platform and the cross-selling benefits that have arisen as a result, have produced and are expected to produce significant opportunities going forward.

 

   

Access and deliver innovative new products and expand our pipeline. We believe that our substantial pipeline investments over the past several years will result in significant new product flow across each of our business units. We believe that our current launch and late stage pipeline, which includes next generation silicone hydrogel contact lenses and a laser-guided cataract surgery platform, targets market opportunities exceeding $1.4 billion.

 

   

Build on existing strength in emerging markets. Our business in emerging markets grew 11% in 2012. We expect that our long operating history in these countries, strong brand, existing infrastructure, growing direct presence and country specific product portfolio will make us well positioned in these highly attractive markets.

 

   

Focus on our partnership with customers. Our goal is to utilize our singular focus on eye health to better understand the changing needs of our customers. We will continue to invest in initiatives that bring us closer to our customers, such as partnering with them to develop our future products, clinician training, sales and marketing efforts and customer service.

 

   

Leverage infrastructure investments to improve operating margins and cash flow. With the organizational and infrastructure investments made over the last several years, we believe we have a global platform that can support continued expansion across developed and emerging markets. Our operational efficiency programs have generated approximately $300 million in annualized savings, much of which have been reinvested in customer-facing personnel and activities, and we will continue to implement efficiency initiatives in recently acquired businesses.

Recent Developments

On March 15, 2013, our board of directors declared a cash dividend of $7.40 per share on our outstanding common stock, resulting in total distributions to our stockholders of $772 million ($758 million to our Principal Stockholders and $14 million to our other stockholders). We refer to this cash dividend as the “March 2013 Dividend.” The March 2013 Dividend was payable March 19, 2013. Our board of directors decided to pay the March 2013 Dividend based on, among other factors, our strong business performance, the deleveraging of our business, the favorable credit environment at the time and cash generation in excess of our business needs.

 

 

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On March 19, 2013, we borrowed $700 million under a new senior unsecured term loan facility. On the same date, our wholly owned operating subsidiary borrowed $100 million under its revolving credit facility and subsequently distributed $83 million to us. We refer to these borrowings as the “March 2013 Financing.” The declaration and payment of the March 2013 Dividend was financed by the March 2013 Financing. We expect to use a substantial portion of the net proceeds from this offering to repay the $700 million borrowed under the senior unsecured term loan facility in the March 2013 Financing. See “Use of Proceeds.”

In connection with the payment of the March 2013 Dividend and this offering, we modified or will modify, as applicable, on or shortly following the closing of this offering the terms of certain stock-based compensation awards held by current and former employees and directors, including (1) by making a cash payment in respect of, and adjusting the exercise price of, certain vested time-based stock options, (2) by reducing the exercise price of all other stock options, (3) in respect of the outstanding restricted stock, by adjusting the market-based vesting condition and paying dividends subject to the underlying vesting conditions and (4) by making a cash payment in cancellation of, and granting replacement options in respect of, certain performance-based options. See “Compensation Discussion and Analysis—Adjustments to Equity Awards.”

Over the past several years, we have made several acquisitions and investments. In January 2013, we purchased all the remaining outstanding shares in our joint venture TPV. The TPV team joined our surgical business, and its femtosecond and excimer laser platforms for cataract and refractive surgery broadened our already robust product portfolio and new product pipeline. In June 2012, we completed our acquisition of ISTA Pharmaceuticals, Inc. (“ISTA”), a leading pharmaceutical company and manufacturer of topical eye medicines in the United States. Our acquisition of ISTA added a portfolio of non-steroidal anti-inflammatory, allergy, glaucoma and spreading agents to our existing prescription ophthalmology and OTC eye health products. In December 2011, we acquired all outstanding stock of Laboratorio Pförtner Cornealent SACIF, the controlling entity of Waicon, which is the Argentinean market leader in contact lenses and lens care products.

Our Principal Stockholders

Following the completion of this offering, the Principal Stockholders will own approximately     % of our common stock, or     % if the underwriters’ overallotment option is fully exercised. Investment funds affiliated with or managed by Warburg Pincus will own approximately     % of our common stock, or     % if the underwriters’ overallotment option is fully exercised, and investment funds affiliated with or managed by Welsh, Carson, Anderson & Stowe (“WCAS”) will own     % of our common stock, or     % if the underwriters’ overallotment option is fully exercised.

Warburg Pincus LLC is a leading global private equity firm focused on growth investing. The firm has more than $30 billion in assets under management. Its active portfolio of more than 125 companies is highly diversified by stage, sector and geography. Warburg Pincus is an experienced partner to management teams seeking to build durable companies with sustainable value. Founded in 1966, Warburg Pincus has raised 13 private equity funds which have invested more than $40 billion in approximately 650 companies in more than 30 countries. The firm is headquartered in New York with offices in Amsterdam, Beijing, Frankfurt, Hong Kong, London, Luxembourg, Mauritius, Mumbai, San Francisco, Sao Paulo and Shanghai. After this offering, Warburg Pincus will indirectly own shares sufficient for the majority vote over fundamental and significant corporate matters and transactions. See “Risk Factors—Risks Related to Our Organization and Structure.”

Corporate and Other Information

Our business was founded in 1853 and incorporated in the State of New York in 1908 (“Old Bausch + Lomb”). From December 1958 to October 2007, Old Bausch + Lomb’s common stock traded under the

 

 

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symbol “BOL” on the NYSE and was registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In October 2007, Old Bausch + Lomb de-listed its common stock from the NYSE and terminated its registration under the Exchange Act in connection with its acquisition by the Principal Stockholders. To effect the acquisition, a subsidiary of a Delaware corporation wholly owned by the Principal Stockholders merged with and into Old Bausch + Lomb. Old Bausch + Lomb continued as the surviving company after the merger.

Prior to the effectiveness of the registration statement of which this prospectus is a part, the Delaware corporation was renamed Bausch & Lomb Holdings Incorporated (“New Bausch + Lomb”). New Bausch + Lomb is the registrant that has filed the registration statement of which this prospectus is a part with the Securities and Exchange Commission (“SEC”). Old Bausch + Lomb, which is the operating entity, is a wholly owned subsidiary of New Bausch + Lomb. Unless the context suggests otherwise, references in this prospectus to “Bausch + Lomb,” the “Company,” “we,” “us,” and “our” refer to New Bausch + Lomb and its consolidated subsidiaries, which includes Old Bausch + Lomb.

Our executive offices are located at Global Eye Health Center, 1400 North Goodman Street, Rochester, New York 14609 and our telephone number is (585) 338-6000. Our Internet website address is www.bausch.com. Information on, or accessible through, our website is not part of this prospectus. We have included our website address only as an inactive textual reference and do not intend it to be an active link to our website.

Risk Factors

Investing in our common stock involves a high degree of risk. These risks are discussed in more detail in “Risk Factors” beginning on page 13, and you should carefully consider these risks before making a decision to invest in our common stock. The following is a summary of some of the principal risks we believe we face:

 

   

the impact of competition and new medical and technological developments in our markets;

 

   

failure to yield new products that achieve commercial success;

 

   

enactment of new regulations or changes in existing regulations related to the research, development, testing and manufacturing of our products;

 

   

failure to comply with post-approval legal and regulatory requirements for our products;

 

   

further concentration of sales with large wholesale and retail customers or fluctuations in their buying patterns;

 

   

failure to maintain our relationships with healthcare providers who recommend our products to their patients;

 

   

product recalls or voluntary market withdrawals;

 

   

interruptions to our manufacturing operations, distribution operations or supply of materials from independent suppliers;

 

   

international operations risks associated with conducting the majority of our business outside the United States; and

 

   

changes in market acceptance of our products due to inadequate reimbursement for such products or otherwise.

 

 

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The Offering

 

Common stock we are offering

             shares

 

Common stock to be issued and outstanding after this offering

             shares

 

Overallotment option

The selling stockholders have granted the underwriters an option, for a period of 30 days, to purchase up to              additional shares of our common stock on the same terms and conditions as set forth on the front cover of this prospectus to cover overallotments, if any.

 

Use of proceeds by us

We estimate that the net proceeds to us from the sale of shares in this offering, after deducting the estimated underwriting discount and offering expenses payable by us, will be approximately $     million, assuming the shares are offered at $         per share, which is the midpoint of the price range set forth on the front cover page of this prospectus.

 

  We expect to use a substantial portion of the net proceeds to repay the $700 million borrowed under the senior unsecured term loan facility in the March 2013 Financing and to make a cash payment of approximately $                 regarding the cancellation of certain performance-based options. We expect to use any remaining proceeds for working capital and other general corporate purposes, which may include funding strategic acquisitions and repayment of other indebtedness. We will not receive any proceeds resulting from any exercise by the underwriters of the overallotment option to purchase additional shares from the selling stockholders. As a result, a significant portion of the proceeds of this offering will not be invested in our business.

 

  See “Use of Proceeds.”

 

Dividend policy

We do not expect to pay dividends on our common stock for the foreseeable future. Instead, we anticipate that all of our earnings in the foreseeable future will be used for the operation and growth of our business and the repayment of indebtedness. See “Dividend Policy.”

 

Risk factors

You should read the section entitled “Risk Factors” beginning on page 13 for a discussion of some of the risks and uncertainties you should carefully consider before deciding to invest in our common stock.

 

Stock exchange symbol

“    ”

 

Conflicts of Interest

Affiliates of J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Citigroup Global Markets Inc., the joint book running managers for this offering, may receive more than 5% of the net proceeds of this offering in connection with the

 

 

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repayment of the $700 million borrowed under the senior unsecured term loan facility in the March 2013 Financing. Accordingly, the offering is being conducted in accordance with the applicable provisions of Rule 5121 of the Financial Industry Regulatory Authority, Inc. (“FINRA”) Conduct Rules because certain of the underwriters will have a “conflict of interest” pursuant to Rule 5121. In accordance with Rule 5121,                      is acting as the qualified independent underwriter in the offering. Any underwriter that has a conflict of interest pursuant to Rule 5121 will not confirm sales to accounts in which it exercises discretionary authority without the prior written consent of the customer. See “Underwriting.”

The number of shares of common stock to be issued and outstanding after the completion of this offering is based on             shares of common stock issued and outstanding as of                     , 2013 and excludes an additional              shares reserved for issuance under the WP Prism Inc. Management Stock Option Plan,              of which              remain available for grant.

Except as otherwise indicated, all information in this prospectus:

 

   

assumes an initial public offering price of $         per share, the midpoint of the price range set forth on the front cover page of this prospectus; and

 

   

assumes no exercise by the underwriters of their option to purchase an additional              shares of common stock from the selling stockholders identified in this prospectus to cover overallotments.

 

 

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SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA

The following tables summarize consolidated financial information of Bausch & Lomb Holdings Incorporated. You should read these tables along with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and our audited consolidated financial statements and the related notes included elsewhere in this prospectus.

The summary consolidated statement of operations, cash flow and other operating data for the years ended December 25, 2010, December 31, 2011 and December 29, 2012 and the summary consolidated balance sheet data at December 31, 2011 and December 29, 2012 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The summary consolidated balance sheet data at December 25, 2010 has been derived from our audited financial statements not included in this prospectus.

 

     Year Ended  
Dollar Amounts in Millions, Except Share and Per Share Data    December 25,
2010
    December 31,
2011
    December 29,
2012
 

Statement of Operations Data:

      

Net Sales:(1)

      

Pharmaceuticals

   $ 937.2      $ 1,110.1      $ 1,288.0   

Vision Care

     1,155.1        1,225.4        1,241.5   

Surgical

     484.6        509.9        508.1   
  

 

 

   

 

 

   

 

 

 
     2,576.9        2,845.4        3,037.6   

Costs and Expenses:

      

Cost of products sold

     1,052.3        1,087.9        1,162.3   

Selling, general and administrative

     1,128.3        1,209.7        1,410.4   

Research and development

     220.2        235.4        227.4   

Goodwill impairment(2)

     139.2        156.0        —     
  

 

 

   

 

 

   

 

 

 

Operating Income

     36.9        156.4        237.5   

Other Expense (Income):

      

Interest expense and other financing costs

     180.9        169.3        246.0   

Interest and investment income

     (3.8     (3.1     (4.0

Foreign currency, net

     1.6        9.1        9.8   
  

 

 

   

 

 

   

 

 

 

Loss before Income Taxes and Equity in Losses of Equity Method Investee

     (141.8     (18.9     (14.3

Provision for income taxes

     33.4        76.5        27.0   

Equity in losses of equity method investee

     17.8        20.8        24.1   
  

 

 

   

 

 

   

 

 

 

Net Loss

     (193.0     (116.2     (65.4

Net income attributable to noncontrolling interest

     3.0        7.7        2.9   
  

 

 

   

 

 

   

 

 

 

Net Loss Attributable to Bausch & Lomb Holdings Incorporated

   $ (196.0   $ (123.9   $ (68.3
  

 

 

   

 

 

   

 

 

 

Per Share (Basic and Diluted):

      

Net Loss Attributable to Bausch & Lomb Holdings Incorporated

   $ (1.89)      $ (1.19)      $ (0.66)   
  

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding (000s)

     103,472        103,889        104,159   
  

 

 

   

 

 

   

 

 

 

Pro forma Net Loss Attributable to Bausch & Lomb Holdings Incorporated (unaudited)

      
      

 

 

 

Pro forma weighted average shares outstanding (000s) (unaudited)

      
      

 

 

 
(1) Reported sales include revenues associated with products acquired from ISTA ($86.1 million) and Waicon ($22.0 million in 2012 and $1.8 million in 2011).
(2) Goodwill impairment charge recorded in 2011 relates to the surgical segment’s Americas reporting unit and the charge in 2010 relates to the surgical segment’s Europe reporting unit.

 

 

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     Year Ended  
Dollar Amounts in Millions    December 25,
2010
     December 31,
2011
     December 29,
2012
 

Balance Sheet Data (at period end):

        

Cash and cash equivalents

   $ 150.4       $ 148.5       $ 359.2   

Total Assets

     5,160.6         5,086.4         5,956.8   

Total Debt (including current portion of Long-Term Debt)

     2,739.1         2,697.3         3,303.7   

Total Bausch & Lomb Holdings Incorporated Shareholders’ Equity

     1,002.0         879.8         794.8   

 

     Year Ended  
Dollar Amounts in Millions    December 25,
2010
    December 31,
2011
    December 29,
2012
 

Cash Flow Data:

      

Net cash provided by (used in):

      

Operating activities

   $ 72.6      $ 265.7      $ 320.5   

Investing activities

     (161.1     (232.0     (611.1

Financing activities

     32.9        (36.3     492.8   

 

     Year Ended  
Dollar Amounts in Millions    December 25,
2010
    December 31,
2011
    December 29,
2012
 

Other Operating Data:

      

Capital expenditures

   $ 86.7      $ 132.2      $ 119.8   

EBITDA (1)

     218.2        319.9        429.5   

Adjusted EBITDA (1)(2)

     471.9        558.9        643.1   

Cash paid for interest

     183.6        164.8        147.9   

Ratio of net total debt to Adjusted EBITDA (1)(2)(3)

     5.5     4.6     4.6

Ratio of Adjusted EBITDA to cash paid for interest(1)(2)(4)

     2.6     3.4     4.3

 

(1)

EBITDA means net loss before interest expense and other financing costs (net of interest and investment income), provision for income taxes, net income attributable to noncontrolling interest and depreciation and amortization. We have also presented Adjusted EBITDA. Adjusted EBITDA means EBITDA further adjusted to exclude certain items. We use EBITDA and Adjusted EBITDA to facilitate a comparison of our operating performance on a consistent basis from period to period that, when viewed in combination with our GAAP results and the following reconciliation, we believe provide a more complete understanding of factors and trends affecting our business than GAAP measures alone. EBITDA and Adjusted EBITDA assist in comparing our operating performance on a consistent basis because they remove the impact of our capital structure (primarily interest charges and amortization of debt issuance costs), asset base (primarily depreciation and amortization) and items outside the control of our management team (taxes) from our operations. We use Adjusted EBITDA as a supplemental measure to assess our performance because it excludes certain equity compensation expenses, and certain other costs. EBITDA and Adjusted EBITDA serve as measures in evaluating annual incentive compensation awards to our employees and senior executives and for the calculation of financial covenants in our credit facilities. We present EBITDA and Adjusted EBITDA because we believe they are useful for investors to analyze our operating results on the same basis as that used by our management. EBITDA, Adjusted EBITDA and ratios computed using them are considered “non-GAAP financial measures” under SEC rules and should not be considered substitutes for net income (loss) or operating income (loss) as determined in accordance with GAAP. EBITDA and Adjusted EBITDA have limitations as analytical tools, including, but not limited to the following:

 

   

EBITDA does not reflect our historical capital expenditures, or future requirements for capital expenditures, or contractual commitments;

 

 

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EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

 

   

EBITDA does not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments under our credit agreement;

 

   

EBITDA does not reflect income tax expense or the cash requirements to pay our taxes;

 

   

Adjusted EBITDA has all the inherent limitations of EBITDA. In addition, you should be aware that there is no certainty that we will not incur expenses in the future that are similar to those eliminated in the calculation of Adjusted EBITDA;

 

   

Other companies in our industry may calculate EBITDA and Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

Because of these limitations, EBITDA and Adjusted EBITDA should not be considered the primary measures of the operating performance of our business. We strongly encourage you to review the GAAP financial statements included elsewhere in this prospectus, and not to rely on any single financial measure to evaluate our business.

EBITDA is calculated as follows:

 

     Year Ended  
Dollar Amounts in Millions    December 25,
2010
    December 31,
2011
    December 29,
2012
 

Net Loss

   $ (193.0   $ (116.2   $ (65.4

Add:

      

Interest expense and other financing costs

     180.9        169.3        246.0   

Interest and investment income

     (3.8     (3.1     (4.0

Provision for income taxes

     33.4        76.5        27.0   

Net income attributable to noncontrolling interest

     (3.0     (7.7     (2.9

Depreciation and amortization

     203.7        201.1        228.8   
  

 

 

   

 

 

   

 

 

 

EBITDA

   $ 218.2      $ 319.9      $ 429.5   
  

 

 

   

 

 

   

 

 

 

(2)    Adjusted EBITDA is calculated as follows:

      

EBITDA

   $ 218.2      $ 319.9      $ 429.5   

Add:

      

Stock-based compensation (a)

     8.5        13.9        18.8   

Goodwill impairment charges (b)

     139.2        156.0        —     

Business realignment and exit activities (c)

     79.5        26.7        15.5   

Acquisition accounting adjustments (d)

     —          0.3        22.0   

Asset impairment charges (e)

     —          1.6        25.0   

Product liability and litigation expenses (f)

     4.8        4.7        4.2   

Rembrandt settlement (g)

     —          —          58.4   

Acquisition related costs (h)

     —          —          27.2   

Licensing milestone (i)

     —          —          10.0   

Legal judgment related to Brazil distributor termination (j)

     —          3.4        (3.0

Foreign currency, net (k)

     1.6        9.1        9.8   

Other, net (l)

     2.3        2.5        1.6   

Equity in losses of equity method investee (m)

     17.8        20.8        24.1   
  

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 471.9      $ 558.9      $ 643.1   
  

 

 

   

 

 

   

 

 

 

 

  (a) Represents stock-based compensation expense recognized under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718 Compensation—Stock Compensation. The 2010 amount excludes $1.1 million of such expense that is included in the line item called “business realignment and exit activities.”

 

 

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  (b) Goodwill impairment charge recorded in 2010 represents the write-down of the surgical segment’s Europe reporting unit’s goodwill. The charge in 2011 represents the write-down of the surgical segment’s Americas reporting unit’s goodwill. See Note 1—Basis of Presentation and Summary of Significant Accounting Policies—Goodwill for further discussion.
  (c) Includes exit activity charges of $64.2 million, $18.9 million and $11.2 million in 2010, 2011 and 2012, respectively. See Note 13—Exit Activities and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Recent Developments and Other Factors Affecting Our Results of Operations—Exit Activities” for further discussion on exit activities. Also includes other expenses for business realignment initiatives benefitting ongoing operations of $15.3 million, $7.8 million and $4.3 million in 2010, 2011 and 2012, respectively.
  (d) Represents the increase in cost of goods sold as a result of the step-up to inventory to fair market value recorded in connection with the Waicon and ISTA acquisitions. The Waicon inventory that was revalued was sold in 2011 and 2012, and the ISTA inventory that was revalued was sold in 2012.
  (e) Charges associated with the write-down of investments in equity securities using the cost method of accounting. Of the total impairment in 2012, $23.0 million relates to an equity investment in a privately held company. See Note 6—Other Long-Term Investments—Investment in Cost Method Investees for further discussion.
  (f) Represents expenses associated with product liability cases related to the 2006 MoistureLoc product recall and the cost of actual MoistureLoc claims settled (net of insurance recoveries); and expenses associated with the legal proceedings, including the Wilmington Partners matter, the Rembrandt arbitration and certain governmental investigations, described in Note 17—Other Matters and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Legal Proceedings.”
  (g) Represents settlement expense related to the Rembrandt arbitration as described in Note 17 — Other Matters.
  (h) Represents costs associated with the acquisition and integration of Waicon and ISTA, including severance, integration costs and professional fees ($23.6 million) and fees incurred in relation to the evaluation of a potential acquisition ($3.6 million).
  (i) Represents payment of a development milestone to NicOx, S.A. (“NicOx”) upon publication of favorable results of a Phase 2b clinical study related to latanaprostene bunod, a development stage drug compound for which we have licensed global rights from NicOx. GAAP requires such payments to be expensed to research and development expense, up until the time a product is approved for commercial sale, after which time such milestone payments are capitalized as intangible assets and amortized.
  (j) Represents expense related to a 2011 legal judgment associated with our termination of a distributor in Brazil, which was partially overturned on appeal in 2012.
  (k) Represents foreign currency expense per our financial statements that primarily reflects the effects of changes in foreign exchange rates on intercompany transactions denominated in currencies other than an entity’s functional currency, to the extent not offset by our ongoing foreign currency hedging programs. See Note 1—Basis of Presentation and Summary of Significant Accounting Policies—Foreign Currency for further discussion.
  (l) This adjustment is comprised of non-cash losses associated with the retirement of fixed assets ($0.7 million in 2010, $2.0 million in 2011 and $1.1 million in 2012). The remainder of the balance was due to individually immaterial items.
  (m) Represents our share of the net loss of the TPV joint venture accounted for under the equity method of accounting in accordance with FASB ASC Topic 323, Equity Method Investments and Joint Ventures. On January 25, 2013, we completed the acquisition of all outstanding and unowned shares of TPV.

 

(3) Calculated as total debt less cash and cash equivalents divided by Adjusted EBITDA as defined in (2), for each respective period.
(4) Calculated as Adjusted EBITDA as defined in (2) divided by cash paid for interest, for each respective period.

 

 

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MARKET AND INDUSTRY DATA AND FORECASTS

Certain market and industry data included in this prospectus has been obtained from third-party sources that we believe to be reliable. Market estimates are calculated by using independent industry publications, government publications and third-party forecasts in conjunction with our assumptions about our markets. We have not independently verified such third-party information. While we are not aware of any misstatements regarding any market, industry or similar data presented herein, such data involves risks and uncertainties and is subject to change based on various factors, including those discussed under the headings “Special Note Regarding Forward-Looking Statements” and “Risk Factors” in this prospectus.

 

 

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RISK FACTORS

This offering and investing in our common stock involves a high degree of risk. You should carefully consider the following risks and uncertainties described below, as well as the other information contained in this prospectus, including our consolidated financial statements and related notes included elsewhere in this prospectus, before deciding to invest in our common stock. The occurrence of any of the following risks could materially and adversely affect our business, prospects, financial condition, results of operations and cash flow, in which case the trading price of our common stock could decline and you could lose all or part of your investment.

Risks Related to Our Business and Industry

The markets for our eye care products are intensely competitive, and new medical and technological developments may reduce the need for our products.

The eye care industry is characterized by continuous product development and technological innovation. Our success and future growth depend, in part, on our ability to develop products that are more effective at treating conditions of the eye or that incorporate the latest technologies. In addition, we must be able to effectively manufacture and market those products and convince a sufficient number of consumers and eye care practitioners to use them. Our existing products face the risk of obsolescence or reduced demand if a competing, more technologically advanced product is introduced by our competitors or if we introduce a new product that represents a substantial improvement over our existing products. Similarly, if we fail to make sufficient investments in research and development programs or if we focus on technologies that do not lead to more effective or acceptable products, our current and planned products may not be accepted in the marketplace or could be overtaken by more effective or advanced products.

We have numerous competitors in the United States and abroad, including Allergan, Inc.; the Abbott Medical Optics business of Abbott, Inc. (“AMO”); the CooperVision Business of the Cooper Companies, Inc.; Hoya; the Vistakon business of Johnson & Johnson; Merck & Co., Inc.; the Alcon Laboratories business of Novartis AG (“Alcon”); Pfizer Inc.; Santen Incorporated; and STAAR Surgical Company. These or other competitors may develop technologies or products that are more effective or less costly than our current or future products, which could render our products obsolete or noncompetitive. Examples of such technologies or products could include contact lenses with anti-microbial or anti-allergenic features, which, based on public information, we believe are in development and could have a significant impact on the contact lens market, and the development of contact lenses for drug delivery or the control of myopia. In addition, competitors may introduce generic products that compete directly or indirectly with our products and reduce our unit sales and prices. Some of our competitors have substantially more resources and a greater marketing scale than we do, and the medical technology and device industry continues to experience consolidation, resulting in an increasing number of larger and more diversified companies. Some of our competitors can spread their research and development costs and marketing and promotion costs over much broader revenue bases and have more resources to influence customer, physician and distributor buying decisions. In addition, some of our competitors may enter into markets in which they do not currently compete with us. For example, several large research-based pharmaceutical companies have indicated an interest in the ophthalmic healthcare sector and, in some cases, have recently acquired companies in the eye care industry or entered into partnerships in the eye health industry. Smaller competitors also have introduced innovation in segments of the eye health market and gained substantial market share as a result. Examples include Sauflon (contact lenses in the United Kingdom), ISTA Pharmaceuticals (topical eye medicines in the United States), which we have since acquired, and Théa (topical eye medicines and an innovative delivery system in Europe). Our inability to produce and develop products that compete effectively against our competitors’ products, or to effectively advertise, promote and market our products against competitors’ offerings, could have a material adverse effect on our sales, results of operations and cash flows.

 

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We devote a substantial amount of resources to research and development, but our research and development may not yield new products that achieve commercial success and compete successfully.

Our research and development process is expensive, prolonged and entails considerable uncertainty and there is a high risk that financial and other resources invested in our research and development programs will not generate financial returns. Because of the complexities and uncertainties associated with ophthalmic research and development in particular, and healthcare-related research and development in general, products we are currently developing, or that we develop in the future, may not complete the development process or obtain the regulatory approvals required for us to market such products successfully, potentially after substantial resources have been devoted to these products. See “—We are subject to extensive government regulation related to the research, development, testing and manufacturing of our products that increases our costs and could prevent us from selling our products.”

We also have various licensing and development programs with third parties that may require us to make future milestone payments to these third parties. These contingent payments are not considered contractual obligations and have not been recorded in our financial statements. Even if we are required to make a milestone payment, this does not mean that the product subject to the milestone payment will be successful.

Successful development of a product and obtaining the required regulatory approvals for a product does not mean that a product will achieve commercial success. It typically takes a significant amount of time to successfully complete the development process and obtain the regulatory approvals required for us to market our products, so our products may be obsolete by the time we are able to introduce them into the market. In addition, even if we successfully develop and obtain approvals for a new product, this product may later exhibit adverse effects that limit or prevent its use or that forces us to withdraw the product from the market or to revise our labeling to limit the indications for which the product may be used. See “—We must comply with post-approval legal and regulatory requirements or our products could be subject to restrictions or withdrawal from the market.” Our inability to develop products that we are able to successfully introduce into the market could have a material adverse effect on our business, prospects, financial condition and results of operations.

We are subject to extensive government regulation related to the research, development, testing and manufacturing of our products that increases our costs and could prevent us from selling our products.

We are subject to extensive and evolving government regulation, including inspection of and controls over testing and manufacturing, safety and environmental controls and efficacy. Government regulation substantially increases the cost of developing and manufacturing our products.

In the United States, we must obtain approval from the U.S. Food & Drug Administration (the “FDA”) for each pharmaceutical product that we market and FDA approval or clearance for each medical device that we market. The FDA approval process is typically lengthy and expensive, and approval is never certain. In January 2011, the FDA announced a plan of action that included 25 action items designed to make its premarket clearance process more rigorous and transparent. Since then, the FDA has implemented some changes intended to improve its premarket programs. Some of these changes and proposals under consideration could impose additional regulatory requirements on us that could delay our ability to obtain new clearances for our products, increase the cost of compliance, or restrict our ability to maintain our current clearances. Products distributed outside the United States are also subject to government regulation, which may be equally or more demanding than in the United States.

Currently, we are actively pursuing approval for a number of products from regulatory authorities in a number of countries, including the United States, countries in the European Union (“EU”) and certain countries in Asia. The clinical trials required to obtain such approvals are complex and expensive and their outcomes are uncertain. We incur substantial expense for, and devote significant time to, clinical trials, but cannot be certain that the trials will ever result in the commercial sale of a product. Positive results from preclinical studies and early clinical trials do not ensure positive results in later clinical trials, which form the basis of an application for regulatory approval. We may suffer significant setbacks in clinical trials, even after earlier clinical trials show promising results. Any of our products may produce undesirable side effects that could cause us or regulatory authorities to interrupt, delay or halt

 

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clinical trials of a pharmaceutical or medical device candidate or rescind its regulatory approval, even after the product is in the market. We, the FDA or another regulatory authority may suspend or terminate clinical trials at any time if we or they believe the trial participants face unacceptable health risks. Non-compliance with applicable regulatory requirements can result in fines, injunctions, penalties, mandatory recalls or seizures, suspensions of production, denial or withdrawal of pre-marketing approvals (“PMAs”), or recommendations by the regulatory body against governmental contracts and criminal prosecution, each of which could have a material adverse effect on our business, operations or financial condition.

The FDA and other regulatory agencies also inspect facilities at which we manufacture our products. Failure to meet FDA and other regulations could result in penalties being assessed against us or, in extreme cases, result in the closure of a facility. While we have mechanisms in place to monitor compliance, we cannot ensure that the FDA or other regulatory agencies will not find indications of non-compliance. Fines or other enforcement responses, such as a temporary or permanent facility closure, could have a material adverse effect on our business, operations or financial condition.

Our development and marketing of products may fail or be delayed by many factors during the product approval process including, for example, the following:

 

   

inability to attract clinical investigators for trials;

 

   

inability to recruit patients at the expected rate;

 

   

failure of the trials to demonstrate a product’s safety or efficacy;

 

   

unavailability of FDA or other regulatory agencies’ accelerated approval processes;

 

   

inability to follow patients adequately after treatment;

 

   

changes in the design or formulation of a product;

 

   

inability to manufacture sufficient quantities of materials to use for clinical trials;

 

   

unforeseen governmental or regulatory delays;

 

   

failure of manufacturing facilities to meet regulatory requirements; or

 

   

failure of clinical trial management, oversight or implementation to meet regulatory requirements.

As a result, our new products could take a significantly longer time than we expect to gain regulatory approval or may never gain approval. If a regulatory authority delays approval of a potentially significant product or if we are unable to obtain regulatory approval at all, our market value and operating results may decline, which could have a material adverse effect on our business, prospects, financial condition and results of operations.

We must comply with post-approval legal and regulatory requirements or our products could be subject to restrictions or withdrawal from the market.

Even if the FDA or another regulatory agency approves a product, the approval may limit its indicated uses, may otherwise limit our ability to promote, sell and distribute it or may require post-marketing studies or impose other post-marketing obligations.

Our manufacturing, sales, promotion and other activities following product approval are subject to regulation by numerous regulatory and law enforcement authorities, including, in the United States, the FDA, the Federal Trade Commission, the Department of Justice (the “DOJ”), the Centers for Medicare and Medicaid Services (“CMS”), other divisions of the Department of Health and Human Services and state and local governments and comparable foreign authorities. We are subject to continual recordkeeping and reporting requirements, review and periodic inspections by regulatory authorities for any product for which we currently have or may obtain marketing approval, along with the associated manufacturing processes, post-approval clinical data that we collect and any adverse events and malfunctions associated with the products. Our advertising and promotional activities are also subject to stringent regulatory rules and oversight.

 

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For example, the Food and Drug Administration Amendments Act of 2007 granted the FDA extensive authority to impose post-approval clinical study and clinical trial requirements, require safety-related changes to product labeling, review advertising aimed at consumers and require the adoption of risk management plans, referred to in the legislation as risk evaluation and mitigation strategies. These risk evaluation and mitigation strategies may include requirements for special labeling or medication guides for patients, special communication plans to healthcare professionals and restrictions on distribution and use. New requirements and industry guidelines have also been adopted to require the posting of ongoing drug and device clinical trials on public registries and the disclosure of designated clinical trial results. We must continually review adverse event and other available safety information that we receive concerning our products and must make expedited and periodic reports to regulatory authorities. In some situations, we have to consider whether to implement a voluntary product recall. We might be required to report to the FDA certain drug and medical device recalls, device malfunctions or product defects and failures to meet federal product standards. In the United States, any free samples we distribute to physicians must be carefully monitored and controlled, and must otherwise comply with the requirements of the Prescription Drug Marketing Act and FDA regulations. In addition, certain of our products must comply with child-resistant packaging requirements under the Poison Prevention Packaging Act and Consumer Product Safety Commission regulations.

The Physician Payment Sunshine Act (the “Sunshine Act”) was enacted in 2010 as part of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act (collectively, the “PPACA”). The Sunshine Act requires manufacturers of pharmaceuticals and medical devices to annually report certain payments and other transfers of value to physicians and teaching hospitals, as well as investment interests held by physicians and their immediate family members. In recent years, several states in the United States have also enacted legislation requiring pharmaceutical companies to file periodic reports with the state, make periodic public disclosures on sales, marketing, pricing, clinical trials and other activities, and/or register their sales representatives, as well as establish marketing compliance programs and prohibiting pharmacies and other healthcare entities from providing certain physician prescribing data to pharmaceutical companies for use in sales and marketing. Many of these requirements are new and their breadth and application is uncertain.

Depending on the circumstances, failure to meet these applicable legal and regulatory requirements can result in criminal prosecution, fines or other penalties, injunctions, recall or seizure of products, total or partial suspension of production, denial or withdrawal of PMAs, private “qui tam” actions brought by individual whistleblowers in the name of the government or refusal to allow us to enter into supply contracts, including government contracts, any of which could have a material adverse effect on our business, prospects, financial condition and results of operations.

The concentration of sales with large wholesale and retail customers or fluctuations in their buying patterns may adversely affect our sales and profitability.

A significant portion of our pharmaceutical and eye care products are sold to major pharmaceutical and healthcare distributors and major retail chains in the United States with whom we generally do not have long-term contracts or contracts at all. This distribution network has undergone significant consolidation and, as a result, a smaller number of large sophisticated wholesale distributors and retail pharmacy chains control a significant share of the market. Consolidation of drug wholesalers and retail pharmacy chains has led to, and may further increase, pricing and competitive pressures on pharmaceutical manufacturers, including us. Our sales, profitability and quarterly growth comparisons may be affected by fluctuations in the buying patterns of major distributors, retail chains and other trade buyers. These fluctuations may result from seasonality, pricing, excess inventories, buying decisions or other factors. Distributors, retail chains and other trade buyers may take actions that affect us for reasons we cannot always anticipate or control, such as the introduction of a competing product or the perceived quality of our products. We are exposed to a concentration of credit risk with respect to these customers. In addition, our customers include certain state run hospitals or other health organizations in countries such as Spain, Italy and Portugal, where there has been recent concern about the financial health of these

 

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European countries. If any of these customers are affected by financial difficulty, this could have a material adverse effect on our business, as we may lose the ability to collect outstanding receivables from these customers.

If we fail to maintain our relationships with healthcare providers, including ophthalmologists, optometrists, opticians, hospitals, ambulatory surgical centers, corporate optometry chains and group purchasing organizations, customers may not buy our products and our sales and profitability may decline.

We market our products to numerous healthcare providers, including eye care professionals, public and private hospitals, ambulatory surgical centers, corporate optometry chains and group purchasing organizations. We have developed and strive to maintain close relationships with members of each of these groups who assist in product research and development and advise us on how to satisfy the full range of patient and surgeon needs. We rely on these groups to recommend our products to their patients and to other members of their organizations. Consumers in the eye health industry, especially contact lens and lens care consumers, have a tendency not to switch products regularly and are repeat consumers. As a result, the success of our products, particularly our vision care products, is dependent upon a physician’s initial recommendation of our products and a consumer’s initial choice to use our products. Because clinicians are the key decision makers with respect to prescribing pharmaceuticals, utilizing surgical products and influencing consumer product decisions in the eye care industry, the failure of our products to retain the support of eye care professionals, public and private hospitals, ambulatory surgical centers, optometry chains or group purchasing organizations could have a material adverse effect on our sales and profitability.

We have in the past and may in the future have to conduct product recalls or voluntary market withdrawals, which could have a material adverse impact on our business, prospects, financial condition and results of operations.

The manufacturing and marketing of pharmaceuticals and medical devices, including surgical equipment and instruments, involve an inherent risk that our products may prove to be defective and cause a health risk even after regulatory approvals have been obtained. In that event, we may voluntarily implement a recall or market withdrawal or may be required to do so by a regulatory authority. On May 15, 2006, we announced a worldwide voluntary recall of MoistureLoc following an investigation into an increase in fungal infections among contact lens wearers in the United States and certain Asian markets. The MoistureLoc recall adversely impacted our business due to lost MoistureLoc revenues, damage to our reputation and customer relations and the incurrence of substantial costs due to product returns, increased marketing expense to support brand rebuilding activities and associated investigations, commercial actions and related legal actions brought against us. In 2011, we announced a voluntary recall of Soothe Xtra Protection (XP) dry eye drops based on testing that showed specific lots of the Soothe Xtra Protection (XP) product were out of specification for preservative efficacy prior to their listed shelf expiration. This recall negatively impacted our U.S. pharmaceutical sales in 2011.

Based on this experience, we believe that the occurrence of a recall could result in significant costs to us, potential disruptions in the supply of our products to our customers and adverse publicity, all of which could harm our ability to market our products. A recall of one of our other products or a product manufactured by another manufacturer could impair sales of other similar products we market as a result of confusion concerning the scope of the recall or perceived risks relating to our similar products. A product recall also could lead to a regulatory agency inspection or other regulatory action.

Because of our reliance on manufactured products, an interruption of our manufacturing operations could negatively impact our business.

We derive most of our sales from manufactured products, and we also rely on a number of manufactured components for our products. Any prolonged disruption in the operation of our manufacturing facilities or those of our third-party manufacturers could cause product shortages and have an adverse impact on our business. We rely on global manufacturing processes that are complex, involve multiple third parties, require significant capital expenditures and are often subject to lengthy regulatory approvals. Problems may arise during the manufacturing

 

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process for a variety of reasons, including technical, labor or other difficulties, equipment malfunction, contamination, failure to follow specific protocols and procedures, destruction of or damage to any facility (as a result of natural disaster, use and storage of hazardous materials or other events) or other reasons. In the event of a quality control issue, we may voluntarily, or our regulators may require us to, close a facility indefinitely.

Some of our products are manufactured or assembled by third parties under contract. We believe there are a limited number of competent, high-quality third-party manufacturers in the industry that meet our standards, and we may be unable to manufacture certain products in a timely manner, or at all, if any of our third-party manufacturers cease or interrupt production or otherwise fail to supply us with these products.

A failure to manufacture products on a timely basis, or a failure to manufacture products that meet certain quality standards, could lead to lost revenue, increased costs, decreased profitability, customer dissatisfaction and damage to our customer relations, and time and expense spent investigating the cause. If problems are not discovered before the affected product is released to the market, recall and product liability costs as well as reputational damage may also be incurred.

Some of our key products are only manufactured at a single facility, and any disruption in the manufacturing of a product at one of these facilities could impair our ability to meet demand for some of our key products.

In some cases, we and our third-party manufacturers manufacture a product, including some of our key products and components, at a single manufacturing facility. Many of these facilities are outside the United States. In many cases, regulatory approvals of our products are limited to one or more specific approved manufacturing facilities. If we fail to produce enough of a product at a facility, or if our manufacturing process at that facility is disrupted, we may be unable to deliver that product to our customers or to identify and validate alternative sources for the affected product on a timely basis. Disruption of our or our third-party manufacturers’ facilities could arise for a variety of reasons including technical, labor or other difficulties, equipment malfunction, contamination, failure to follow specific protocols and procedures, destruction of, or damage to, any facility (as a result of natural disaster, use and storage of hazardous materials or other events), quality control issues, bankruptcy of the manufacturer or other reasons. In addition, we do not generally have long-term contracts with our third-party suppliers. Any of these disruptions in the production of our key manufacturers could have a negative impact on our sales and profitability.

Disruption to our distribution operations could adversely affect our business.

We primarily distribute products from our distribution facilities in Amsterdam, Netherlands and Greenville, South Carolina. Especially because our distribution facilities are so concentrated, any prolonged disruption in the operations of our existing distribution facilities, whether due to technical, labor or other difficulties, equipment malfunction, contamination, failure to follow specific protocols and procedures, destruction of or damage to any facility (as a result of natural disaster, use and storage of hazardous materials or other events) or other reasons, could have a material adverse effect on our business, prospects, financial condition and results of operations.

Except for North America and Europe, we rely on independent distributors in international markets who generally control the importation and marketing of our product within their territories. We generally grant exclusive rights to these distributors and rely on them to understand local market conditions, to diligently sell our products and to comply with local laws and regulations. The operation of local laws and our agreements with distributors can make it difficult for us to change quickly from a distributor who we feel is underperforming. If we do terminate an independent distributor, we may lose customers who have been dealing with that distributor. Because we do not have local staff in many of the areas covered by independent distributors, it may be difficult for us to detect failures in our distributors’ performance or compliance. Actions by independent distributors that are beyond our control could result in flat or declining sales in that territory, harm to the reputation of our company or its products, or legal liability.

 

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We rely on independent suppliers for many of the active ingredients and components used in our products and interruptions in the supply of these materials or the loss of any of these suppliers could disrupt our manufacturing process.

We single-source active ingredients contained in many of our pharmaceutical and consumer eye care products. In these cases, obtaining the required regulatory approvals, including from the FDA, to use alternative suppliers may be a lengthy process. In many cases, we also use single-source suppliers for other components and raw materials used in our products such as various chemicals and other packaging materials. The loss of any of these or other significant suppliers or the inability of any such supplier to meet performance and quality specifications, requested quantities or delivery schedules could cause our sales and profitability to decline and have a negative impact on our customer relations. In addition, a significant price increase from any of our single-source suppliers could cause our profitability to decline if we cannot increase our prices to our customers. In order to ensure sufficient supply, we may determine that we need to provide financing to some of our single-source suppliers, which could increase our financial exposure to such suppliers.

In addition, failure of our suppliers to make raw materials that conform to our specifications, or our failure to detect raw materials from suppliers that are not of sufficient quality, could affect the quality of product that we produce. A decrease in the quality of our products could cause our sales and profitability to decline materially.

Economic conditions and price competition may cause sales of our products used in elective surgical procedures to decline and reduce our profitability.

Sales of products used in elective surgical procedures, such as laser refractive surgery, have been and may continue to be adversely impacted by economic conditions. Generally, in both the United States and abroad, the costs of elective surgical procedures are borne by individuals without reimbursement from their medical insurance providers or government programs. Accordingly, individuals may be less willing to incur the costs of these procedures in weak or uncertain economic conditions and, as a result, there may be a decline in the number of these procedures. Sales of our laser refractive surgical equipment and disposable products used in laser refractive surgery may come under pressure during periods of economic uncertainty. A softening in demand for laser refractive surgery could impact us by reducing our profits if customers with whom we have placed laser refractive surgical equipment are unable to make required payments to us.

Unauthorized or illegal importation of products from countries with lower drug, medical device and vision care product prices to countries with higher drug, medical device and vision care product prices may reduce the prices we receive for our products.

In the United States and elsewhere, our products are subject to competition from lower priced versions of our products and competing products from Canada, Mexico and other countries where there are government imposed price controls or other market dynamics that make the products lower priced. The ability of patients and other customers to obtain these lower priced imports has grown significantly as a result of regulatory harmonization and common market or trade initiatives, such as those underpinning the EU, and the Internet. Despite government regulations in some countries aimed at limiting low priced imports, the volume of imports may continue to rise due to the limited enforcement resources, as well as political pressure to permit the imports as a mechanism for expanding access to lower priced medicines.

The importation of products from lower priced markets into higher priced markets adversely affects our revenues and profitability in our higher priced markets, such as the United States. This impact could become more significant in the future, and the impact could be even greater if there are further changes to the law or if state or local governments in higher priced markets take further steps to import products from abroad.

 

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The majority of our business is conducted outside the United States, subjecting us to additional risks that could adversely affect our business.

Our products are sold in more than 100 countries. More than 60% of our net sales in 2012 came from customers outside the United States. In the past five years, our net sales have grown significantly in emerging markets, including Brazil, Russia, India, China, Turkey, Poland and Latin America. Economic, social and political conditions, laws, practices and local customs vary widely among the countries in which we sell our products.

Our international operations are, and will continue to be, subject to a number of risks and potential costs, including:

 

   

multiple non-U.S. regulatory requirements that are subject to unexpected changes and that could restrict our ability to manufacture, market or sell our products;

 

   

differing local product preferences and product requirements;

 

   

social, political and economic uncertainty and instability;

 

   

inflation, recession, fluctuations in foreign currency exchange and interest rates and discriminatory fiscal policy;

 

   

changes in non-U.S. medical reimbursement and coverage policies and programs;

 

   

lower margins;

 

   

diminished protection of intellectual property and political pressure to weaken existing intellectual property protection in some countries;

 

   

uncertainties as to local laws and enforcement of contractual obligations;

 

   

trade protection measures and import or export licensing requirements;

 

   

potential tax costs associated with, and possible changes in governmental regulation related to, repatriating cash from our non-U.S. subsidiaries and managing specific cash needs of the business across geographies;

 

   

complexity and difficulty in establishing, staffing and managing international operations;

 

   

differing labor regulations; and

 

   

potentially negative consequences from changes in tax laws.

Our continued success as a global company depends, in part, on our ability to develop and implement policies and strategies that are effective in anticipating and managing these and other risks and costs in the non-U.S. countries where we do business. Any of these factors could have a material adverse effect on our business, prospects, financial condition and results of operations.

We could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and other worldwide anti-bribery laws.

Our products are sold in more than 100 countries, and we conduct most of our international business through wholly owned subsidiaries. Managing distant subsidiaries and fully integrating them into our business is challenging. While we seek to integrate our international subsidiaries fully into our operations, direct supervision of every aspect of their operations is impossible, and, as a result, we rely on our local managers and staff to manage our business in local jurisdictions. Cultural factors, language differences and the local legal climate can result in misunderstandings among internationally dispersed personnel, and increase the risk of failing to meet U.S. and international legal requirements, including with respect to the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), the U.S. Foreign Corrupt Practices Act of 1977 (the “FCPA”) and the United Kingdom’s Bribery Act of 2010. The risk that unauthorized conduct may go undetected is greater in international

 

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subsidiaries. Our reliance on international subsidiaries and independent distributors demands a high degree of vigilance in maintaining our policy against participation in corrupt activity. In many of our markets outside the United States, doctors and hospital administrators may be deemed government officials. Other U.S. companies in the medical device and pharmaceutical field have faced criminal penalties under the FCPA for allowing their agents to deviate from appropriate practices in doing business with such individuals.

We are subject to the FCPA, which generally prohibits companies and their intermediaries from making payments in violation of law to non-U.S. government officials for the purpose of obtaining or retaining business or securing any other improper advantage. We are also subject to similar anti-bribery laws in the jurisdictions in which we operate, including the United Kingdom’s Bribery Act of 2010, which went into effect in the third quarter of 2011, which also prohibits commercial bribery and makes it a crime for companies to fail to prevent bribery. These laws are complex and far-reaching in nature, and, as a result, we cannot assure you that we would not be required in the future to alter one or more of our practices to be in compliance with these laws or any changes in these laws or the interpretation thereof. Any violations of these laws, or allegations of such violations, could disrupt our operations, involve significant management distraction, involve significant costs and expenses, including legal fees, and could result in a material adverse effect on our business, prospects, financial condition and results of operations. We could also suffer severe penalties, including criminal and civil penalties, disgorgement and other remedial measures.

Pricing pressure from changes in third-party coverage and reimbursement schemes may impact our ability to sell our surgical and pharmaceutical products at prices necessary to support our current business strategy.

Managed care organizations and governments continue to place increased emphasis on the delivery of more cost-effective medical therapies. For example, major third-party payers for hospital services, including government insurance plans, Medicare and Medicaid in the United States and private healthcare insurers, have substantially revised their payment methodologies during the last few years, resulting in stricter standards for, and lower levels of reimbursement of, hospital and outpatient charges for some medical procedures. There have also been recent initiatives by third-party payers to challenge the prices charged for medical products. This cost-cutting emphasis could adversely affect demand, sales and prices of some of our surgical and pharmaceutical products. Physicians, hospitals and other healthcare providers may be reluctant to purchase our products if they do not receive substantial reimbursement from third-party payers for the cost of those pharmaceutical and surgical products and for procedures performed using those surgical products. Reductions in the prices for our products in response to these trends could reduce our profit margins, which would adversely affect our ability to invest and grow our business.

With some of our products, we are subject to government regulation with respect to the prices we charge and the rebates we offer to customers, including rebates paid to certain governmental entities. Pricing and rebate programs must comply with the Medicaid drug rebate requirements of the Omnibus Budget Reconciliation Act of 1990, as amended, the Veterans Healthcare Act of 1992, as amended, and the Deficit Reduction Act of 2005, as amended. CMS imposes controls on the prices at which medical devices and physician-administered drugs used in ophthalmic surgery are reimbursed for Medicare patients and many private third-party payers use CMS guidelines in determining reimbursement levels. In March 2010, the United States government enacted PPACA to implement various payment system reforms. This legislation increased rebates pharmaceutical manufacturers must pay to the Medicaid program, imposed new discount obligations on pharmaceutical manufacturers with respect to Medicare Part D, imposed an annual fee on pharmaceutical manufacturers and an excise tax on medical device products (excluding contact lenses), imposed additional reporting requirements surrounding interactions with healthcare providers, and affected the manner in which insurers provide medical coverage.

Federal and state programs that reimburse at typically predetermined fixed rates may decrease or otherwise limit amounts available through reimbursement. For example, in the EU, member states impose controls on whether products are reimbursable by national or regional health service providers and on the prices at which

 

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medicines and medical devices are reimbursed under state-run healthcare schemes. Some member states operate reference pricing systems in which they set national reimbursement prices by reference to those in other member states. Other governmental funding restrictions, legislative proposals and interpretations of policy may negatively impact amounts available through reimbursement, including by restricting payment increases to hospitals and other providers through reimbursement systems. We are not able to predict whether changes will be made in the rates prescribed by these governmental programs or, if they are made, what effect they could have on our business. However, governmental rate changes and other similar developments could negatively affect our ability to sell our products.

Additionally, managed care organizations in the United States restrict the pharmaceutical products that doctors in those organizations can prescribe through the use of formularies, which are the lists of drugs that physicians are permitted to prescribe to patients in a managed care organization. Failure of our pharmaceutical products to be included on formularies, additional price concessions necessary to be included on formularies or occupying positions on formularies that are lower than those of the products we compete with, including generic products, could have an adverse effect on our revenues and profits. Reductions in the prices for our products in response to these trends could reduce our profits.

As a result of our significant operations outside the United States, our business faces significant foreign currency exchange rate exposure, which could materially negatively impact our results of operations.

The results of operations and the financial position of our local operations are generally reported in the relevant local currencies and then translated into U.S. dollars at the applicable exchange rates for inclusion in our consolidated financial statements, exposing us to currency translation risk. In 2012, our most significant currency exposures were to the Japanese yen and the euro. The exchange rates between these and other local currencies and the U.S. dollar may fluctuate substantially. In addition, we are exposed to transaction risk because we may enter into agreements requiring us to pay or receive settlement in a different currency. Fluctuations in the value of the U.S. dollar against other currencies have had in the past, and may have in the future, an adverse effect on our operating margins and profitability.

If we market products in a manner that violates federal, state and non-U.S. laws pertaining to healthcare fraud and abuse, we may be subject to civil or criminal penalties.

We are subject to various federal, state and non-U.S. laws pertaining to healthcare fraud and abuse, including anti-kickback laws and physician self-referral laws. The U.S. federal healthcare program anti-kickback statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration to induce or in return for purchasing, leasing, ordering, arranging for or recommending the purchase, lease or order of any healthcare item or service reimbursable under Medicare, Medicaid or other federally financed healthcare programs. This statute has been interpreted to apply to arrangements between pharmaceutical or medical device manufacturers, on the one hand, and prescribers, purchasers, formulary managers and other healthcare related professions, on the other hand. Due to recent legislative changes, a person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it. In addition, the government may assert that a claim including items or services resulting from a violation of the federal anti-kickback statute constitutes a false or fraudulent claim for purposes of the false claims statutes. See “—Unfavorable results in future claims as well as the outcome of pending or future investigations could have a material adverse effect on our business, prospects, financial condition and results of operations” for information about two investigations relating to marketing and promotional activities to which we are subject.

Device and drug manufacturers are also required to report and disclose any investment interests held by physicians and their immediate family members during the preceding calendar year. Failure to submit required information may result in significant civil monetary penalties. Although there are a number of statutory exemptions and regulatory safe harbors for certain common activities, the exemptions and safe harbors are drawn narrowly, and practices that involve remuneration could be subject to scrutiny if they do not qualify for an exemption or safe harbor. Violations of these laws are punishable by criminal and civil sanctions, including, in

 

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some instances, exclusion from participation in government healthcare programs, including, in the United States, Medicare, Medicaid, Veterans Administration health programs and TRICARE.

Compliance with domestic and international laws and regulations pertaining to the privacy and security of health information is time consuming, difficult and costly.

We are subject to various domestic and international privacy and security laws and regulations pertaining to the privacy and security of health information, and failure to comply with these laws and regulations can result in the imposition of significant civil and criminal penalties. One such law is the Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009 (collectively, “HIPAA”), which mandates, among other things, the adoption of uniform standards for the electronic exchange of information in common healthcare transactions. HIPAA also mandates standards relating to the privacy and security of individually identifiable health information, which require the adoption of administrative, physical and technical safeguards to protect such information. In addition, many states have enacted comparable laws addressing the privacy and security of health information, some of which are more stringent than HIPAA. The costs of compliance with these laws, including the protection of electronically stored information and potential liability associated with failure to do so, could adversely affect our business, prospects, financial condition and results of operations.

We are increasingly dependent on sophisticated information technology and infrastructure and our operations could be disrupted if we are unable to protect such systems against data corruption, cyber-based attacks or network security breaches.

We are increasingly dependent on sophisticated information technology and infrastructure to process, transmit and store electronic information. In particular, our information technology infrastructure handles electronic communications among our locations around the world and between our personnel and our subsidiaries, customers, and suppliers. We must constantly update our information technology infrastructure and we cannot assure you that our current global management information system will continue to meet our current and future business needs. Modification, upgrade or replacement of such system may be costly. Any significant breakdown, intrusion, interruption or corruption of these systems or data breaches can create system disruptions, shutdowns or unauthorized disclosure of confidential information. If we are unable to prevent such events from occurring, our operations could be disrupted or we may suffer financial damage or other loss including fines or criminal penalties because of lost or misappropriated information.

Litigation, including product liability lawsuits, may harm our business or otherwise distract our management.

Substantial, complex or extended litigation could cause us to incur large expenditures, affect our ability to market and distribute our products and distract our management. Lawsuits by employees, stockholders, customers or competitors, or potential indemnification obligations and limitations of our director and officer liability insurance, could be very costly and substantially disrupt our business. Disputes from time to time with such companies or individuals are not uncommon, and we cannot be sure that we will always be able to resolve such disputes on terms favorable to us.

From time to time, we are named as a defendant in product liability lawsuits. For example, we have been named as a defendant in approximately 324 currently active product liability lawsuits on behalf of individuals who claim they suffered personal injury as a result of using a contact lens solution with MoistureLoc. As of March 5, 2013, there were 628 settlements relating to MoistureLoc product liability lawsuits. Based on this settlement experience, our consolidated balance sheet includes an additional liability and a corresponding insurance recovery asset. These amounts constituted less than 1% of our total current liabilities as of December 29, 2012 and December 31, 2011. Additionally, continued claims related to our previously-marketed Hydroview IOLs have caused reputational harm to our business amongst physicians in Japan and other countries, and we expect our financial exposure to these claims will be covered by our insurance policies.

 

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We may incur material liabilities relating to product liability claims in the future, including claims arising out of procedures performed using our surgical equipment. We currently rely on a combination of self-insurance and third-party insurance to cover potential product liability exposure. The combination of our insurance coverage, cash flows and reserves may not be adequate to satisfy product liabilities we may incur in the future. Even meritless claims could subject us to adverse publicity, hinder us from securing insurance coverage in the future or require us to incur significant legal fees. Successful product liability claims could have a material adverse effect on our business, prospects, financial condition and results of operations.

Our potential liability relating to a Notice of Final Partnership Administrative Adjustment and to various Notices of Deficiency from the Internal Revenue Service could have a material adverse effect on our business, prospects, financial condition and results of operations.

In 1993, we formed a partnership, Wilmington Partners, L.P. (“Wilmington Partners”), to raise additional financing. Several of our subsidiaries contributed various assets in exchange for partnership interests. The contributed assets included a $550 million note (the “Contributed Note”). We determined that the Contributed Note had a tax basis of $550 million upon contribution and therefore that the subsidiary that contributed the Contributed Note had a tax basis of $550 million in its partnership interest in Wilmington Partners.

In June 1999, following a downgrade in our credit rating, we completed a series of restructuring transactions with respect to our interests in Wilmington Partners. In one of those transactions, the subsidiary that had contributed the Contributed Note sold a portion of its partnership interest to an outside investor. This sale generated a long-term capital loss of approximately $348 million that we applied in 1999, carried back to 1998 and carried forward to the years 2001 through 2004. The amount of this loss depends in part on the contributing partner’s tax basis in the Contributed Note at the time of its contribution to Wilmington Partners. After the completion of the restructuring transactions, Wilmington Partners sold all of the assets of one of its operating businesses to an outside party. Wilmington Partners reported both gains and losses on the sale of the business assets. The amounts of gain and loss recognized on this sale depend on the initial tax basis of the Contributed Note and the tax consequences of the subsequent restructurings.

The transactions noted above have been the subject of multiple Internal Revenue Service (“IRS”) reviews, starting in 1996. On December 4, 1996, the IRS initiated an audit of Wilmington Partners’s 1993 taxable year, the year in which Wilmington Partners was formed. That audit was completed with a letter dated March 23, 2000, in which the IRS stated that it would make no adjustments to Wilmington Partners’s tax return for the 1993 taxable year.

On May 12, 2006, the IRS issued a Notice of Final Partnership Administrative Adjustment (“FPAA”) to Wilmington Partners for its two taxable periods that ended during 1999. The IRS asserted that the contributing partner’s tax basis in the Contributed Note at the time of its contribution to Wilmington Partners (and therefore that Wilmington Partners’s initial tax basis in the Contributed Note) was $0, not $550 million. The adjustment affected the amount of gain recognized by Wilmington Partners in 1999 with respect to the sale of the operating business discussed above.

The IRS further asserted that the adjustment to the initial tax basis in the Contributed Note resulted in the disallowance of the long-term capital loss of approximately $348 million that we reported on the sale of the Wilmington Partners partnership interest. The IRS sought to assess additional tax for our 1999 taxable year resulting from the sale of our Wilmington Partners partnership interest and disallowed the losses related to that sale that we had carried back to our 1998 taxable year and carried forward to our taxable years 2001 through 2004; the IRS also made related adjustments to our 2000 and 2005 tax years.

We challenged the FPAA and the IRS’s proposed assessments and adjustments on various grounds in the Tax Court, including the ground that the applicable statute of limitations had expired for the years 1998, 1999 and 2000. On April 30, 2008, the Tax Court issued an Order and Decision stating that the applicable statute of limitations for those years had indeed expired, thereby foreclosing the assessment of any tax in those years resulting from the FPAA adjustments. As discussed further below, this ruling is now supported by a U.S.

 

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Supreme Court opinion in an unrelated case. In the same Order and Decision, the Tax Court ruled that no tax resulting from the FPAA adjustments could be assessed in 2001 through 2004. As discussed further below, this latter ruling is now subject to further proceedings.

The IRS appealed the Order and Decision to the U.S. Court of Appeals for the Second Circuit (the “Second Circuit”). On April 25, 2012, prior to any decision by the Second Circuit in our case, the U.S. Supreme Court released its opinion in a different case, United States v. Home Concrete & Supply, LLC. In Home Concrete, which presented a substantially similar statute of limitations issue as in the Wilmington Partners matter, the Supreme Court rejected the IRS’s statute of limitations argument. Therefore, as a result of Home Concrete, the IRS sought to withdraw its appeal of the Tax Court’s decision in our case with respect to the years 1998, 1999 and 2000.

The IRS did not, however, seek to withdraw its appeal with respect to our 2001 through 2004 tax years, arguing that although it could not assess taxes for years prior to 2001, it could make adjustments in those prior years that would affect losses carried forward to the 2001 through 2004 tax years. The total assessments now at issue are limited to those losses carried forward to the years 2001 through 2004 and related assessments to our 2005 tax year.

On September 10, 2012, the Second Circuit affirmed the Tax Court’s holding with respect to 1998, 1999 and 2000. It remanded the Wilmington Partners case to the Tax Court with instructions that the Tax Court clarify the grounds for its holding with respect to 2001 through 2004. We believe that the arguments we have presented and the Tax Court’s prior ruling justify disallowing the adjustments in the FPAA for years 2001 through 2004, but we cannot be certain of the outcome of the further proceedings on these adjustments. On March 8, 2013, the Tax Court issued an Order encouraging the parties to settle the case. We expect to engage in settlement discussions with the IRS soon.

We have not made any financial provision for the asserted additional taxes, penalties or interest as we believe the related tax benefits have met the recognition and full measurement threshold as outlined under FASB ASC Subtopic 740-10-25, Income Taxes – Overall Recognition. If the Tax Court were to rule against us (and all of our appeals were unsuccessful), we believe that the maximum actual cash payment we would be required to make to the IRS would be $36 million ($26 million in tax and $10 million in penalties), plus interest. The amount of gross interest that we will owe is uncertain but as of March 31, 2013 we estimate that it is approximately 55% of the total tax and penalties; interest will continue to accrue pending resolution of the described proceedings. Any settlement with the IRS may result in an actual cash payment to the IRS, the amount of which will depend on the terms of that settlement.

Any final resolution of Wilmington Partners’s FPAA proceeding may result in related adjustments to the tax liability of our subsidiaries that are or were partners in Wilmington Partners. In addition, we believe that, to the extent we are required to pay any tax for any period covered in this dispute, the deferred tax liability noted below may be adjusted.

As a related matter, we recorded a deferred tax liability of $158 million to account for the future tax consequences arising in part from intercompany repayment of the Contributed Note, scheduled to occur in late 2013, and in part from the liquidation of Wilmington Partners, the timing of which is undetermined. We believe that, in view of our current U.S. tax attribute position, including net operating losses, neither the repayment of the Contributed Note nor the liquidation of Wilmington Partners will result in an immediate cash outlay. However, use of such attributes would mean that they are no longer available to offset future taxable income, and could increase cash tax payments in the future.

We cannot be certain of the outcome of any of these proceedings or the terms of any settlement. Therefore any final determination or settlement of the issues discussed above could have a material adverse effect on our business, prospects, financial condition and results of operations.

 

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Unfavorable results in future claims as well as the outcome of pending or future investigations could have a material adverse effect on our business, prospects, financial condition and results of operations.

Our policy is to comply with applicable laws and regulations in each jurisdiction in which we operate and, if we become aware of a potential or alleged violation, to conduct an appropriate investigation, to take appropriate remedial action and to cooperate fully with any related governmental inquiry. We may from time to time learn of alleged non-compliance with laws or regulations or other improprieties through compliance hotlines, communications by employees, former employees or other third parties, as a result of our internal audit procedures, or otherwise.

For example, in April 2008, ISTA received a series of Grand Jury Subpoenas from the office of the United States Attorney for the Western District of New York relating primarily to ISTA’s marketing and promotion of Xibrom. In October 2011, ISTA and some of its officers and current and former employees received correspondence from the government identifying them as targets in an ongoing DOJ criminal investigation into the marketing and promotional practices of ISTA. Parallel civil DOJ investigations are currently ongoing, and the governmental investigations are focused on potential violations of civil and/or criminal laws, including the Federal False Claims Act, the Food, Drug and Cosmetic Act, and the Anti-Kickback Statute. In addition, there have been two related qui tam complaints brought against ISTA. We had no involvement in the alleged events that are the focus of the government’s investigations, but on June 6, 2012, we acquired ISTA and we have therefore assumed responsibility for the matter. Additionally, on June 29, 2011, we received a subpoena from the New York Office of Inspector General for the U.S. Department of Health and Human Services regarding payments and communications between us and medical professionals related to our pharmaceutical products Lotemax and Besivance. The government has indicated that the subpoena was issued in connection with a civil investigation. We are cooperating fully with the government’s investigations into both of these matters. It is not possible to fully predict the outcome of these investigations at this time, but the ultimate resolution of these investigations and any future investigations may have a material adverse effect on our business, prospects, financial condition and results of operations.

We may not have sufficient insurance to cover our liability in our pending litigation claims and future claims either due to coverage limits or as a result of insurance carriers seeking to deny coverage of such claims, which in either case could expose us to significant liabilities.

We maintain third-party insurance coverage against various liability risks, including securities, shareholder derivative, ERISA, and product liability claims, as well as other claims that form the basis of litigation matters pending against us. We believe these insurance programs are an effective way to protect our assets against liability risks. However, the potential liabilities associated with litigation matters pending against us, or that could arise in the future, could exceed the coverage provided by such programs. In addition, our insurance carriers have sought or may seek to rescind or deny coverage with respect to pending claims or lawsuits, completed investigations or pending or future investigations and other legal actions against us. If we do not have sufficient coverage under our policies, or if the insurance companies are successful in rescinding or denying coverage to us, we may be required to make material payments in connection with third-party claims.

If we fail to attract, hire and retain qualified personnel, we may not be able to design, develop, market or sell our products or successfully manage our business.

Our ability to attract new customers, retain existing customers, pursue our strategic objectives and maintain and improve our internal controls over financial reporting depends on the continued services of our current management, sales, product development, technical finance and accounting personnel and our ability to identify, attract, train and retain similar personnel. Competition for top management personnel generally, and within the healthcare industry specifically, is intense and we may not be able to recruit and retain the personnel we need. Many of our senior management and other key personnel were recruited by us specifically due to their industry experience or specific expertise. We depend on the continued service of our senior management and other key employees and we do not maintain insurance policies to cover the cost of replacing the services of any of our

 

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senior management who may unexpectedly die or become disabled. We do not have employment agreements containing restrictive covenants or specified term lengths with our executives (except for Mr. Saunders). Mr. Saunders’ agreement is terminable by him on 45 days’ notice, subject to one year non-compete, non-solicitation and non-disclosure covenants. The loss of any one of our management personnel, or our inability to identify, attract, retain and integrate additional qualified management personnel, could make it difficult for us to manage our business successfully and pursue our strategic objectives.

Similarly, competition for skilled sales, product development, technical finance and accounting personnel is intense and we may not be able to recruit and retain the personnel we need. The loss of the services of any key sales, product development, technical finance and accounting personnel, or our inability to hire new personnel with the requisite skills, could restrict our ability to develop new products or enhance existing products in a timely manner, sell products to our customers or manage our business effectively. For example, in 2012 we had significant deficiencies in certain of our operations in Russia, Mexico and Brazil, which, in part, related to our inability to retain adequate accounting and finance personnel. We may not be able to hire or retain qualified personnel if we are unable to offer competitive salaries and benefits. We could be particularly hurt if any key employee or employees went to work for competitors.

We depend on our intellectual property rights, and any inability to protect our intellectual property rights could reduce the value of our products and brands.

We consider our intellectual property rights, particularly our trademarks and patents, but also our trade secrets, licenses and other intellectual property rights, to be a significant and valuable aspect of our business. We rely on a combination of contractual provisions, confidentiality procedures and patent, trademark, copyright and trade secrecy laws to protect the proprietary aspects of our technology. These legal measures afford limited protection and may not prevent our competitors from gaining access to our intellectual property and proprietary information. In addition, some countries in which we operate offer less protection and our intellectual property rights may therefore be subject to higher risks in such countries than is the case in Europe or the United States. Any of our patents may be challenged, invalidated, circumvented or rendered unenforceable. Furthermore, we cannot ensure that any pending patent application held by us will result in an issued patent, or that if patents are issued to us, such patents will provide meaningful protection against competitors or competitive technologies. Even for patents that we are able to obtain, the value of our patented products and their profitability may decline or be reduced to zero as our patents expire.

We rely on trademarks to establish a market identity for our products, and the reputation and perception of our brands is integral to the success of our products. If our trademarks or other intellectual property are copied or used without authorization, the value of our brands, their reputation and our goodwill could be harmed. To maintain the value of our trademarks, we might have to file lawsuits against third parties to prevent them from using trademarks confusingly similar to or dilutive of our registered or unregistered trademarks. We might not obtain registrations for our pending or future trademark applications, and might have to defend our registered trademark and pending applications from challenge by third parties. Enforcing or defending our registered and unregistered trademarks might result in significant litigation costs and damages, including the inability to continue using certain trademarks.

Litigation may also be necessary to enforce our other intellectual property rights, to protect our trade secrets and to determine the validity and scope of our proprietary rights. Any litigation could result in substantial expense, may reduce our profits and may not adequately protect our intellectual property rights.

Claims that we infringe third-party intellectual property rights could subject us to damages and harm our business.

Significant litigation regarding intellectual property rights exists in our industry. Our competitors and others in the United States and other countries may have applied for or obtained, or may in the future apply for and obtain, patents that will prevent, limit or otherwise interfere with our ability to make and sell our existing or future products. Claims that our products infringe the proprietary rights of others often are not asserted until after

 

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commencement of commercial sales incorporating our technology. Any infringement litigation or claims against us, whether or not successful, could result in substantial costs and harm our reputation. Third parties have made, and it is possible that they will make in the future, claims of infringement against us or our contract manufacturers in connection with the use of our technology. Any claims, even those without merit, could:

 

   

be expensive and time consuming to defend;

 

   

cause us to cease making, selling, licensing or using products that incorporate the challenged intellectual property;

 

   

require us to redesign, reengineer or rename our products to avoid infringing the intellectual property rights of third parties, which may not be possible and could be costly and time consuming if it is possible to do so;

 

   

divert management’s attention and resources; or

 

   

require us to enter into royalty or licensing agreements, which may not be available on reasonable terms (if at all), in order to obtain the right to use a necessary product, component or process.

For example, we have been involved in several patent proceedings relating to silicone hydrogel contact lens technology, including our PureVision contact lens product line. Five of these proceedings were commenced by CIBA Vision Corporation and/or its parent company, Novartis AG, alleging that our PureVision contact lenses infringed a CIBA Vision Corporation and Novartis AG patent. In July 2004, we reached a final settlement agreement and agreed to cross-license rights to silicone hydrogel contact lens technologies. As part of that settlement, we also entered into a license agreement with CIBA Vision AG and agreed to pay a royalty on net sales of PureVision brand contact lenses, and certain other silicone hydrogel contact lenses utilizing the licensed technology, made and sold in the United States until 2014, and on net sales of these products manufactured or sold in a country outside the United States where a licensed patent exists until 2016. On January 1, 2013, we modified the agreement and will begin paying the royalty to Alcon Pharmaceuticals Ltd., CIBA Vision AG’s successor-in-interest.

A successful claim of infringement against us or our contract manufacturers in connection with the use of our intellectual property, in particular if we are unable to manufacture or sell any of our planned products in any major market, could have a material adverse effect on our business, prospects, financial condition and results of operations.

We also rely on patent licenses to produce a number of our products, and, if we were to lose any of these licenses, we may not be able to continue to produce or manufacture certain products. For example, we rely on our license agreement with Alcon to sell our PureVision contact lenses.

The terms of our debt agreements impose restrictions on our business, reducing our operational flexibility and creating default risks.

We now have and expect to continue to have significant indebtedness that could have a material adverse effect on our business. As of December 29, 2012, our reported long-term debt, which excludes borrowings under the March 2013 Financing, including current portion, totaled $3,304 million. We may incur substantial additional debt from time to time to finance working capital, capital expenditures, investments or acquisitions, or for other purposes. Specifically, our high level of debt could have important consequences, including:

 

   

increasing our vulnerability to general adverse economic and industry conditions;

 

   

requiring us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, acquisitions, research and development efforts and other general corporate purposes;

 

   

limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

 

   

placing us at a competitive disadvantage if any of our competitors has less debt;

 

   

restricting our ability to pay dividends on our capital stock or redeem, repurchase or retire our capital stock or indebtedness;

 

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limiting our ability to borrow additional funds and the cost at which we can borrow;

 

   

exposing us to the risk of increased interest rates as certain of our borrowings are and may in the future be at variable interest rates; and

 

   

making it more difficult for us to satisfy our obligations with respect to our debt, including our obligation to repay amounts borrowed under our credit facilities or repurchase outstanding notes under certain circumstances.

Our debt agreements contain representations, warranties and covenants which, if breached, could lead to an event of default. In addition, one of our debt agreements includes a financial covenant that requires us to maintain a certain financial ratio. As a result of this covenant and ratio, we have certain limitations on the manner in which we can conduct our business, and we may be restricted from engaging in business activities that may otherwise improve our business or from financing future operations or capital needs. Failure to comply with the financial covenant or to maintain the financial ratio contained in our debt agreement, if not cured or waived, could result in an event of default that could trigger acceleration of our indebtedness, which could have a material adverse impact on our business. We cannot be certain that our future operating results will be sufficient to ensure compliance with the covenants in our debt agreements or to remedy any such default. In addition, in the event of any default and related acceleration, we may not have or be able to obtain sufficient funds to make any accelerated payments. Our debt agreements also have provisions that trigger repayment upon change of control, in the case of our credit agreements, and a tender offer for the senior notes issued by our wholly owned subsidiary, with a premium, in the case of the indenture governing such notes.

We may not successfully implement our acquisition strategy, and strategic acquisitions or joint ventures that we pursue may present unforeseen obstacles and costs, increase our leverage and adversely effect our business.

As part of our growth strategy, we expect to pursue strategic business acquisitions and joint ventures to expand or complement our business, such as our recent acquisitions of ISTA and the outstanding minority position of TPV. We may not be able to identify suitable acquisition candidates, and if we do identify suitable candidates, our acquisition activities may be thwarted by overtures from competitors for the targeted candidates, governmental regulation (including market concentration limitations) and replacement product developments in our industry.

Risks we could face with respect to acquisitions or joint ventures include:

 

   

difficulties in the integration of the operations, technologies, products, customers, suppliers, personnel or corporate culture of the acquired business;

 

   

the incurrence of debt or an increase in amortization and write-offs of other intangible assets and goodwill;

 

   

the establishment of appropriate accounting controls and reporting procedures and other regulatory compliance procedures;

 

   

expenses of any contingent, unknown or potential liabilities of the acquired company or the creation of tax or accounting issues;

 

   

risks of entering markets in which we have no or limited prior experience;

 

   

potential loss of key employees or customers;

 

   

diversion of management’s attention away from other business concerns;

 

   

expenses, including restructuring expenses, to shut down locations and/or terminate employees; and

 

   

risks inherent in accounting allocations and consequences thereof.

 

 

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As a result of the foregoing, our acquisition strategy may not be successful. In addition, we may not realize any anticipated benefits from acquisitions or joint ventures and our acquired companies or joint ventures may not achieve the levels of sales or profitability that would justify our investment in them.

Failure to implement successfully our business strategies, including our transformation, may adversely affect our business, results of operations and financial condition.

The execution of our transformation has been critical in strengthening our business, increasing our revenue growth and expanding our margins. We believe that our future financial performance and success depends, in part, on our ability to complete and execute our transformation. We may not be able to successfully execute our business strategies or achieve the anticipated benefits of our transformation. If we are unable to do this, our business, results of operations and financial condition may be adversely affected. Even if we are able to execute some or all of our business strategies, our results of operations and financial condition may not improve to the extent we anticipate, or at all.

We are subject to evolving and complex tax laws, which may result in additional liabilities that may affect results of operations.

We are subject to evolving and complex tax laws in the jurisdictions in which we operate. Significant judgment is required for determining our tax liabilities, and our tax returns are periodically examined by various tax authorities. We believe that our accrual for tax contingencies is adequate for all open years based on past experience, interpretations of tax law, and judgments about potential actions by tax authorities; however, due to the complexity of tax contingencies, the ultimate resolution of any tax matters may result in payments greater or less than amounts accrued.

In February 2012, President Obama’s administration re-proposed significant changes to the U.S. international tax laws, including changes that would tax companies on “excess returns” attributable to certain offshore intangible assets, limit U.S. tax deductions for expenses related to un-repatriated foreign-source income and modify the U.S. foreign tax credit rules. Other potentially significant changes to the U.S. international laws, including a move toward a territorial tax system, have been set out by various Congressional committees. We cannot determine whether these proposals will be enacted into law or what, if any, changes may be made to such proposals prior to their being enacted into law. If these or other changes to the U.S. international tax laws are enacted, they could have a significant impact on our financial results.

In addition, we may be impacted by changes in tax laws, including tax rate changes, changes to the laws related to the remittance of foreign earnings (deferral), or other limitations impacting the U.S. tax treatment of foreign earnings, new tax laws, and revised tax law interpretations in domestic and foreign jurisdictions.

We may have limited ability to fully use our recorded tax loss carryforwards.

We have accumulated approximately $550 million of U.S. federal tax net operating loss carryforwards as of December 29, 2012, which can be used to offset taxable income in future quarters if our U.S. operations become profitable. If unused, these tax loss carryforwards will begin to expire between 2015 and 2032. Under the current tax laws, if we were to experience a significant change in ownership, including as a result of this offering, Section 382 of the Internal Revenue Code (as amended, the “Code”) may restrict the future utilization of these tax loss carryforwards even if our U.S. operations generate significant profits. As of December 29, 2012, we have recognized a deferred tax asset of $193 million related to these net operating losses.

We incur substantial costs with respect to pension benefits and providing healthcare for our employees.

With approximately 11,200 full time employees, we incur substantial costs relating to pension benefits and current and post-retirement medical and other health and welfare benefits. These costs can vary substantially as a result of changes in healthcare laws and costs, volatility in investment returns on pension plan assets and changes

 

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in discount rates used to calculate related liabilities. Our estimates of liabilities and expenses for pensions and other post-retirement healthcare benefits require the use of assumptions, including assumptions relating to the rate used to discount the future estimated liability, the rate of return on plan assets, inflation and several assumptions relating to the employee workforce (salary increases, medical costs, retirement age and mortality). Actual results may differ, which may have a material adverse effect on our business, prospects, financial condition and results of operations. In addition, rising healthcare and retirement benefit costs in the United States may put us under significant cost pressure as compared to our competitors, if they can provide these benefits at lower costs. Our pension and post-retirement medical plans in the aggregate are underfunded by approximately $273 million as of December 29, 2012. If our cash flow from operations is insufficient to fund these obligations, we may be materially and adversely harmed and have to seek additional capital.

Catastrophic events may disrupt our business.

We have operations and facilities which sell and distribute our products in many parts of the world. Natural events (such as a hurricane or major earthquake), terrorist attack or other catastrophic events could cause delays in developing, manufacturing or selling our products. Such events that occur in major markets where we sell our products could reduce the demand for our products in those areas and, as a result, impact our sales into those markets. In either case, any such disruption could have a material adverse effect on our business, financial condition and results of operations.

Our activities involve hazardous materials, and our business is subject to various environmental and health and safety laws and regulations, which may increase our compliance costs or subject us to costly liabilities.

Our business operations are subject to extensive regulations relating to the protection of the environment and health and safety matters. In particular, our manufacturing, research and development practices involve the controlled use of hazardous materials. We are subject to foreign, federal, state and local laws and regulations in the various jurisdictions in which we operate that govern the use, manufacture, storage, handling and disposal of these materials and certain waste products. Although we believe that our environmental, health and safety procedures for handling and disposing of these materials comply with legally prescribed standards, we cannot completely eliminate the risk of accidental contamination or injury from these materials. We may also be liable for actions of previous owners on properties we acquire or for properties we previously occupied. For example, we are still monitoring, investigating and remediating environmental contamination at sites occupied by businesses and properties that we sold in the 1970s and in the 1990s. Remedial environmental actions or compliance with environmental laws could require us to incur substantial unexpected costs, which could have a material adverse effect on our business, prospects, financial condition and results of operations. If we were involved in a major environmental accident or release, or found to be in non-compliance with applicable environmental laws, we could be held liable for clean-up costs, third-party personal injury or property damage claims, or penalized with fines or civil or criminal sanctions. In addition, we cannot predict what environmental laws or regulations will be enacted or amended in the future, or what impact any such requirements may have on our operations.

The combination of insurance coverage, cash flows and reserves may not be adequate to satisfy environmental liabilities that we may incur in the future. Any environmental claims could subject us to adverse publicity, hinder us from securing insurance coverage in the future and/or require us to incur significant legal fees. Successful environmental liability claims brought against us could have a material adverse effect on our results of operations or our financial condition.

Our pro forma financial information may not be representative of our future performance.

In preparing the pro forma financial information included in this prospectus, we have made adjustments to our historical financial information based upon currently available information and upon assumptions that our management believes are reasonable in order to reflect, on a pro forma basis, the impact of the acquisition of ISTA, the acquisition of the minority position of TPV, the March 2013 Financing, the March 2013 Dividend and this

 

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offering. The estimates and assumptions used in the calculation of the pro forma financial information in this prospectus may be materially different from our actual experience. Accordingly, the pro forma financial information included in this prospectus does not purport to indicate the results that would have actually been achieved had the acquisitions of ISTA and the minority position of TPV been completed on the assumed date or for the periods presented, or which may be realized in the future, nor does the pro forma financial information give effect to any events other than those discussed in our unaudited pro forma financial statements and related notes.

Risks Related to Our Organization and Structure

If the ownership of our common stock continues to be highly concentrated with our Principal Stockholders, our Principal Stockholders will continue to have substantial control over us and will maintain the ability to control the election of directors and other significant corporate decisions, which will limit or preclude your ability to influence corporate matters and may result in conflicts of interest.

Following the completion of this offering, our Principal Stockholders will own approximately     % of our outstanding common stock, or     %, if the underwriters’ overallotment option is fully exercised. As a result, the Principal Stockholders will be able to control the outcome of all matters requiring a stockholder vote, including: the election of directors; approval of mergers or a sale of all or substantially all of our assets; and the amendment of our amended and restated Certificate of Incorporation (our “Certificate of Incorporation”) and our amended and restated By-Laws (our “By-Laws”). Since our Principal Stockholders will have the ability to control the election of the members of our board of directors, the Principal Stockholders will thereby control our policies and operations, including the appointment of management, future issuances of our common stock or other securities, the payments of dividends, if any, on our common stock and the incurrence of indebtedness. This control may delay, deter or prevent acts that would be favored by our other stockholders, as the interests of the Principal Stockholders may not always coincide with our interests or the interests of our other stockholders. For example, the Principal Stockholders may seek to cause us to take courses of action that, in their judgment, could enhance their investment in us, but which might involve risks to our other stockholders or adversely affect us or our other stockholders, including investors in this offering.

The Principal Stockholders will be able to cause or prevent a change of control of us or a change in the composition of our board of directors and could preclude any unsolicited acquisition of us. This may have the effect of delaying, preventing or deterring a change in control. This concentration of share ownership may adversely affect the trading price of our common stock because investors may perceive disadvantages in owning shares in a company with significant stockholders. See “Principal and Selling Stockholders” and “Description of Capital Stock—Anti-Takeover Effects of Provisions of Our Certificate of Incorporation, Our By-Laws and Delaware Law.”

Certain provisions of the Shareholders’ Agreement, our Certificate of Incorporation and our By-Laws could hinder, delay or prevent a change in control, which could adversely affect the price of our common stock.

Certain provisions of our Shareholders’ Agreement with our Principal Stockholders, our Certificate of Incorporation and our By-Laws contain provisions that could make it more difficult for a third party to acquire us without the consent of our board of directors or our Principal Stockholders, including:

 

   

provisions in our By-Laws that prevent stockholders from calling special meetings of our stockholders;

 

   

advance notice requirements by stockholders with respect to director nominations and actions to be taken at annual meetings;

 

   

certain rights of our Principal Stockholders with respect to the designation of directors for nomination and election to our board of directors, including the ability to appoint members to each board committee. See “Certain Relationships and Related Party Transactions—Shareholders’ Agreement”;

 

   

no provision in our Certificate of Incorporation or By-Laws for cumulative voting in the election of directors, which means that the holders of a majority of the outstanding shares of our common stock can elect all the directors standing for election; and

 

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under our Certificate of Incorporation, our board of directors has authority to issue preferred stock without stockholder approval, which could be used to dilute the stock ownership of a potential hostile acquiror. Nothing in our Certificate of Incorporation precludes future issuances without stockholder approval of the authorized but unissued shares of our common stock.

In addition, these provisions may make it difficult and expensive for a third party to pursue a tender offer, change in control or takeover attempt that is opposed by our Principal Stockholders, our management or our board of directors. Public stockholders who might desire to participate in these types of transactions may not have an opportunity to do so, even if the transaction is favorable to stockholders. These anti-takeover provisions could substantially impede the ability of public stockholders to benefit from a change in control or to change our management and board of directors and, as a result, may adversely affect the market price of our common stock and your ability to realize any potential change of control premium. See “Description of Capital Stock—Anti-Takeover Effects of Provisions of Our Certificate of Incorporation, Our By-Laws and Delaware Law.” Our Shareholders’ Agreement, Certificate of Incorporation and By-Laws may be amended before our initial public offering, however, and such amendments may add or remove provisions such as those described above.

Although we do not expect to rely on the “controlled company” exemption, we will be a “controlled company” within the meaning of the stock exchange rules and we will qualify for exemptions from certain corporate governance requirements.

Because Warburg Pincus will own a majority of our outstanding common stock following the completion of this offering, we will be considered a “controlled company” as that term is set forth in the stock exchange rules. Under these rules, a company of which more than 50% of the voting power is held by another person or group of persons acting together is a “controlled company” and may elect not to comply with certain stock exchange rules regarding corporate governance, including:

 

   

the requirement that a majority of our board of directors consist of independent directors;

 

   

the requirement that our nominating and corporate governance committee be composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

 

   

the requirement that our compensation committee be composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities.

These requirements will not apply to us as long as we remain a “controlled company.” Although we qualify as a “controlled company,” we do not expect to rely on this exemption and intend to fully comply with all corporate governance requirements under the stock exchange rules. However, if we were to utilize some or all of these exemptions, you may not have the same protections afforded to stockholders of companies that are subject to all of the stock exchange rules regarding corporate governance. Warburg Pincus’ significant ownership interest could adversely affect investors’ perceptions of our corporate governance.

Certain of our stockholders have the right to engage or invest in the same or similar businesses as us.

Warburg Pincus has other investments and business activities in addition to its ownership of us. Warburg Pincus has the right, and has no duty to abstain from exercising such right, to engage or invest in the same or similar businesses as us, do business with any of our clients, customers or vendors or employ or otherwise engage any of our officers, directors or employees. If Warburg Pincus or any of its directors, officers or employees acquires knowledge of a potential transaction that could be a corporate opportunity, they have no duty, to the fullest extent permitted by law, to offer such corporate opportunity to us, our stockholders or our affiliates.

In the event that any of our directors and officers who is also a director, officer or employee of Warburg Pincus acquires knowledge of a corporate opportunity or is offered a corporate opportunity, provided that this

 

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knowledge was not acquired solely in such person’s capacity as our director or officer and such person acts in good faith, then to the fullest extent permitted by law such person is deemed to have fully satisfied such person’s fiduciary duties owed to us and is not liable to us, if Warburg Pincus pursues or acquires the corporate opportunity or if Warburg Pincus does not present the corporate opportunity to us.

Risks Related to this Offering

An active trading market for our common stock may never develop or be sustained, which could impede your ability to sell your shares.

Although our common stock has been approved for listing on the                 , an active trading market for our common stock may not develop on that exchange or elsewhere or, if developed, that market may not be sustained. Accordingly, if an active trading market for our common stock does not develop or is not sustained, the liquidity of our common stock, your ability to sell your shares of common stock when desired and the prices that you may obtain for your shares of common stock will be adversely affected.

The market price and trading volume of our common stock may be volatile, which could result in rapid and substantial losses for our stockholders.

Even if an active trading market develops, the market price of our common stock may be highly volatile and could be subject to wide fluctuations. In addition, the trading volume in our common stock may fluctuate and cause significant price variations to occur. The initial public offering price of our common stock has been determined by negotiation between us and the representatives of the underwriters based on a number of factors and may not be indicative of prices that will prevail in the open market following completion of this offering. If the market price of our common stock declines significantly, you may be unable to resell your shares at or above your purchase price, if at all. The market price of our common stock may fluctuate or decline significantly in the future. Some of the factors that could negatively affect our share price or result in fluctuations in the price or trading volume of our common stock include:

 

   

variations in our quarterly or annual operating results;

 

   

changes in our earnings estimates (if provided) or differences between our actual financial and operating results and those expected by investors and analysts;

 

   

the contents of published research reports about us or our industry or the failure of securities analysts to cover our common stock after this offering;

 

   

additions or departures of key management personnel;

 

   

any increased indebtedness we may incur in the future;

 

   

announcements by us or others and developments affecting us;

 

   

future sales of our common stock by us, the Principal Stockholders or members of our management;

 

   

actions by institutional stockholders;

 

   

litigation and governmental investigations;

 

   

changes in market valuations of similar companies;

 

   

speculation or reports by the press or investment community with respect to us or our industry in general;

 

   

increases in market interest rates that may lead purchasers of our shares to demand a higher yield;

 

   

announcements by us or our competitors of significant contracts, acquisitions, dispositions, strategic relationships, joint ventures or capital commitments; and

 

   

general market, political and economic conditions, including any such conditions and local conditions in the markets in which our customers are located.

 

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These broad market and industry factors may decrease the market price of our common stock, regardless of our actual operating performance. The stock market in general has from time to time experienced extreme price and volume fluctuations, including in recent years. In addition, in the past, following periods of volatility in the overall market and the market price of a company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.

Future offerings of debt or equity securities by us may adversely affect the market price of our common stock.

In the future, we may attempt to obtain financing or to increase further our capital resources by issuing additional shares of our common stock or offering debt or other equity securities, including commercial paper, medium-term notes, senior or subordinated notes, debt securities convertible into equity or shares of preferred stock. Future acquisitions could require substantial additional capital in excess of cash from operations. We would expect to finance the capital required for acquisitions through a combination of additional issuances of equity, corporate indebtedness, asset-backed acquisition financing and/or cash from operations.

Issuing additional shares of our common stock or other equity securities or securities convertible into equity may dilute the economic and voting rights of our existing stockholders or reduce the market price of our common stock or both. Upon liquidation, holders of such debt securities and preferred shares, if issued, and lenders with respect to other borrowings would receive a distribution of our available assets prior to the holders of our common stock. Debt securities convertible into equity could be subject to adjustments in the conversion ratio pursuant to which certain events may increase the number of equity securities issuable upon conversion. Preferred shares, if issued, could have a preference with respect to liquidating distributions or a preference with respect to dividend payments that could limit our ability to pay dividends to the holders of our common stock. Our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, which may adversely affect the amount, timing or nature of our future offerings. Thus, holders of our common stock bear the risk that our future offerings may reduce the market price of our common stock and dilute their stockholdings in us. See “Description of Capital Stock.”

The market price of our common stock could be negatively affected by future sales or the possibility of future sales of substantial amounts of our common stock in the public markets.

After this offering, there will be              shares of common stock outstanding. Of our issued and outstanding shares, all the common stock sold in this offering will be freely transferable, except for any shares held by our “affiliates,” as that term is defined in Rule 144 under the Securities Act. Following completion of the offering, approximately     % of our outstanding common stock (or     % if the underwriters exercise their overallotment option in full) will be held by the Principal Stockholders and can be resold into the public markets in the future in accordance with the requirements of Rule 144. See “Shares Eligible For Future Sale.”

We and our executive officers, directors and the Principal Stockholders (who will hold in the aggregate approximately     % of our outstanding common stock immediately after the completion of this offering, or     % if the underwriters exercise their overallotment option in full) have agreed with the underwriters that, subject to certain exceptions, for a period of 180 days after the date of this prospectus, we and they will not directly or indirectly offer, pledge, sell, contract to sell, sell any option or contract to purchase or otherwise dispose of any common stock or any securities convertible into or exercisable or exchangeable for common stock, or in any manner transfer all or a portion of the economic consequences associated with the ownership of common stock, or cause a registration statement covering any common stock to be filed, without the prior written consent of J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Citigroup Global Markets Inc. See “Underwriting.” J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Citigroup Global Markets Inc. may waive these restrictions at their discretion.

 

 

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The market price of our common stock may decline significantly when the restrictions on resale by our existing stockholders lapse. Under the registration rights agreement between our Principal Stockholders and us, our Principal Stockholders have certain rights to require us to register their shares. See “Certain Relationships and Related Party Transactions—Registration Rights Agreement.” A decline in the price of our common stock might impede our ability to raise capital through the issuance of additional common stock or other equity securities.

The future issuance of additional common stock in connection with our incentive plans, acquisitions or otherwise will dilute all other stockholdings and could negatively affect the market price of our common stock.

After this offering, assuming the underwriters exercise their overallotment option in full, we will have an aggregate of              shares of common stock authorized but unissued and not reserved for issuance under our incentive plans. We may issue all of these shares of common stock without any action or approval by our stockholders, subject to certain exceptions. We also intend to continue to evaluate acquisition opportunities and may issue common stock in connection with these acquisitions. Any common stock issued under our incentive plans, acquisitions, the exercise of outstanding stock options or otherwise would dilute the percentage ownership held by the investors who purchase common stock in this offering.

Investors in this offering will suffer immediate and substantial dilution in the net tangible book value per share of our common stock.

Prior investors in our common stock have paid substantially less per share than the price in this offering. The initial public offering price of our common stock will be substantially higher than the net tangible book value per share of the outstanding common stock immediately after this offering. If you purchase shares of our common stock in this offering, you will experience immediate and substantial dilution of $         in the net tangible book value per share, assuming an initial public offering price of $         per share (the midpoint of the price range set forth on the front cover of this prospectus). See “Dilution.”

Certain underwriters have interests in this offering beyond customary underwriting discounts; specifically, certain underwriters have affiliates that will receive more than 5% of the net proceeds of this offering.

Affiliates of J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Citigroup Global Markets Inc., the joint book running managers for this offering, may receive more than 5% of the net proceeds of this offering in connection with the repayment of the $700 million borrowed under the senior unsecured term loan facility in the March 2013 Financing. Accordingly, the offering is being conducted in accordance with the applicable provisions of Rule 5121 of the FINRA Conduct Rules because these underwriters will have a “conflict of interest” pursuant to Rule 5121. See “Underwriting” for additional information about conflicts of interest the underwriters may have.

Because a substantial portion of the proceeds from this offering may be used to repay the $700 million borrowed in the March 2013 Financing, only a portion of the proceeds from this offering may be used to further invest in our business. We will have broad discretion in the use of the remaining proceeds and may not use them effectively.

We expect to use $         of the $         net proceeds from this offering, assuming an initial public offering price of $         per share (the midpoint of the price range set forth on the front cover of this prospectus), to repay the $700 million borrowed under the senior unsecured term loan facility in the March 2013 Financing, and to make a cash payment of approximately $         regarding the cancellation of certain performance-based options, with the balance to be used for working capital and other general corporate purposes, including strategic acquisitions and repayment of other indebtedness. As a result, a significant portion of the proceeds of this offering will not be invested in our business. Because we will have broad discretion in the application of the net proceeds from this offering remaining after the repayment of the $700 million borrowed under the senior unsecured term loan facility in the March 2013

 

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Financing and the cash payment in respect of certain performance-based options, our management may fail to apply these funds effectively, which could adversely affect our ability to operate and grow our business.

We do not anticipate paying any dividends on our common stock in the foreseeable future, and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.

We do not expect to declare or pay dividends on our common stock in the foreseeable future. We currently expect to use cash flow generated by operations, if any, to pay for our operations, repay existing indebtedness and grow our business. Our ability to pay dividends on our common stock is limited by the terms of some of our debt, including our credit agreements and the indenture governing the senior notes. As a result, capital appreciation, if any, of our common stock will be the sole source of potential gain for the foreseeable future, and you will have to sell some or all of your common stock to generate cash flow from your investment. See “Dividend Policy.”

As a public company, we will incur additional costs, be subject to additional regulations and face increased demands on our management, which could lower our profits or make it more difficult to run our business.

As a public company with shares listed on a U.S. exchange, we will incur significant legal, accounting and other expenses that we have not incurred as a private company. We will also need to comply with an extensive body of regulations that have not applied to us since our acquisition in 2007, including provisions of the Sarbanes-Oxley Act, regulations of the SEC and certain stock exchange requirements. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly. For example, as a result of becoming a public company, we intend to add independent directors, create additional board committees and adopt certain policies regarding internal controls and disclosure controls and procedures. In addition, we will incur additional costs associated with our public company reporting requirements and maintaining directors’ and officers’ liability insurance. We are currently evaluating and monitoring developments with respect to these rules, which may impose additional costs on us and materially affect our business, prospects, financial condition and results of operations.

We will be required by Section 404 of the Sarbanes-Oxley Act to evaluate the effectiveness of our internal controls by the end of our fiscal year ending December 27, 2014, and the outcome of that effort may adversely affect our business, prospects, financial condition and results of operations.

As a U.S.-listed public company, we will be required to comply with Section 404 of the Sarbanes-Oxley Act by December 27, 2014. Section 404 will require that we evaluate our internal control over financial reporting to enable management to report on, and our independent auditors to audit as of the end of our fiscal year ended December 27, 2014, the effectiveness of those controls. While we have begun the lengthy process of evaluating our internal controls, we are in the early phases of our review and will not complete our review until well after this offering is completed. The outcome of our review may adversely affect our business, prospects, financial condition and results of operations. During the course of our review, we may identify control deficiencies of varying degrees of severity, and we may incur significant costs to remediate those deficiencies or otherwise improve our internal controls. As a public company, we will be required to report control deficiencies that constitute a “material weakness” in our internal control over financial reporting. We will also be required to obtain an audit report from our independent auditors regarding the effectiveness of our internal controls over financial reporting. If we fail to implement the requirements of Section 404 in a timely manner, we may be subject to sanctions or investigation by regulatory authorities, including the SEC or any stock exchange on which our common stock is listed. Furthermore, if we discover a material weakness or our independent auditors do not provide an unqualified audit report, our share price could decline and our ability to raise capital could be impaired.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some of the statements under “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and elsewhere in this prospectus may contain forward-looking statements that reflect our current views with respect to, among other things, future events and financial performance. These statements can be identified by the fact that they do not relate strictly to historical or current fact, and you can often identify these forward-looking statements by the use of forward-looking words such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “could,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates,” “target,” “projects,” “contemplates” or other comparable words. Any forward-looking statements contained in this prospectus are based upon our historical performance and on our current plans, estimates and expectations in light of information currently available to us. The inclusion of this forward-looking information should not be regarded as a representation by us, the Principal Stockholders, the underwriters or any other person that the future plans, estimates or expectations contemplated by us will be achieved. Such forward-looking statements are subject to various risks and uncertainties and assumptions relating to our operations, financial results, financial condition, business, prospects, growth strategy and liquidity. Accordingly, there are or will be important factors that could cause our actual results to differ materially from those indicated in these statements. You should not place undue reliance on any forward-looking statement and should consider the following factors, as well as the factors discussed elsewhere in this prospectus, including under “Risk Factors” beginning on page 13. We believe that these factors include, but are not limited to:

 

   

the impact of competition and new medical and technological developments in our markets;

 

   

failure to yield new products that achieve commercial success;

 

   

enactment of new regulations or changes in existing regulations related to the research, development, testing or manufacturing of our products;

 

   

failure to comply with post-approval legal and regulatory requirements for our products;

 

   

further concentration of sales with large wholesale and retail customers or fluctuations in their buying patterns;

 

   

failure to maintain our relationships with healthcare providers who recommend our products to their patients;

 

   

product recalls or voluntary market withdrawals;

 

   

interruptions to our manufacturing operations, distribution operations or supply of materials from independent suppliers;

 

   

general economic conditions and price competition;

 

 

   

risks associated with conducting the majority of our business outside the United States;

 

 

   

the impact of violations of the U.S. Foreign Corrupt Practices Act and other worldwide anti-bribery laws;

 

   

changes in market acceptance of our products due to inadequate reimbursement for such products or otherwise;

 

   

currency exchange rate fluctuations;

 

   

civil or criminal penalties if we market our products in violation of healthcare fraud and abuse laws;

 

   

our compliance with laws and regulations pertaining to the privacy and security of health information;

 

   

disruption to our operations from failures of or attacks on our information technology systems;

 

 

   

litigation that harms our business or otherwise distracts our management;

 

   

liability relating to various IRS notices;

 

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failure to attract, hire and retain qualified personnel;

 

   

inability to adequately protect our intellectual property rights;

 

   

restrictions on our business imposed by the terms of our debt agreements;

 

   

adverse effects on our business from our acquisitions and joint ventures;

 

   

failure to successfully implement our business strategies;

 

   

changes in tax laws;

 

   

loss of our ability to fully use our recorded tax loss carryforwards;

 

   

substantial costs with respect to pension benefits and providing healthcare for our employees;

 

   

catastrophic events; and

 

   

environmental liability resulting from our activities involving hazardous materials and emissions.

The factors identified above should not be construed as an exhaustive list of factors that could affect our future results, and should be read in conjunction with the other cautionary statements that are included in this prospectus. The forward-looking statements made in this prospectus are made only as of the date of this prospectus. We do not undertake any obligation to publicly update or review any forward-looking statement except as required by law, whether as a result of new information, future developments or otherwise.

If one or more of the risks or uncertainties described above materialize, or if our underlying assumptions prove to be incorrect, our actual results may vary materially from what we have expressed or implied by these forward-looking statements. We caution that you should not place undue reliance on any of our forward-looking statements. You should specifically consider the factors identified in this prospectus that could cause actual results to differ before making an investment decision to purchase our common stock. Furthermore, new risks and uncertainties arise from time to time, and it is impossible for us to predict those events or how they may affect us.

 

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USE OF PROCEEDS

We estimate that the net proceeds to us from the sale of the              shares of our common stock in this offering will be approximately $         million, assuming an initial public offering price of $         per share (the midpoint of the price range set forth on the front cover page of this prospectus) and after deducting the estimated underwriting discount and estimated offering expenses payable by us. We expect to use a substantial portion of the net proceeds to repay the $700 million borrowed in the March 2013 Financing and to make a cash payment of approximately $         regarding the cancellation of certain performance-based options. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Recent Developments and Other Factors Affecting Our Results of Operations” and “Compensation Discussion and Analysis—Adjustments to Equity Awards.” As a result, a significant portion of the proceeds of this offering will not be invested in our business. We expect to use any remaining proceeds for working capital and other general corporate purposes, which may include funding strategic acquisitions and repayment of other indebtedness.

In connection with the March 2013 Financing, we borrowed $700 million under a new senior unsecured term loan facility, and on the same day our wholly owned operating subsidiary borrowed $100 million under its revolving credit facility and subsequently distributed $83 million to us. The term loans under our new senior unsecured term loan facility will mature on May 31, 2018. On or after March 19, 2014, the lenders will have the option to exchange the term loans for senior exchange notes with terms substantially similar to the term loans, including with respect to interest rate and covenants. Interest on the term loans may be paid-in-kind by being added to the outstanding principal amount of the loans (“PIK Interest”), except that the first two interest payments must be paid in cash. Thereafter, interest must be paid in cash to the extent we are permitted to receive cash dividends or distributions from our subsidiaries under their respective financing documents, under applicable law and to the extent of our cash on hand (on an unconsolidated basis). Until March 19, 2014 (or earlier, between October 1, 2013 and March 19, 2014, under certain circumstances), the term loans will bear interest at a rate per annum equal to 5.25 percent (or 6.00 percent if paid as PIK Interest) plus LIBOR, provided that LIBOR rates are subject to a floor of 1 percent per annum; on and after March 19, 2014 (or earlier, between October 1, 2013 and March 19, 2014, under certain circumstances), the term loans will bear interest at a rate per annum equal to 9.50 percent (or 10.25 percent if paid as PIK Interest).

A $1.00 increase (decrease) in the assumed initial public offering price of $         per share (the midpoint of the price range set forth on the front cover page of this prospectus) would increase (decrease) the net proceeds to us from this offering by $         million, assuming the number of shares of common stock offered by us, as set forth on the front cover page of this prospectus, remains the same and after deducting the estimated underwriting discount and estimated offering expenses payable by us.

We will not receive any proceeds from the sale of our common stock by the selling stockholders named in this prospectus pursuant to the underwriters exercising their option to purchase additional shares to cover overallotments. If the underwriters exercise their option to purchase additional shares to cover overallotments in full, the selling stockholders will receive approximately $         million of proceeds from this offering, assuming an initial public offering price of $         per share (the midpoint of the price range set forth on the front cover page of this prospectus) and after deducting the estimated underwriting discount.

Affiliates of the underwriters of this offering are lenders under our credit facilities. Based on amounts outstanding as of the date of this prospectus, and assuming the $700 million borrowed in the March 2013 Financing is repaid in full, such affiliates would receive, in the aggregate, approximately $         from this offering upon such repayment.

 

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DIVIDEND POLICY

We do not expect to pay dividends on our common stock for the foreseeable future. Instead, we anticipate that all of our earnings in the foreseeable future, if any, will be used for the operation and growth of our business and the repayment of indebtedness. Our ability to pay dividends to holders of our common stock is limited as a practical matter by the terms of some of our debt, including our credit agreements and the indenture governing the senior notes. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

Any future determination to pay dividends on our common stock will be at the discretion of our board of directors and will depend upon many factors, including our financial position, results of operations, liquidity, legal requirements, restrictions that may be imposed by the terms in current and future financing instruments, including our credit facilities and outstanding senior notes, and other factors deemed relevant by our board of directors.

 

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CAPITALIZATION

The following sets forth our cash and cash equivalents and capitalization as of December 29, 2012:

 

   

on an actual basis;

 

   

on a pro forma basis to give effect to the acquisition of the outstanding and unowned shares of TPV, which was completed on January 25, 2013, as if such transaction occurred on December 29, 2012; and

 

   

on a pro forma as adjusted basis to give effect to (1) the sale of              shares of common stock by us in this offering, at an assumed initial public offering price of $         per share, the midpoint of the price range set forth on the front cover page of this prospectus, after deducting the estimated underwriting discount and estimated offering expenses payable by us and (2) the application of the net proceeds therefrom as described in “Use of Proceeds.”

You should read this table in conjunction with “Use of Proceeds,” “Selected Consolidated Historical Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements and related notes and other financial information included elsewhere in this prospectus.

 

     December 29, 2012  
Dollar Amounts in Millions except per share data    Actual     Pro Forma
Unaudited
     Pro Forma
as Adjusted

Unaudited (1)
 

Cash and cash equivalents

   $ 359.2      $         $     
  

 

 

   

 

 

    

 

 

 

Debt:

       

Holdco Senior Unsecured Term Loan

     —          

Opco Senior Secured Term Loans

     2,918.6        

Opco Senior Secured Revolving Credit Facility (2)

            

Opco 9.875% Senior Notes

     349.7        

Other

     35.4        
  

 

 

   

 

 

    

 

 

 

Total debt

   $ 3,303.7      $         $     
  

 

 

   

 

 

    

 

 

 

Shareholders’ equity:

       

Common stock, par value $0.01 per share, 450,000,000 shares authorized, 104,227,439 shares issued

   $ 1.0      $         $     

Preferred stock, par value $0.01 per share, 50,000,000 shares authorized, none issued

     —          —           —     

Common stock in treasury, at cost, 9,863 shares

     (0.4     

Capital in excess of par value

     2,143.0        

Retained deficit

     (1,140.7     

Accumulated other comprehensive loss

     (208.1     
  

 

 

   

 

 

    

 

 

 

Total Bausch & Lomb Holdings Incorporated shareholders’ equity

     794.8        

Noncontrolling interest

     15.3        
  

 

 

   

 

 

    

 

 

 

Total shareholders’ equity

   $ 810.1      $         $     
  

 

 

   

 

 

    

 

 

 

Total capitalization

   $ 4,113.8      $                    $                
  

 

 

   

 

 

    

 

 

 

 

(1)

A $1.00 increase or decrease in the assumed initial public offering price of $        , the midpoint of the price range set forth on the front cover of this prospectus, would result in an approximately $         million increase or decrease in each of the as adjusted cash and cash equivalents, capital in excess of par value, total shareholders’ equity and total capitalization, assuming the number of shares offered by us set forth on the front cover of this prospectus remains the same, and after deducting the underwriting discount and estimated offering expenses payable by us. An increase or decrease of 1.0 million shares in the number of shares offered by us would increase or decrease as adjusted cash and cash equivalents, capital in excess of par value, total shareholders’ equity and total capitalization by approximately $         million assuming

 

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  the assumed initial public offering price of $         per share, the midpoint of the price range set forth on the front cover of this prospectus, remains the same, and after deducting the underwriting discount and estimated offering expenses payable by us. The as adjusted information discussed above is illustrative only and will adjust based on the actual initial public offering price and terms of this offering determined at pricing.
(2) As of March 22, 2013, $309.5 million was available under the revolving credit facility.

The table above excludes              shares of our common stock that may be purchased by the underwriters to cover overallotments and an additional                  shares reserved for issuance under the WP Prism Inc. Management Stock Option Plan, of which                  remain available for grant.

 

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DILUTION

If you invest in our common stock, your ownership interest will be diluted to the extent of the difference between the initial public offering price per share in this offering and the pro forma as adjusted net tangible book value per share of our common stock upon consummation of this offering. Net tangible book value per share represents the book value of our total tangible assets less the book value of our total liabilities divided by the number of shares of our common stock then issued and outstanding.

Our pro forma net tangible book deficit as of December 29, 2012 was approximately $             million, or approximately $                 per share based on the              million shares of our common stock issued and outstanding as of such date. After giving effect to the sale of common stock in this offering at the initial public offering price of $         per share (the midpoint of the price range set forth on the front cover page of this prospectus), and after deducting the estimated underwriting discount and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of December 29, 2012 would have been approximately $         million, or $         per share (assuming no exercise of the underwriters’ overallotment option). This represents an immediate and substantial dilution of $         per share to new investors purchasing common stock in this offering. The following table illustrates this dilution per share:

 

Assumed initial public offering price per share

      $                

Pro forma net tangible book deficit per share as of December 29, 2012

   $        

Increase in net tangible book deficit per share attributable to this offering

     

Pro forma as adjusted net tangible book deficit per share after giving effect to this offering

     

Dilution per share to new investors in this offering

      $     

A $1.00 increase (decrease) in the assumed initial public offering price of $         per share (the midpoint of the price range set forth on the front cover page of this prospectus) would increase (decrease) our net tangible book deficit by $         million, the pro forma as adjusted net tangible book deficit per share after this offering by $         per share and the dilution to new investors in this offering by $         per share, assuming the number of shares of common stock offered by us, as set forth on the front cover page of this prospectus, remains the same and after deducting the estimated underwriting discount and estimated offering expenses payable by us.

The following table summarizes, on the same pro forma as adjusted basis as of December 29, 2012, the differences between the number of shares of common stock purchased from us, the total price and the average price per share paid by existing stockholders and by the new investors in this offering, before deducting the estimated underwriting discount and estimated offering expenses payable by us, at an assumed initial public offering price of $         per share (the midpoint of the price range set forth on the front cover page of this prospectus).

 

                               Average
Price  per
Share
 
     Shares Purchased      Total Consideration     
     Number    Percent      Amount      Percent     
     (in thousands)      (in thousands)         

Existing stockholders

        %       $                  %       $            

New investors

              

Total

        %       $           %      

A $1.00 increase (decrease) in the assumed initial offering price would increase (decrease) total consideration paid by new investors and average price per share paid by new investors by $             million and $1.00 per share, respectively. An increase (decrease) of 1.0 million in the number of shares offered by us would increase (decrease) total consideration paid by new investors and average price per share paid by new investors by $             million and $             per share, respectively.

 

 

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If the underwriters’ overallotment option is fully exercised, the pro forma as adjusted net tangible book value per share after this offering as of December 29, 2012 would be approximately $             per share and the dilution to new investors per share after this offering would be $             per share.

The discussion and tables above exclude              shares of our common stock issuable upon the exercise of options outstanding under the WP Prism Inc. Management Stock Option Plan. To the extent these outstanding options or any future options granted to our employees are exercised or other issuances of our common stock are made, new investors will experience further dilution.

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

The following tables present selected consolidated financial information of Bausch & Lomb Holdings Incorporated. You should read these tables along with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and our audited consolidated financial statements and the related notes included elsewhere in this prospectus.

The selected consolidated statement of operations, cash flow and other operating data for the years ended December 25, 2010, December 31, 2011 and December 29, 2012 and the selected consolidated balance sheet data at December 31, 2011 and December 29, 2012 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The selected consolidated balance sheet data at December 25, 2010 has been derived from our audited consolidated financial statements not included in this prospectus. The selected consolidated statement of operations, cash flow and other operating data for the years ended December 27, 2008 and December 26, 2009 and the selected consolidated balance sheet data at December 27, 2008 and December 26, 2009 have been derived from our unaudited consolidated financial statements not included in this prospectus which in the opinion of management include all adjustments necessary for fair presentation of the results for the unaudited annual periods.

 

    Year Ended  
Dollar Amounts in Millions, Except Share and Per Share Data   December 27,
2008
    December 26,
2009
    December 25,
2010
    December 31,
2011
    December 29,
2012
 

Statement of Operations Data:

         

Net Sales:(1)

         

Pharmaceuticals

  $ 763.5      $ 832.4      $ 937.2      $ 1,110.1      $ 1,288.0   

Vision Care

    1,224.4        1,186.5        1,155.1        1,225.4        1,241.5   

Surgical

    613.2        499.4        484.6        509.9        508.1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    2,601.1        2,518.3        2,576.9        2,845.4        3,037.6   

Costs and Expenses:

         

Cost of products sold

    1,267.1        1,069.4        1,052.3        1,087.9        1,162.3   

Selling, general and administrative

    1,199.3        1,124.8        1,128.3        1,209.7        1,410.4   

Research and development

    228.2        198.9        220.2        235.4        227.4   

Goodwill impairment(2)

    —          —          139.2        156.0        —     

Purchased in-process research and development(3)

    24.3        —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (Loss) Income

    (117.8     125.2        36.9        156.4        237.5   

Other Expense (Income):

         

Interest expense and other financing costs

    228.1        220.9        180.9        169.3        246.0   

Interest and investment income

    (6.6     (5.4     (3.8     (3.1     (4.0

Foreign currency, net

    (2.8     14.4        1.6        9.1        9.8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before Income Taxes and Equity in Losses of Equity Method Investee

    (336.5     (104.7     (141.8     (18.9     (14.3

(Benefit from) Provision for income taxes

    (15.9     (4.6     33.4        76.5        27.0   

Equity in losses of equity method investee

    —          1.7        17.8        20.8        24.1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Loss

    (320.6     (101.8     (193.0     (116.2     (65.4

Net (loss) income attributable to noncontrolling interest

    (0.7     7.1        3.0        7.7        2.9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Loss Attributable to Bausch & Lomb Holdings Incorporated

  $ (319.9   $ (108.9   $ (196.0   $ (123.9   $ (68.3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Per Share (Basic and Diluted):

         

Net Loss Attributable to Bausch & Lomb Holdings Incorporated

  $ (3.13   $ (1.06   $ (1.89   $ (1.19   $ (0.66
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding (000s)

    102,081        103,180        103,472        103,889        104,159   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro Forma Net Loss Attributable to Bausch & Lomb Holdings Incorporated (unaudited)

          $     
         

 

 

 

Pro forma weighted average shares outstanding (000s) (unaudited)

         
         

 

 

 

 

(1) Reported sales include revenues associated with products acquired from ISTA ($86.1 million) and Waicon ($22.0 million in 2012 and $1.8 million in 2011).
(2) Goodwill impairment charge recorded in 2011 relates to the surgical segment’s Americas reporting unit and the charge in 2010 relates to the surgical segment’s Europe reporting unit.
(3) On February 1, 2008, we completed the acquisition of all the outstanding stock of eyeonics, inc. As required under GAAP applicable at the time of the acquisition, in-process research and development (“IPR&D”) of $24.3 million identified in the acquisition was expensed immediately.

 

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     Year Ended  
Dollar Amounts in Millions    December 27,
2008
     December 26,
2009
     December 25,
2010
     December 31,
2011
     December 29,
2012
 

Balance Sheet Data (at period end):

              

Cash and cash equivalents

   $ 258.2       $ 204.8       $ 150.4       $ 148.5       $ 359.2   

Total Assets

     5,564.9         5,400.1         5,160.6         5,086.4         5,956.8   

Total Debt (including current portion of Long-Term Debt)

     2,674.4         2,750.7         2,739.1         2,697.3         3,303.7   

Total Bausch & Lomb Holdings Incorporated Shareholders’ Equity

     1,243.5         1,203.8         1,002.0         879.8         794.8   

 

Dollar Amounts in Millions    December 27,
2008
    December 26,
2009
    December 25,
2010
    December 31,
2011
    December 29,
2012
 

Cash Flow Data:

          

Net cash provided by (used in):

          

Operating activities

   $ 12.6      $ 91.9      $ 72.6      $ 265.7      $ 320.5   

Investing activities

     (379.9     (216.4     (161.1     (232.0     (611.1

Financing activities

     319.1        73.2        32.9        (36.3     492.8   

Other Operating Data:

          

Capital expenditures

   $ 78.9      $ 89.6      $ 86.7      $ 132.2      $ 119.8   

 

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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION

The following unaudited pro forma condensed consolidated financial information sets forth our unaudited pro forma and historical condensed consolidated balance sheet as of December 29, 2012 and our unaudited pro forma and historical condensed consolidated statement of operations for the year ended December 29, 2012. Historical information for Bausch & Lomb Holdings Incorporated and TPV is based on the audited consolidated financial statements of Bausch & Lomb Holdings Incorporated and TPV appearing elsewhere in this prospectus. The historical information for ISTA is unaudited and has not been included elsewhere in this prospectus. The historical consolidated financial information has been adjusted in the following unaudited pro forma condensed consolidated financial statements to give effect to pro forma events that are (i) directly attributable to the applicable pro forma transactions, (ii) factually supportable and (iii) with respect to the statements of operations, expected to have a continuing impact on the consolidated results.

The unaudited pro forma condensed consolidated balance sheet at December 29, 2012, and the unaudited pro forma condensed consolidated statement of operations for the year ended December 29, 2012, are presented:

 

   

On an actual basis;

 

   

On a pro forma basis to give effect to the following transactions:

 

  (1) The acquisition of ISTA, which was completed on June 6, 2012;

 

  (2) The acquisition of the outstanding and unowned shares of TPV, which was completed on January 25, 2013;

 

  (3) The incurrence of $800.0 million of indebtedness, with $700.0 million under Holdco’s new senior unsecured term loan facility (the “Holdco Term Loans”) and $100.0 million under Opco’s revolving credit facility, which is collectively referred to as the March 2013 Financing, and a cash dividend of $7.40 per share declared on March 15, 2013 on our outstanding common stock, resulting in total distributions to our stockholders of $772.4 million, which is referred to as the March 2013 Dividend (collectively, the “March 2013 Transactions”); and

 

   

On a pro forma as adjusted basis to also give effect to:

 

  (4) The issuance of          shares of common stock in this offering (assuming an estimated public offering price of $         per share, the midpoint of the price range set forth on the front cover page of this prospectus), the use of $700.0 million of proceeds from this offering to repay the Holdco term loans and to make a cash payment in cancellation of, and granting replacement options in respect of, certain performance-based options,

as if such transactions occurred on December 29, 2012 for the unaudited pro forma condensed consolidated balance sheet, with exception to the acquisition of ISTA, which is already reflected in the December 29, 2012 balance sheet, and as if such transactions occurred on January 1, 2012, for the unaudited pro forma condensed consolidated statement of operations.

Our unaudited pro forma adjustments are based on available information and certain assumptions that we believe are reasonable. Presentation of our unaudited pro forma condensed consolidated financial data is prepared in conformity with Article 11 of Regulation S-X. The unaudited pro forma condensed consolidated financial information should be read in conjunction with “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and related notes thereto, included elsewhere in this prospectus. The unaudited pro forma condensed consolidated financial information is included for informational purposes only and does not purport to reflect our results of operations or financial position that would have occurred had we operated as a public company during the periods presented, and it therefore should not be relied upon as being indicative of our results of operations or financial position had the acquisitions of ISTA and TPV, the March 2013 Transactions, and this offering occurred on the dates assumed. The unaudited condensed consolidated pro forma financial information is also not a projection of our results of operations, or financial position for any future period or date. The estimates and assumptions used in the preparation of the unaudited pro forma condensed consolidated financial information may be materially different from our actual experience.

 

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BAUSCH & LOMB HOLDINGS INCORPORATED AND CONSOLIDATED SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

For the year ended December 29, 2012

 

Dollar Amounts in
Millions—Except Share and
Per Share Data

  Historical
Bausch &
Lomb
Holdings
Incorporated
    ISTA
Pro Forma (1)
    TPV
Pro Forma  (2)
    March 2013
Transactions  (3)
        Pro
Forma
    Offering
and Use of
Proceeds (4)
    Pro Forma,
As Adjusted
 

Net Sales

  $ 3,037.6     $ 31.3     $                  $ —          $                  $                  $               

Costs and Expenses

               

Cost of products sold

    1,162.3       (24.1       —             

Selling, general and administrative

    1,410.4       33.8         —             

Research and development

    227.4       15.4         —             
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

 

Operating Expenses

    2,800.1       25.1         —             
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

 

Operating Income (Loss)

    237.5       6.2          —             

Other Expense (Income)

               

Interest expense and other financing costs

    246.0       10.3         50.6  i         

Other Expense, Net

    5.8        13.1         —             
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

 

Total Other Expenses

    251.8       23.4         50.6           
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

 

(Loss) Earnings before Income Taxes and Equity in Losses of Equity Method Investee

    (14.3     (17.2       (50.6        

Provision for income taxes

    27.0       46.2         (19.4 ) j         

Equity in losses of equity method investee

    24.1       —           —             
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

 

Net (Loss) Income

    (65.4     (63.4       (31.2        

Net income attributable to noncontrolling interest

    2.9       —           —             
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

 

Net (Loss) Income Attributable to Bausch & Lomb Holdings Incorporated

  $ (68.3   $ (63.4   $       $ (31.2     $       $       $    
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

 

Net Loss Attributable to Bausch & Lomb Holdings Incorporated per Common Share

               

Basic and Diluted

  $ (0.66 )              

Weighted Average Shares Outstanding (000s)

               

Basic and Diluted

    104,159                 

See Notes to the Unaudited Pro Forma Condensed Consolidated Financial Statements.

 

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BAUSCH & LOMB HOLDINGS INCORPORATED AND CONSOLIDATED SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET

For the year ended December 29, 2012

 

Dollar Amounts in Millions

  Historical Bausch
& Lomb Holdings
Incorporated
    TPV
Pro Forma  (2)
    March 2013
Transactions  (3)
        Pro
Forma
    Offering
and Use of
Proceeds (4)
    Pro Forma,
As Adjusted
 

Assets

             

Current Assets:

             

Cash and cash equivalents

  $ 359.2     $                  $ 4.5  g      $                  $                  $               

Trade receivables

    573.8         —             

Inventories

    317.4         —             

Other current assets

    178.0         —             

Deferred income taxes

    128.0         —             
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

 

Total Current Assets

    1,556.4         4.5           
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

 

Property, Plant and Equipment, net

    718.6         —             

Goodwill

    1,391.3         —             

Other Intangibles, net

    1,946.0         —             

Other Long-Term Assets

    323.8         10.5  h         

Deferred Income Taxes

    20.7         —             
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

 

Total Assets

  $ 5,956.8     $       $ 15.0        $       $       $    
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

 

Liabilities and Shareholders’ Equity

             

Current Liabilities:

             

Notes payable

  $ 3.0     $       $ —          $       $       $    

Current portion of debt

    52.3         800.0  g         

Accounts payable

    146.3         —             

Accrued compensation

    181.2         —             

Accrued liabilities

    638.3              

Income taxes payable

    15.1         —             

Deferred income taxes

    0.4         —             
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

 

Total Current Liabilities

    1,036.6         800.00           

Long-Term Debt, less current portion

    3,251.4         —             

Pension and Other Benefit Liabilities

    272.8         —             

Other Long-Term Liabilities

    7.7         4.5  k         

Income Tax Liabilities

    46.2         —             

Deferred Income Taxes

    532.0         —             
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

 

Total Liabilities

    5,146.7         804.5           
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

 

Shareholders’ Equity:

             

Common Stock

    1.0         —             

Preferred Stock

    —           —             

Common Stock in Treasury

    (0.4       —             

Capital in Excess of Par Value

    2,143.0         (789.2 ) k         

Retained Deficit

    (1,140.7       (0.3 ) h         

Accumulated Other Comprehensive Loss

    (208.1       —             
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

 

Total Bausch & Lomb Holdings Incorporated Shareholders’ Equity

    794.8         789.5           

Noncontrolling interest

    15.3         —             
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

 

Total Shareholders’ Equity

    810.1         789.5           
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

 

Total Liabilities and Shareholders’ Equity

  $ 5,956.8     $       $ 15.0        $       $       $    
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

 

See Notes to the Unaudited Pro Forma Condensed Consolidated Financial Statements.

 

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(1) ISTA Pro Forma

On June 6, 2012, we completed the acquisition of ISTA, a leading pharmaceutical company, under which we acquired all outstanding stock of ISTA for $9.10 per share or $487.5 million ($465.5 million, net of cash acquired). Prior to the acquisition, we provided contract manufacturing services to ISTA, accordingly adjustments have been made to eliminate these transactions. The purchase of ISTA was accounted for under the acquisition method of accounting, as required under ASC 805. ASC 805 requires that management measure the fair value of the assets acquired and liabilities assumed as of the acquisition date. A preliminary assessment of fair value has been developed based on available data and certain estimates. Amounts related to IPR&D and other long-lived assets, among other items, are subject to change.

ISTA PHARMACEUTICALS, INC.

UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS

For the year ended December 29, 2012

 

Dollar Amounts in Millions

   Historical ISTA
Period of  January 1,
2012—June 6, 2012
    Pro Forma
Adjustments
    ISTA
Pro
Forma
 

Net Sales

   $ 34.0      $ (2.7 )a    $ 31.3   

Costs and Expenses

      

Cost of products sold

     (0.4     (23.7 )b      (24.1

Selling, general and administrative

     68.9        (35.1 )c      33.8   

Research and development

     19.4        (4.0 )d      15.4   
  

 

 

   

 

 

   

 

 

 

Operating Expenses

     87.9        (62.8     25.1   
  

 

 

   

 

 

   

 

 

 

Operating Income (Loss)

     (53.9     60.1        6.2   

Other Expense (Income)

      

Interest expense and other financing costs

     6.8        3.5  e      10.3   

Other Expense, Net

     13.1        —          13.1   
  

 

 

   

 

 

   

 

 

 

Total Other Expenses

     19.9        3.5        23.4   
  

 

 

   

 

 

   

 

 

 

(Loss) Earnings before Income Taxes

     (73.8     56.6        (17.2

Provision for income taxes

     —          46.2  f      46.2   

Equity in losses of equity method investee

     —          —          —     
  

 

 

   

 

 

   

 

 

 

Net (Loss) Income

     (73.8     10.4        (63.4

Net income attributable to noncontrolling interest

     —          —          —     
  

 

 

   

 

 

   

 

 

 

Net (Loss) Income Attributable to ISTA Pharmaceuticals

   $ (73.8   $ 10.4      $ (63.4
  

 

 

   

 

 

   

 

 

 

 

  (a) Net Sales

From January 1, 2012 to June 6, 2012 we had a contract to manufacture products for ISTA. Under the terms of this contract we recorded $2.3 million of sales, which have been eliminated with this adjustment as if ISTA had been a consolidated subsidiary since January 1, 2012.

In order to align ISTA’s accounting policies to our accounting policies, net sales decreased by $2.3 million as a result of reclassifying coupon reimbursement expenses from selling, general and administrative expenses, which was partially offset by an increase of $1.9 million relating to the accounting policy alignment adjustment to eliminate the impact from ISTA’s participation in the Tri-Care pharmacy program.

 

  (b) Cost of Products Sold

Reflects a $2.3 million adjustment to eliminate cost of products sold incurred by ISTA related to the contract manufacturing arrangement described in Note (a). In addition we have eliminated $21.4 million from cost of products sold to exclude the amortization of the fair value step-up to inventory recorded on the acquisition date.

 

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Table of Contents
  (c) Selling, General and Administrative Expense

The adjustments to selling, general and administrative expenses are summarized in the table below:

 

Reclassification of coupon reimbursement expenses to sales (see Note (a))

     (2.3

Severance and relocation charges related to the ISTA acquisition

     (21.0

ISTA stock compensation expense triggered by the completion of the acquisition

     (10.1

ISTA acquisition costs

     (17.7

Amortization of acquisition related intangible assets

     15.7   

Other

     0.3   
  

 

 

 

Total impact to Selling, General and Administrative Expense

     (35.1

 

  (d) Research and Development Expense

Adjustments of $4.0 million reflect the elimination of $3.5 million of ISTA stock compensation expense triggered by the completion of our acquisition and the elimination of $0.5 million to eliminate severance and relocation costs related to the ISTA acquisition.

 

  (e) Interest Expense and Other Financing Costs

The net increase in interest expense and other financing costs of $3.5 million reflects an increase of $9.6 million in interest expense and $0.7 million for the amortization of debt issuance costs related to debt incurred for the ISTA acquisition. These are partially offset by a $6.8 million decrease to exclude ISTA’s historical interest expense associated with pre-acquisition outstanding debt that was paid on June 6, 2012 in connection with the acquisition.

 

  (f) Income Taxes

The total increase of $46.2 million reflects $21.7 million of tax expense computed by applying the statutory tax rates of the relevant jurisdictions to the pro forma adjustments in Notes a-e above and an increase of $24.5 million to exclude a non-recurring benefit related to the release of valuation allowance as a result of taxable temporary differences that were recorded in the historical financial statements of Bausch & Lomb as part of the ISTA acquisition. These tax rates do not reflect our effective tax rate, which includes other items such as valuation allowance impacts and other tax charges or benefits. Our effective tax rate may be significantly different than the rates assumed for purposes of preparing the unaudited pro forma condensed consolidated financial statements for a variety of factors.

 

(2) TPV Pro Forma

On January 25, 2013, we completed the acquisition of all outstanding and unowned shares of TPV, representing 45.9 percent of TPV’s outstanding equity. We paid €99.5 million ($133.1 million) for the unowned shares and €0.9 million ($1.2 million) for transaction costs from cash on hand. This purchase price is subject to adjustments, including an increase of up to €92.0 million for milestone payments contingent on achievement of sales targets for specific TPV products in future years. We are in the process of determining the fair value of the assets acquired and liabilities assumed in the transaction, the fair value of the contingent consideration, the fair value of our equity interest in TPV immediately prior to the acquisition, and the gain or loss, if any, to be recognized upon settling preexisting relationships with TPV.

 

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TECHNOLAS PERFECT VISION GMBH

UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 29, 2012

 

Dollar Amounts in Millions

   Historical TPV    Pro Forma Adjustments    TPV Pro Forma

Net Sales

        

Costs and Expenses

        

Cost of products sold

        

Selling, general and administrative

        

Research and development

        
  

 

  

 

  

 

Operating Expenses

        
  

 

  

 

  

 

Operating Income (Loss)

        

Other Expense (Income)

        

Interest expense and other financing costs

        

Other Expense, Net

        
  

 

  

 

  

 

Total Other Expenses

        
  

 

  

 

  

 

(Loss) Earnings before Income Taxes

        

Provision for income taxes

        

Equity in losses of equity method investee

        
  

 

  

 

  

 

Net (Loss) Income

        

Net income attributable to noncontrolling interest

        
  

 

  

 

  

 

Net (Loss) Income Attributable to TPV

        
  

 

  

 

  

 

 

(3) March 2013 Transactions

On March 15, 2013, our board of directors declared a cash dividend of $7.40 per share on our outstanding common stock, resulting in total distributions to our stockholders of $772.4 million. This cash dividend is referred to as the “March 2013 Dividend.” The March 2013 Dividend was payable on March 19, 2013.

On March 19, 2013, we borrowed $700.0 million in Holdco Term Loans. In addition, we borrowed $100.0 million under our revolving credit facility. These borrowings together are referred to as the “March 2013 Financing.” The declaration and payment of the March 2013 Dividend, the payment of related fees and expenses, and a cash payment to the holders of certain time-based options was funded by the March 2013 Financing.

(g) Debt and Use of Proceeds

The current portion of debt was adjusted to reflect the increase related to the $700.0 million Holdco Term Loans and $100.0 million borrowing under the revolving credit facility.

The uses of the proceeds from the March 2013 Financing are summarized below:

 

March 2013 dividend

     772.4   

Payment related to vested time-based option modification

     12.3   

Financing fees (deferred in long term assets)

     10.5   

Other related fees (expensed)

     0.3   

Cash

     4.5   
  

 

 

 

Total use of proceeds

     800.0   
  

 

 

 

 

 

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(h) Debt Issuance Costs

In connection with these borrowings, we recorded an adjustment to reflect $10.5 million in deferred financing costs which were paid out of proceeds. These deferred financing costs will be amortized over the five-year term of the Holdco Term Loans (maturing May 31, 2018). We also recorded an adjustment of $0.3 million for other related fees which were paid out of proceeds and recognized as an expense.

(i) Interest Expense

Until March 19, 2014 (or earlier, between October 1, 2013 and March 19, 2014, under certain circumstances), the Holdco Term Loans will bear interest at a rate per annum equal to 5.25 percent (or 6.00 percent if paid as PIK Interest) plus LIBOR, provided that LIBOR rates are subject to a floor of 1 percent per annum. The revolving credit facility will bear interest at a rate per annum equal to 3.75 percent plus LIBOR, provided that LIBOR rates are subject to a floor of 1 percent per annum. We recorded an adjustment to interest expense and other financing costs to reflect incremental interest expense of $50.6 million, which includes amortization of deferred financing costs of $2.1 million and which assumes that interest is paid in cash. For the purposes of the pro forma statement of operations, an assumed rate of 6.25 percent for the Holdco Term Loans and 4.75 percent for the revolving credit facility have been applied.

A 1/8th% variance in the interest rates that apply to the March 2013 Financing would result in a change in pro forma interest expense of $1.0 million for the year ended December 29, 2012.

(j) Income Taxes

The tax benefit of $19.4 million is calculated by applying our U.S. combined federal and state statutory rate of 38.3% to the pro forma interest expense related to the March 2013 Financing. This tax rate does not reflect our effective tax rate, which includes other items such as valuation allowance impacts and other tax charges or benefits. Our effective tax rate may be significantly different than the rates assumed for purposes of preparing the unaudited pro forma condensed consolidated financial statements for a variety of factors.

(k) Dividend

To reflect the use of proceeds from the borrowings under the March 2013 Financing to issue a cash dividend of $7.40 per share on our outstanding common stock, resulting in a total distribution of $772.4 million to our stockholders.

In connection with the payment of the March 2013 Dividend, we modified certain stock-based compensation awards held by current and former employees and directors, including (1) by making a cash payment in respect of, and adjusting the exercise price of, certain vested time-based stock options, (2) by reducing the exercise price of all other stock options and (3) in respect of the outstanding restricted stock by adjusting the market-based vesting condition and paying dividends subject to the underlying vesting conditions. The total cash payment associated with the stock option modifications will be $12.3 million, and we have accrued $4.5 million for future payments on the restricted stock plans, which has been offset by a corresponding reduction in capital in excess of par value. The March 2013 Dividend to shareholders, in addition to the payments and accruals made in respect of the modified share-based compensation awards resulted in a reduction in capital paid in excess of par value of $789.2.

The incremental costs associated with the make-whole modification of time based options and restricted stock is expected to be immaterial. The modification of performance-based options will not result in any immediate impact but may impact expense to be recognized following the completion of this offering.

 

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(4) Offering and Use of Proceeds

 

  (l) Common Stock

Reflects the issuance of shares of common stock in this offering, assuming an estimated public offering price of $         per share, the midpoint of the range set forth on the cover page of this prospectus, after deducting the estimated underwriting discount and estimated offering expenses payable by us of $         resulting in net proceeds of $        .

These underwriting discounts and offering expenses have been summarized in the table below:

 

Underwriters fees

  

Attorneys fees

  

Other professional services fees associated with the offering

  

Agency fees

  
  

 

Total

  
  

 

 

  (m) Debt Repayment

Reflects the use of $700.0 million of proceeds for this offering that we expect to be used to repay the Holdco Term Loans, resulting in a decrease in pro forma interest expense of $        . Additionally, as a result of extinguishing our borrowings under the Holdco Term Loans, we will write-off $         in deferred financing costs.

 

  (n) Stock Compensation

Upon completion of this offering, we will make a cash payment of $                 in cancellation of, and granting replacement options in respect of, certain performance-based options.

 

(5) Pro Forma As Adjusted Earnings Per Share

The following table illustrates the calculation of pro forma as adjusted earnings per share for the year ended December 29, 2012:

 

Pro forma as adjusted net income

  

Shares issued in this offering

  

Pro forma as adjusted weighted average shares outstanding

  
  

 

Pro forma as adjusted earnings per share

  
  

 

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read together with our financial statements and related notes and other financial information appearing elsewhere in this prospectus. This discussion and analysis contains forward-looking statements that involve risk, uncertainties and assumptions. See “Special Note Regarding Forward-Looking Statements.” Our actual results could differ materially from those anticipated in the forward-looking statements as a result of many factors, including those discussed in “Risk Factors” and elsewhere in this prospectus. Except where the context otherwise requires, the terms “we,” “us,” or “our” refer to the business of Bausch & Lomb Holdings Incorporated and its consolidated subsidiaries.

The fiscal years ended December 29, 2012 and December 25, 2010 consisted of four thirteen-week fiscal quarters. The fiscal year ended December 31, 2011 contained 53 weeks, with the first, second and third quarters each consisting of 13 weeks of results and the fourth quarter consisting of 14 weeks. The first and second months of each fiscal quarter contain four weeks of results and the third month contains five weeks of results (six weeks in the case of the fourth quarter of 2011). Accordingly, net sales are typically higher in the third month of any given quarter. In addition, we typically increase the level of activity within our broad portfolio of customer programs at the end of each quarter.

Business Overview

Our Business

We are a leading global eye health company. We are solely focused on protecting, enhancing, and restoring people’s eyesight. Over our 160 year history, Bausch + Lomb has become one of the most widely recognized and respected eye health brands in the world. We globally develop, manufacture and market one of the most comprehensive product portfolios in our industry.

Our ability to deliver a broad, complementary portfolio of products to eye care professionals, patients and consumers enables us to address a full spectrum of eye health needs. We offer products such as branded and generic prescription ophthalmic pharmaceuticals, OTC ophthalmic medications, ophthalmic nutritional products, contact lenses and lens care solutions, as well as products that are used in cataract, vitreoretinal, refractive and other ophthalmic surgical procedures. Our sales organization of over 3,700 employees markets our diversified product portfolio of more than 300 products in over 100 countries.

Since 2007, we have been executing an operational and financial transformation. This transformation began with our acquisition by our Principal Stockholders. It was accelerated with the arrival of our current management team in 2010 and the implementation of a multi-year turnaround plan. As a result of our work to date, we have strengthened our business, increased revenue growth and expanded margins by developing a unified and streamlined global business model, by investing in global commercial and manufacturing capabilities, by expanding geographically in developed and emerging markets and by creating a differentiated approach to new product innovation.

Our Business Segments

We manage and review our business and allocate resources through three business segments: pharmaceuticals, vision care and surgical. Support costs not directly associated with one of the three business segments, such as certain manufacturing, research and development and administrative expenses, including corporate expenses, are not allocated to or included in business segment results. Our pharmaceuticals segment portfolio is diversified and includes branded and generic prescription ophthalmic pharmaceuticals, OTC medications and ophthalmic nutritional products. Our vision care segment consists of contact lenses and lens care products. Our surgical segment includes products used in cataract, vitreoretinal, refractive and other ophthalmic procedures.

 

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Recent Developments and Other Factors Affecting Our Results of Operations

Recent Acquisitions

Transactions with Technolas Perfect Vision GmbH (TPV). Effective January 1, 2009, we formed TPV, a joint venture with 20/10 Perfect Vision AG (“20/10”), which combined the assets and operations of 20/10 and our refractive products business. In each of the years presented in our accompanying financial statements, we accounted for our investment in TPV as an equity investment, such that our share of TPV’s losses is included in “Equity in Losses of Equity Method Investee” in our statements of operations.

During the third quarter of 2011, we entered into a definitive agreement with TPV pursuant to which we obtained an option to purchase all outstanding TPV shares that we did not own based on the achievement of certain milestones and earn-outs. Pursuant to the terms of this agreement, we paid €20 million ($28 million) for the option and also advanced an additional €40 million ($54 million) to TPV. On November 7, 2012, we announced that we had exercised our option to purchase all outstanding shares of TPV that we did not own, and we completed the acquisition of the remaining shares of TPV on January 25, 2013. See “Unaudited Pro Forma Condensed Consolidated Financial Information.” TPV will be reported in our surgical business segment beginning in 2013.

Acquisition of ISTA Pharmaceuticals, Inc. On June 6, 2012, we completed the acquisition of ISTA, a leading pharmaceutical company and manufacturer of topical eye medicines in the United States, for a total of $488 million (or $466 million, net of cash acquired). The results of operations of ISTA were included in our pharmaceuticals business segment beginning in June 2012.

Acquisition of Laboratorio Pförtner Cornealent SACIF (Waicon). In December 2011, we acquired all outstanding stock of Laboratorio Pförtner Cornealent SACIF, the controlling entity of Waicon, which is the Argentinean market leader in contact lenses and lens care products. The fair value measurement of the assets acquired and liabilities assumed was finalized in the third quarter of 2012. Total consideration paid for the acquisition was $22 million in cash. The results of operations of Waicon were included in our consolidated financial statements beginning in December 2011.

Exit Activities

2008/2009 Program. In the fourth quarter of 2008, we undertook a strategic review of our businesses’ cost structure. In order to better align our organization to our operating segments and become more competitive in the current economic environment, we initiated a realignment program in late 2008 and in early 2009 we committed to a more comprehensive plan of action. The exit activities associated with this plan resulted in cost reductions in some manufacturing operations and in selling, general and administrative (“SG&A”) functions. These activities affected approximately 2,100 positions worldwide and resulted in total charges of $137 million from 2008 through 2012, including $117 million for termination benefits, and $20 million for contract termination and other exit costs. These activities were substantially complete as of December 31, 2011 and yielded annual pre-tax cost savings of approximately $170 million. These savings were partially reinvested into R&D, marketing and other programs designed to accelerate sales growth.

2010 Program. In May 2010, we began a second series of exit actions designed to further improve our profitability and operational efficiency. These activities resulted in additional cost reductions in some manufacturing operations, procurement and SG&A functions. The activities affected approximately 500 positions worldwide and resulted in total charges of $55 million from 2010 through 2012, including $44 million for termination benefits and $11 million for contract termination and other exit costs. These activities were substantially complete as of December 29, 2012. These actions yielded annual pre-tax cost savings of approximately $130 million. These savings were partially reinvested into R&D, marketing and other programs designed to accelerate sales growth.

 

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Cash Dividend and Related Financing

On March 15, 2013, our board of directors declared the March 2013 Dividend. The March 2013 Dividend was payable on March 19, 2013. Our board of directors decided to pay the March 2013 Dividend based on, among other factors, our strong business performance, the deleveraging of our business, the favorable credit environment at the time and cash generation in excess of our business needs.

On March 19, 2013, we borrowed $700 million in the March 2013 Financing. On the same date, our wholly owned operating subsidiary borrowed $100 million in the March 2013 Financing and subsequently distributed $83 million to us. The declaration and payment of the March 2013 Dividend, along with the payment of related fees and expenses, was financed by the March 2013 Financing. We expect to use a substantial portion of the net proceeds from this offering to repay the $700 million we borrowed in the March 2013 Financing. See “Use of Proceeds.”

In connection with the payment of the March 2013 Dividend and this offering, we modified or will modify, as applicable, on or shortly following the closing of this offering the terms of certain stock-based compensation awards held by current and former employees and directors, including (1) by making a cash payment in respect of, and adjusting the exercise price of, certain vested time-based stock options, (2) by reducing the exercise price of all other stock options, (3) in respect of the outstanding restricted stock, by adjusting the market-based vesting condition and paying dividends subject to the underlying vesting conditions and (4) by making a cash payment in cancellation of, and granting replacement options in respect of, certain performance-based options.

Impairments

Asset Impairment Charge. In the fourth quarter of 2012, we recorded an asset impairment charge of $23 million, associated with an investment in a privately held company developing corneal inlay technology for the treatment of presbyopia.

Goodwill Impairment Charges. In the fourth quarters of 2011 and 2010, we recorded goodwill impairment charges of $156 million and $139 million, respectively, associated with our surgical segment. The 2011 charge was associated with the segment’s Americas reporting unit and related to competitors introducing new products that captured market share, and the 2010 charge was associated with its Europe reporting unit and related to an updated analysis of the market acceptance of a then-recently launched IOL. The fair values of our remaining reporting segments exceeded their carrying values including goodwill at the end of 2011 and 2010. The fair values of all our reporting segments exceeded their carrying values including goodwill at the end of 2012.

Rembrandt Settlement

In the fourth quarter of 2012, we reached an agreement with respect to the Rembrandt arbitration matter, whereby we paid, subsequent to fiscal year end, $69 million, including $59 million of damages and $10 million of interest, to fully settle the matter. As a result of this development, fourth quarter financial results included a reversal of previously accrued expenses of $5 million. See “Business—Legal Proceedings” for further discussion of our legal proceedings, including the Rembrandt settlement.

Key Components of Our Results of Operations

Our business benefits from reasonably predictable worldwide demand due to its medical and non-discretionary nature and provides us with a relatively stable source of new customers. Demographic factors, including an aging population and the rising prevalence of diabetes, are key factors in the growth of our customer base and net sales. In addition, greater purchasing power due to the rise of the middle class in emerging markets increases the demand for our vision care and other products in these markets. Our net sales are also affected by product and geographic sales mix, operational effectiveness, pricing, marketing and promotional efforts, brand recognition levels, competition and changes in foreign currency exchange rates. Our gross profit is affected by product sales mix, the efficiency of our manufacturing operations and the costs of materials used to make our

 

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products. Regulatory actions, including healthcare reimbursement schemes, which may require costly expenditures or result in pricing pressure, may decrease our gross profit and operating income.

In assessing the performance of our business, we consider a variety of performance and financial measures. The key measures we consider are net sales (both at actual rates and on a constant-currency basis), Adjusted EBITDA and Segment Adjusted EBITDA. Constant-currency net sales and Adjusted EBITDA are both non-GAAP measures and were two of the metrics used to calculate annual bonuses paid under our incentive plan for management level employees in each of the periods presented in this Management’s Discussion and Analysis (“MD&A”). We believe the items discussed below provide insight into the factors that affect these key measures.

Net Sales

We derive net sales primarily from sales of eye health products that include branded and generic prescription ophthalmic pharmaceuticals, OTC medications and ophthalmic nutritional products; contact lenses and lens care solutions; and products used in ophthalmic surgery. Net sales, which include freight costs billed to customers, represent gross invoiced sales, reduced by amounts for customer programs, which include rebates to managed healthcare plans, contractual pricing allowances, cash discounts, promotional and advertising allowances, volume discounts and specifically established customer product return programs. Several factors affect our reported net sales in any period, including product and geographic sales mix, operational effectiveness, pricing, marketing and promotional efforts, brand recognition levels, competition and changes in foreign currency exchange rates. Our net sales are generally higher in the second and fourth quarters of our fiscal year. This is due to a number of factors including the timing of consumer advertising and promotional activity, the spring and fall allergy seasons in the pharmaceuticals segment, and consumer and customer purchasing patterns associated with healthcare reimbursement programs. Our net sales consist of both self-payments made directly by consumers without relying on any healthcare reimbursement scheme and reimbursements through health care or other reimbursement systems.

Gross Profit

Gross profit is equal to our net sales minus our cost of products sold, and generally increases as net sales increase. Cost of products sold includes the direct cost of manufacturing, distributing and warehousing our products, freight costs for both inbound and outbound shipments, and other product costs including third party royalties, obsolescence, customs, duty, returns processing, and warranty and repair costs. Factors affecting gross profit include product sales mix (including sales volume of products upon which we pay third party royalties), the efficiency of our manufacturing operations and volatility associated with the cost of materials to manufacture our products. Gross profit could decrease if we were to have excess quantities of inventory on hand, or if we were to institute and execute a product recall or incur business realignment and exit activities as a result of a broad restructuring program. Additionally, fair value measurements associated with significant acquisitions will result in adjustments to “step up” the book value of acquired inventories to their estimated fair values. These adjustments would result in increased cost of products sold associated with the acquisition date inventory.

Selling, General and Administrative Expenses

SG&A expenses include those associated with selling, marketing, advertising and promoting our products, general administrative expenses (including corporate administration) and intangible asset amortization. Major costs included in this category are employee related costs (including salaries and benefit programs), sales commissions, professional fees paid to advertising agencies, legal fees and litigation expenses and settlements, and other administrative expenses. Selling expenses will generally increase or decrease in tandem with net sales. Marketing, advertising and promotion expenses will increase or decrease based on the timing of product launches, season of the year, and specific campaign parameters. General and administrative expenses do not correlate with changes in net sales as they are largely fixed in nature. In addition to these factors, our reported SG&A expenses could increase if we were to incur significant expenses in connection with business development activities or for business realignment and exit activities as part of a broad restructuring program.

 

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Research and Development Expenses

Research and development expenses include all expenses associated with developing and researching new products, including salaries and employee benefit costs, third-party contract fees, other external consulting fees, occupancy costs, and third-party milestone payments. Research and development expenses generally do not vary with sales increases or decreases, and are dependent on the timing and number of projects in development, and their various stages of completion. For example, the achievement of milestones or regulatory approvals could increase fees payable to third-party development partners. In addition, research and development expenses could increase if we were to incur significant expenses for business realignment and exit activities as part of a broad restructuring program.

Operating Income

Operating income represents gross profit, less SG&A and research and development expenses, as well as unusual expenses such as asset impairment charges.

Constant Currency Net Sales and Operating Income

Because our products are sold worldwide (with more than 60 percent of sales derived outside the United States in each of the periods presented), our reported financial results are impacted by fluctuations in foreign currency exchange rates. “Constant currency” is a non-GAAP measure we use to assess performance excluding the impact of foreign currency exchange rate changes. Constant currency results are calculated by translating actual current and prior-year local currency net sales and expenses at the same exchange rates. The translated results are then used to determine year-over-year percentage increases or decreases. On the net sales line, our greatest translation risk exposures typically result from changes in rates for the euro and the Japanese yen. For the euro, these exposures are largely offset at the operating income line because we incur euro-denominated expenses associated with manufacturing, selling and research and development activities within Europe. Exposure to the yen is mitigated to a lesser extent, because we do not manufacture products in Japan. We occasionally employ foreign currency derivative instruments to mitigate translation risk associated with the yen. Gains or losses on any such contracts are reported as part of net financing expenses (below operating income).

Adjusted EBITDA

 

Adjusted EBITDA is a supplemental financial measure used by us and by external users of our financial statements, such as our lenders. We consider Adjusted EBITDA an indicator of the operational strength and performance of our business and we also believe that it provides insight into our ability to incur additional debt and meet our liquidity requirements. Adjusted EBITDA allows us to assess our performance without regard to financing methods and capital structure and without the impact of other matters that we do not consider indicative of the operating performance of our business.

We compensate for the limitations of Adjusted EBITDA as an analytical tool by reviewing the comparable GAAP measure (net loss), understanding the differences between the measures and incorporating these insights into our decision-making processes. Adjusted EBITDA is not considered a measure of financial performance under GAAP and the items excluded from Adjusted EBITDA are significant components in understanding and assessing our financial performance. Adjusted EBITDA should not be considered in isolation or as an alternative to GAAP measures such as net income or operating income. Since Adjusted EBITDA is a measure not deemed to be in accordance with GAAP and is susceptible to varying calculations, Adjusted EBITDA, as presented, may not be comparable to other similarly titled measures of other companies.

Segment Adjusted EBITDA

Segment Adjusted EBITDA is the primary earnings measure we use to evaluate the performance of our segments, as defined in ASC 280 – Segment Reporting. Costs associated with support functions that are not

 

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directly associated with one of the three business segments, such as certain manufacturing , research and development and administrative expenses, including corporate, are not allocated to or included in segment results.

Results of Operations

Information concerning our consolidated and business segment sales and operating performance is presented in the following tables.

All dollar amounts in the tables below are expressed in millions.

 

    

                                             Year Ended                                          

 
    

 December 25, 2010 

   

 December 31, 2011 

   

 December 29, 2012 

 

Net Sales:

               

Pharmaceuticals

   $ 937.2        36   $ 1,110.1        39   $ 1,288.0        42

Vision Care

     1,155.1        45     1,225.4        43     1,241.5        41

Surgical

     484.6        19     509.9        18     508.1        17
  

 

 

      

 

 

      

 

 

    
   $ 2,576.9        $ 2,845.4        $ 3,037.6     
  

 

 

      

 

 

      

 

 

    

 

    Year Ended  
     December 25, 2010       December 31, 2011       December 29, 2012   

Adjusted EBITDA:

     

Pharmaceuticals

  $ 275.4     $ 376.6     $ 454.2  

Vision Care

    319.4       354.4       371.2  

Surgical

    91.8       87.5       81.0  
 

 

 

   

 

 

   

 

 

 

Segment Adjusted EBITDA

    686.6       818.5       906.4  

Other, including support functions and corporate

    (214.7     (259.6     (263.3
 

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

    471.9        558.9        643.1   

Stock-based compensation 1

    (8.5     (13.9     (18.8

Goodwill impairment charges 2

    (139.2     (156.0     —     

Business realignment and exit activities 3

    (79.5     (26.7     (15.5

Acquisition accounting adjustments 4

    —          (0.3     (22.0

Asset impairment charges 5

    —          (1.6     (25.0

Product liability and litigation expenses 6

    (4.8     (4.7     (4.2

Rembrandt settlement 7

    —          —          (58.4

Acquisition related costs 8

    —          —          (27.2

Licensing milestone 9

    —          —          (10.0

Legal judgment related to Brazil distributor termination 10

    —          (3.4     3.0  

Foreign currency, net 11

    (1.6     (9.1     (9.8

Other, net 12

    (2.3     (2.5     (1.6

Net income attributable to noncontrolling interest

    3.0       7.7       2.9  

Depreciation and amortization

    (203.7     (201.1     (228.8

Interest expense and other financing costs

    (180.9     (169.3     (246.0

Interest and investment income

    3.8        3.1        4.0   

Provision for income taxes

    (33.4     (76.5     (27.0

Equity in losses of equity method investee

    (17.8     (20.8     (24.1
 

 

 

   

 

 

   

 

 

 

Net loss

  $ (193.0   $ (116.2   $ (65.4
 

 

 

   

 

 

   

 

 

 

 

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1 Represents stock-based compensation expense recognized under FASB ASC Topic 718 Compensation—Stock Compensation. The 2010 amount excludes $1.1 million of such expense that is included in the line item called “business realignment and exit activities.”
2 Goodwill impairment charge recorded in 2010 represents the write-down of the surgical segment’s Europe reporting unit’s goodwill. The charge in 2011 represents the write-down of the surgical segment’s Americas reporting unit’s goodwill. See Note 1—Basis of Presentation and Summary of Significant Accounting Policies—Goodwill for further discussion.
3 Includes exit activity charges of $64.2 million, $18.9 million and $11.2 million in 2010, 2011 and 2012, respectively. See Note 13—Exit Activities and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Recent Developments and Other Factors Affecting Our Results of Operations—Exit Activities” for further discussion on exit activities. Also includes other expenses for business realignment initiatives benefitting ongoing operations of $15.3 million, $7.8 million and $4.3 million in 2010, 2011 and 2012, respectively.
4 Represents the increase in cost of goods sold as a result of the step-up to inventory to fair market value recorded in connection with the Waicon and ISTA acquisitions. The Waicon inventory that was revalued was sold in 2011 and 2012, and the ISTA inventory that was revalued was sold in 2012.
5 Charges associated with the write-down of investments in equity securities using the cost method of accounting. Of the total impairment in 2012, $23.0 million relates to an equity investment in a privately held company. See Note 6—Other Long-Term Investments—Investment in Cost Method Investees for a further discussion.
6 Represents expenses associated with product liability cases related to the 2006 MoistureLoc product recall and the cost of actual MoistureLoc claims settled (net of insurance recoveries); and expenses associated with the legal proceedings, including the Wilmington Partners matter, the Rembrandt arbitration and certain governmental investigations, described in Note 17—Other Matters and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Legal Proceedings”.
7 Represents settlement expense related to the Rembrandt arbitration as described in Note 17—Other Matters.
8 Represents costs associated with the acquisition and integration of Waicon and ISTA, including severance, integration costs and professional fees ($23.6 million) and fees incurred in relation to the evaluation of a potential acquisition ($3.6 million).
9 Represents payment of a development milestone to NicOx upon publication of favorable results of a Phase 2b clinical study related to latanaprostene bunod, a development stage drug compound for which we have licensed global rights from NicOx. GAAP requires such payments to be expensed to research and development expense, up until the time a product is approved for commercial sale, after which time such milestone payments are capitalized as intangible assets and amortized.
10 Represents expense related to a 2011 legal judgment associated with our termination of a distributor in Brazil, which was partially overturned on appeal in 2012.
11 Represents foreign currency expense per our financial statements that primarily reflects the effects of changes in foreign exchange rates on intercompany transactions denominated in currencies other than an entity’s functional currency, to the extent not offset by our ongoing foreign currency hedging programs. See Note 1—Basis of Presentation and Summary of Significant Accounting Policies—Foreign Currency for further discussion.
12 This adjustment is comprised of non-cash losses associated with the retirement of fixed assets and other individually immaterial items.

 

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The following table summarizes percentage net sales trends for each of our business segments:

 

     Net Sales  
     Percent Increase  
     2011 vs. 2010     2012 vs. 2011  
     Actual
Dollars
    Constant
Currency(1)
    Actual
Dollars
    Constant
Currency(1)
 

Pharmaceuticals

     18     16     16     19

Vision Care

     6     2     1     4

Surgical

     5     3     —       2

Total Company

     10     7     7     10

 

  (1) Constant currency net sales were calculated by translating actual current and prior-year local currency at the same exchange rates.

Year ended December 31, 2011 compared to year ended December 25, 2010

Net Sales. Compared to 2010, consolidated net sales increased 10 percent on a reported basis and 7 percent on a constant currency basis in 2011.

 

   

Pharmaceuticals revenues advanced 18 percent in 2011, or 16 percent on a constant currency basis. Net sales of prescription drugs grew in excess of 20 percent. Growth was led by higher sales of anti-inflammatory, anti-infective, glaucoma, allergy and anti-viral medications. These trends reflected growth in the Lotemax and Alrex brands (largely driven by price increases), higher sales of our Besivance antibiotic, overall higher sales of generic pharmaceuticals in the United States and revenues associated with recently acquired product lines. Advances for U.S. generic drugs reflected a favorable competitive environment for several products (including our continued reliability of supply) along with opportunistic price increases and the introduction of new products including generic Xalatan. These gains were somewhat mitigated by anticipated lower sales of erythromycin ointment. Revenues from OTC medications also grew at double digit rates in 2011, largely driven by the Artelac brand in Europe and the Mioclear brand in China. U.S. performance was impacted by recalls of Soothe dry eye drops. Constant-currency sales of ocular vitamins increased close to 10 percent in 2011, led by advances in the PreserVision brand.

 

   

Vision care revenues increased 6 percent in 2011 and increased 2 percent on a constant currency basis. Constant-currency sales of contact lenses were flat compared to the prior year, and lens care sales advanced moderately in a relatively flat market. Contact lens sales trends reflected gains in Asia, emerging European markets and Latin America (the latter reflecting the acquisition of Waicon in the fourth quarter of 2011), offset by declines in mature markets in Europe and in North America. Gains were attributable to double-digit growth in sales of daily disposable lenses (mainly in Asia and the United States) and PureVision spherical lenses, as well as new limbal ring (cosmetic) lenses that we launched in Asia. Sales of toric and multifocal products declined from the prior year period, reflecting continued market share losses associated in part with new competitive product offerings. To combat these losses, in the second half of 2011 we introduced PureVision2 for astigmatism in the United States and Europe and launched this product in additional markets in 2012. Lens care performance mainly reflected increased sales of Biotrue and renu multipurpose solutions, growth for the latter largely due to the fact that 2010 sales had been negatively impacted by a voluntary recall in Europe.

 

   

Surgical revenues increased 5 percent in 2011, or 3 percent on a constant currency basis, with advances in markets outside the United States more than offsetting modestly lower U.S. sales. Overall gains were led by double-digit sales of phacoemulsification equipment and disposables (especially our Stellaris PC microsurgical system, which we launched in mid-2010) and strong growth for the Storz line of surgical instruments. Revenues from IOLs declined moderately from the prior year. Sales of acrylic IOLs advanced modestly on strong unit growth, with gains in Asia, Latin America and North America offset by declines in European markets (reflecting competitive pressures and cataract procedure declines in countries in regions that implemented austerity measures). Sales of silicone monofocal and

 

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accommodating IOLs declined from a year ago, mainly due to lower pricing (including the expiry of a temporarily increased pricing reimbursement in the United States for new technology aspheric IOLs), and accommodating IOL market share losses.

Total Segment Adjusted EBITDA. Total segment Adjusted EBITDA increased $132 million or 19 percent in 2011 from 2010. This reflected gross margin improvements, partially offset by increased operating expenses.

Gross margin advances mainly reflected improved product mix and manufacturing efficiencies in the pharmaceuticals segment, and lower obsolescence expense than 2010 in the vision care segment (which had included charges associated with lens care product recalls in Europe). Increased operating expenses were largely driven by higher selling, marketing and advertising expenses, reflecting investment in our pharmaceuticals sales forces and in programs to support recently introduced products in the pharmaceuticals and vision care segments. General and administrative expenses also increased from the prior year, reflecting increased provisions for performance-based incentive compensation plans as a result of improved operating performance. See further discussion in “—Operating Costs and Expenses” below.

Year ended December 29, 2012 compared to year ended December 31, 2011

Net Sales. Compared to 2011, consolidated net sales increased 7 percent on a reported basis in 2012, or 10 percent on a constant currency basis. Reported sales include revenues associated with products acquired from ISTA ($86 million) and Waicon ($22 million in 2012 and $2 million in 2011).

 

   

Pharmaceuticals revenues increased 16 percent in 2012, or 19 percent on a constant currency basis. Growth was driven by higher sales of proprietary prescription drugs and OTC medications, which more than offset declines in sales of generic drugs. Constant-currency prescription drug growth mainly reflected incremental sales associated with the former ISTA products, combined with higher sales of anti-inflammatory, anti-infective and allergy medications. This resulted from a combination of favorable pricing and higher shipments for Lotemax suspension and ointment (for treating post-surgical inflammation), Besivance (our proprietary fluoroquinolone antibiotic for treating allergic conjunctivitis) and Alrex (for treating allergies), along with higher sales of Yellox in Europe, reflecting market share gains for this non-steroidal anti-inflammatory product which was launched in 2011. OTC product sales growth was mainly driven by an increase of more than 15 percent in sales of our lines of vitamins, attributable mainly to the Ocuvite brand, which benefited from successful consumer advertising campaigns in the United States. Our lines of dry eye medications also experienced growth, especially our Artelac lines in Europe, reflecting successful consumer advertising campaigns and sales gains in emerging markets.

 

   

Vision care revenues increased 1 percent in 2012, or 4 percent on a constant currency basis, as compared to 2011. Modestly higher constant-currency sales of contact lenses reflected incremental revenues due to the Waicon acquisition and growth in Asia and European emerging markets, largely offset by declines in North America and mature European markets. Constant-currency sales of daily disposable contact lenses grew nearly 15 percent, mainly benefitting from recently launched products including limbal ring lenses in Asia. In addition, during the fourth quarter we launched Biotrue ONEday contact lenses in the United States and Europe. Customer acceptance of the lenses, which are made from an innovative new contact lens material, has been strong. Sales of PureVision single vision spherical lenses increased moderately as compared to the prior year, reflecting geographic expansion and continued market acceptance of our recently launched PureVision2 brand. Overall revenues from multifocal and toric contact lenses declined from a year ago, mainly due to market share declines. Constant-currency lens care sales growth reflected mainly organic gains, combined with incremental sales from Waicon. Organic lens care sales advanced moderately in 2012, led by the continued expansion and share growth for Biotrue multipurpose solution combined with modest growth for renu multipurpose solutions.

 

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Surgical revenues were essentially flat compared to 2011 on a reported basis, and grew 2 percent on a constant currency basis. Constant-currency growth reflected higher sales of acrylic IOLs and capital equipment and related consumables used to perform posterior ophthalmic surgery. Overall constant-currency revenues from IOLs grew slightly in 2012, with double-digit gains for our acrylic products (mainly due to the enVista and Akreos brands) somewhat offset by lower sales of other IOLs due to continued competitive challenges. Posterior surgical equipment gains were largely driven by Asian markets, particularly Japan, where we obtained regulatory approval and launched our Stellaris PC platform in the first quarter of 2012. Consumables sales advances reflect the increased installed base of Stellaris and Stellaris PC systems.

Total Segment Adjusted EBITDA. Total segment Adjusted EBITDA increased $88 million, or 11 percent, in 2012 as compared to 2011. This reflected gross margin improvement, somewhat offset by higher operating expenses.

Gross margin advances mainly reflected improved product mix in the pharmaceuticals segment following the acquisition of ISTA. These products in general produce higher margins than the vision care and surgical segments. Increased operating expenses were largely driven by selling, marketing and advertising expenses. Selling expense trends mainly reflect the addition and integration of ISTA and Waicon and expansion of our European sales forces in the pharmaceuticals and vision care segments. Marketing and advertising expense increases were largely driven by pharmaceuticals advertising campaigns. See further discussion in “—Operating Costs and Expenses” below.

Operating Costs and Expenses

The following table shows operating costs and expenses as a percentage of sales (all dollar amounts expressed in millions).

 

     2010     2011     2012  
     Amount      % of
Sales
    Amount      % of
Sales
    Amount      % of
Sales
 

Cost of products sold

   $ 1,052.3         40.8   $ 1,087.9         38.2   $ 1,162.3         38.3

Selling, general and administrative

     1,128.3         43.8     1,209.7         42.5     1,410.4         46.4

Research and development

     220.2         8.5     235.4         8.3     227.4         7.5

Year ended December 31, 2011 compared to year ended December 25, 2010

Cost of products sold was $1,088 million or 38.2 percent of sales in 2011 and $1,052 million or 40.8 percent of sales in 2010. The reported amounts include $11 million and $18 million of costs associated with business realignment and exit activities in 2011 and 2010, respectively. Excluding those items, the ratio of adjusted cost of products sold to sales was 37.9 percent in 2011 and 40.1 percent in 2010. On this adjusted basis, margin improvement reflected favorable sales mix associated with increased sales of higher margin pharmaceuticals, favorable manufacturing expenses (especially for pharmaceuticals) and lower vision care obsolescence expense (reflecting charges in the prior year associated with the lens care recall in Europe). These factors were somewhat offset by increased costs to process returns in 2011 (reflecting pharmaceuticals recalls), along with increased royalty expense associated with recently acquired products. Changes in foreign currency exchange rates had a slightly positive impact on the cost of products sold to sales ratio in both 2011 and 2010.

SG&A expenses include those associated with selling, marketing, advertising and promoting our products, general administrative expenses (including corporate administration) and intangible asset amortization. SG&A expenses totaled $1,210 million or 42.5 percent of sales in 2011 as compared to $1,128 million or 43.8 percent of sales in 2010. These reported amounts include $13 million and $55 million of costs in 2011 and 2010, respectively, associated with business realignment and exit activities (mainly severance). Excluding these items

 

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from both periods, the ratio of adjusted SG&A expenses to sales was 42.0 percent in 2011 and 41.6 percent in 2010. On this comparable basis, increased spending was due to increased general administrative, selling, marketing and advertising expenses, combined with currency movements. General administrative expense trends mainly reflected increased expense for performance-based compensation plans and a $3 million legal judgment associated with the prior termination of a distributor in Brazil, somewhat offset by lower expense associated with product liability settlements. Selling expense trends mainly reflected expansion of our sales forces and increased sales commission expense in the United States due to pharmaceuticals sales volume growth, and incremental costs associated with the recent commencement of pharmaceuticals operations in India. Marketing and advertising trends mainly reflected higher spending in support of programs to promote OTC pharmaceuticals and recently launched products. Overall spending in the vision care and surgical segments was less than 2010, reflecting the timing and number of programs in these segments.

R&D expense totaled $235 million in 2011 and represented 8.3 percent of sales, compared to $220 million or 8.5 percent of sales in 2010. These reported amounts include costs of $3 million in 2011 and $6 million in 2010, respectively, associated with business realignment and exit activities. Excluding these costs, the ratio of adjusted R&D expense as a percent of sales represented 8.2 percent in 2011 and 8.3 percent in 2010. Increased reported expense in 2011 mainly reflects the timing of spending on projects, increased expense for performance-based compensation plans, a $4 million payment to license the rights to a generic glaucoma medication, and currency rate movements. Major research projects in 2011 were associated with the development of new contact lens, pharmaceuticals and surgical products. These factors were somewhat offset by the impact of a $10 million payment in 2010 associated with in-licensing a development stage glaucoma drug, which did not recur in 2011.

Year ended December 29, 2012 compared to year ended December 31, 2011

Cost of products sold was $1,162 million or 38.3 percent of sales in 2012, compared to $1,088 million or 38.2 percent of sales in 2011. The reported amounts include acquisition accounting adjustments for inventory step-up associated with the ISTA and Waicon acquisitions ($22 million in 2012), along with costs associated with business realignment and exit activities ($8 million and $11 million in 2012 and 2011, respectively). Excluding those items, the ratio of adjusted cost of products sold to sales was 37.3 percent in 2012 and 37.9 percent in 2011. On this adjusted basis, margin improvement in 2012 was due to favorable sales mix (increased proportion of higher margin pharmaceuticals products, including the impact of the ISTA acquisition) and lower distribution, warehouse and freight expenses, somewhat offset by increased royalties expense (mainly due to the newly-acquired ISTA products). Foreign currency exchange rate movements had virtually no impact on the cost of products sold to sales ratio in 2012 and a slightly positive impact in 2011.

SG&A expenses totaled $1,410 million in 2012 and represented 46.4 percent of sales, compared to $1,210 million or 42.5 percent of sales in 2011. The 2012 reported amount includes $5 million of costs associated with business realignment and exit costs (mainly severance), and the 2011 reported amount includes $13 million of such costs. In addition, 2012 reported expenses include a $59 million charge related to the Rembrandt arbitration, a $23 million impairment charge related to a cost method investment, and $21 million of costs associated with the acquisition and integration of ISTA, including severance, integration costs, and professional fees. Excluding these items, the ratio of adjusted SG&A expenses to sales was 42.9 percent in 2012 and 42.0 percent in 2011. On this comparable basis, increased spending reflected higher selling, marketing and advertising expenses, increased amortization (mainly related to the ISTA and Waicon acquisitions) and higher general administrative expenses, somewhat offset by favorable currency movements. Selling expense trends mainly reflect the addition and integration of ISTA and Waicon and expansion of our European sales forces in the pharmaceuticals and vision care segments. Marketing expense increases were largely driven by pharmaceuticals advertising campaigns and spending in Asia to support several new vision care products (Biotrue branded products and limbal ring contact lenses) in the current year, somewhat offset by decreased spending in the vision care segment associated with products that had been launched or actively promoted in the prior year (including Biotrue multipurpose solution and PureVision2 contact lenses). General administrative expense trends were largely due to increased expenses associated with employee benefit costs, including the winding up of a non-U.S. pension plan and increased product liability expense in 2012 (due to our having received net recoveries in the prior year).

 

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R&D expense totaled $227 million in 2012 and represented 7.5 percent of sales, compared to $235 million or 8.3 percent of sales in 2011. The 2012 reported amount includes $2 million of costs associated with business realignment and exit activities (mainly severance) and the ISTA acquisition. The 2011 reported amount includes $3 million of business realignment and exit activities costs. Excluding these items, adjusted R&D expense represented 7.3 percent of sales in 2012 and 8.2 percent of sales in 2011. Spending declined from 2011, mainly reflecting the timing of projects. In 2012, major expenses included a $10 million milestone payment made to our development partner associated with latanoprostene bunod, a compound being developed to reduce levels of elevated intraocular pressure in patients with glaucoma or ocular hypertension, following the release of favorable Phase 2 clinical trial results, spending on products acquired with ISTA, as well as pipeline products in each of our businesses. Prior-year spending included costs associated with products that were launched in 2012, including Biotrue ONEday, PureVision2 for astigmatism and limbal ring contact lenses and enVista IOLs, and a $4 million license fee for a generic glaucoma medication that did not recur in the current period.

Non-Operating Income and Expense

Interest Expense and Other Financing Costs

Interest expense and other financing costs were $246 million in 2012, $169 million in 2011 and $181 million in 2010. The 2012 amount includes a $22 million loss associated with the extinguishment and modification of our former senior secured credit facility and a $12 million loss associated with the early termination of a portion of our outstanding senior notes (both of which are described in “—Liquidity and Capital Resources” below), as well as $10 million associated with the Rembrandt settlement (described in “Business—Legal Proceedings—Rembrandt Arbitration”). The remainder of the increase in expense as compared to 2011 mainly reflected higher overall outstanding debt balances and interest rates subsequent to the refinancing of our credit facilities. Interest expense was lower in 2011 than in 2010, mainly due to lower average effective interest rates on our outstanding debt. This was due to the interest rate environment and the impact of swap contracts in effect during 2011 as compared to those in 2010. These benefits were partially offset by a third quarter 2011 interest charge of $3 million associated with a legal judgment in Brazil, the effects of foreign exchange rate movements on our reported euro denominated term loan interest, and interest related to higher revolving credit borrowings than in the prior year.

Interest and Investment Income

Interest and investment income was $4 million in 2012, $3 million in 2011 and $4 million in 2010. The increase in 2012 reflected favorable market performance for assets associated with deferred compensation programs. Increased income on overall higher investment balances as compared to the prior year was more than offset by lower average yields on non-U.S. invested assets. Trends in 2011 were driven by unfavorable market performance for invested assets associated with deferred compensation programs, somewhat offset by improved yields on our non-U.S. cash and investments.

Foreign Currency

Net foreign currency losses were $10 million in 2012, $9 million in 2011 and $2 million in 2010, and primarily reflect the effects of changes in foreign exchange rates on intercompany transactions denominated in currencies other than an entity’s functional currency, to the extent not offset by our ongoing foreign currency hedging programs.

Income Taxes

Our effective tax rate was -186.6 percent in 2012, compared to the U.S. statutory rate of 35 percent. The difference in rates was primarily attributable to losses generated in the current year for which no tax benefit could be recorded and the geographic mix of income before taxes from operations outside the United States and the related tax rates in those jurisdictions. The effective tax rates were -403.7 percent and -23.5 percent for 2011 and 2010, respectively.

 

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We have accumulated approximately $550 million of U.S. federal tax net operating loss carryforwards as of December 29, 2012, which can be used to offset taxable income in future quarters if our U.S. operations become profitable. If unused, these tax loss carryforwards will begin to expire between 2015 and 2032. Although we currently generate profits on a consolidated basis, those profits are generated outside the U.S. and cannot be offset with U.S. loss carryforwards. Moreover, under the current tax laws, if we were to experience a significant change in ownership, Section 382 of the Code may restrict the future utilization of these tax loss carryforwards even if our U.S. operations generate significant profits. As of December 29, 2012, we have recognized a deferred tax asset of $193 million related to these net operating losses.

At December 29, 2012, we reported a valuation allowance of $225 million, a net increase of $43 million from December 31, 2011. The valuation allowance at December 29, 2012 relates primarily to tax credit carryforwards and state and non-U.S. net operating loss carryforwards that are not expected to be utilized. The increase in valuation allowance from 2011 relates primarily to foreign tax credits generated in the current year and state attributes acquired with the ISTA acquisition that, based upon the available evidence, will more likely than not expire unutilized. This increase was partially offset by a reduction in required valuation allowance on general business credits, as a result of taxable temporary differences arising in the ISTA acquisition. The change in valuation allowance had a -214.7 percent effective tax rate impact in 2012.

At December 31, 2011, we reported a valuation allowance of $182 million, a net increase of $18 million from December 25, 2010. The valuation allowance at December 31, 2011 relates primarily to tax credit carryforwards and net operating loss carryforwards that are not expected to be utilized. The increase in valuation allowance from 2010 relates primarily to general business credits that, based upon the available evidence, will more likely than not expire unutilized as a result of a reduction of certain projected taxable income in the United States (the change in valuation allowance had a -45.7 percent effective tax rate impact in 2011). This reduction relates primarily to the definitive agreement entered into with TPV.

At December 25, 2010, we reported a valuation allowance of $164 million, a net decrease of $38 million from December 26, 2009. The valuation allowance at December 25, 2010 relates primarily to tax credit carryforwards and net operating loss carryforwards that are not expected to be utilized. The decrease in valuation allowance from 2009 relates primarily to the expiration of certain attributes for which a valuation allowance had previously been provided (the change in valuation allowance had a 26.4 percent effective tax rate impact in 2010).

We will continue to assess the realizability of our deferred tax assets, including consideration of the reversal of these and other temporary basis differences, future earnings, and prudent and feasible tax planning strategies. If we make a later determination that it is more likely than not that the deferred tax assets will be realized, the related valuation allowance will be reduced, generally with an increase to income.

In 1993, we formed a partnership, Wilmington Partners, to raise additional financing. Several of our subsidiaries contributed various assets in exchange for partnership interests. These transactions have been the subject of multiple IRS reviews, starting in 1996. On December 4, 1996, the IRS initiated an audit of Wilmington Partners’s 1993 taxable year, the year in which Wilmington Partners was formed. That audit was completed with a letter dated March 23, 2000, in which the IRS stated that it would make no adjustments to Wilmington Partners’s tax return for the 1993 taxable year. On May 12, 2006, the IRS issued a Notice of Final Partnership Administrative Adjustment (“FPAA”) to Wilmington Partners for its two taxable periods that ended during 1999. We challenged the FPAA and the IRS’s proposed assessments and adjustments on various grounds in the Tax Court. On March 8, 2013, the Tax Court issued an Order encouraging the parties to settle the case. We expect to engage in settlement discussions with the IRS soon.

We have not made any financial provision for the asserted additional taxes, penalties or interest as we believe the related tax benefits have met the recognition and full measurement threshold as outlined under FASB ASC Subtopic 740-10-25, Income Taxes – Overall Recognition. Any final resolution of Wilmington Partners’s

 

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FPAA proceeding may result in related adjustments to the tax liability of our subsidiaries that are or were partners in Wilmington Partners. In addition, we believe that, to the extent we are required to pay any tax for any period covered in this dispute, the deferred tax liability noted below may be adjusted.

We recorded a deferred tax liability of $158 million to account for the future tax consequences arising in part from intercompany repayment of the Contributed Note, scheduled to occur in late 2013, and in part from the liquidation of Wilmington Partners, the timing of which is undetermined. We believe that, in view of our current U.S. tax attribute position, including net operating losses, neither the repayment of the Contributed Note nor the liquidation of Wilmington Partners will result in an immediate cash outlay. However, use of such attributes would mean that they are no longer available to offset future taxable income, and could increase cash tax payments in the future.

We cannot be certain of the outcome of any of these proceedings or the terms of any settlement. Therefore any final determination or settlement of the issues discussed above could have a material adverse effect on our business, prospects, financial condition and results of operations. For further detail regarding the status of the partnership and corporate litigation see “Business—Legal Proceedings.”

Equity in Losses of Equity Method Investee

Our share of the net income or loss of the TPV joint venture is reported in “Equity in Losses of Equity Method Investee” on our statements of operations. In 2012, the total amount reported was $24 million, representing our share of the joint venture’s net losses ($23 million) and amortization of basis difference ($1 million). In 2011, the total reported amount was $21 million, representing our share of the joint venture’s net losses ($19 million), amortization of basis difference and the effect of a decrease in our ownership. During 2010, the total amount reported of $18 million reflected our share of the joint venture’s 2010 net loss and amortization of basis difference. On January 25, 2013, we completed the acquisition of all outstanding and unowned shares of TPV, representing 45.9 percent of TPV’s outstanding equity.

Net Income Attributable to Noncontrolling Interest

Net income attributable to noncontrolling interest was $3 million in 2012, $8 million in 2011 and $3 million in 2010. The amounts reflect our minority partners’ share of after-tax income. The amounts mainly relate to the performance of our Chinese joint ventures.

Liquidity and Capital Resources

Our primary sources of cash are cash generated from operations and borrowings under our senior secured credit facilities. In addition to business development activities, our primary uses of cash are for costs associated with manufacturing our products, employee related costs, capital expenditures, research and development and debt service obligations.

Based on the current level of operations, we believe that cash flow from operations and available cash, together with available borrowing capacity under our senior secured credit facilities, will be adequate to meet our liquidity needs for the next twelve months, including anticipated capital expenditures of approximately $200 million, primarily to increase contact lens manufacturing capacity. This assessment includes our due consideration of the recent volatility in the global financial markets, a review of the creditworthiness of the significant counterparties to our revolving credit facility, as well as remaining cash outflows associated with business realignment and exit activities. However, we cannot provide you with certainty that our business will generate sufficient cash flow from operations or that future borrowing will be available to us under the senior secured credit facilities in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs. In addition, upon the occurrence of certain events, such as change of control, we could be required to repay or refinance our indebtedness. We cannot assure you that we will be able to refinance any of our indebtedness, including our senior secured credit facilities and the senior notes, on commercially reasonable terms or at all.

Cash and cash equivalents totaled $359 million at the end of 2012 and $149 million at the end of 2011. Subsequent to year end 2012, payments of €100 million ($133 million) were made as part of the acquisition of TPV and $69 million was paid to settle the Rembrandt matter (as described in “Business—Legal Proceedings—

 

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Rembrandt Arbitration”), both using cash on hand. At December 29, 2012, a substantial portion of our cash and cash equivalents was held by non-U.S. subsidiaries. Certain of these investments are considered to be permanent in duration. If the amounts held outside of the United States were to be repatriated, under current law, they would be subject to U.S. federal income taxes, less applicable foreign tax credits. In addition, we may utilize available U.S. tax attributes, including net operating loss or tax credit carry forwards, to reduce or eliminate taxes that would otherwise be payable as a result of repatriating cash from these investments. It is not practicable to estimate the amount of additional tax that might be payable if such earnings were to be remitted or the subsidiaries were sold or otherwise disposed. We repatriated $74 million, $90 million and $86 million in cash from our non-U.S. subsidiaries in 2012, 2011 and 2010, respectively, to support the liquidity needs of our U.S. operations. To the extent cash is not permanently re-invested in our non-U.S. subsidiaries, and is otherwise available for repatriation, we will continue to repatriate to support the liquidity needs of our U.S. operations.

Summarized statements of cash flows follow (all dollar amounts expressed in millions):

 

     2010     2011     2012  

Cash Flows from:

      

Operating activities

   $ 72.6     $ 265.7     $ 320.5  

Investing activities

     (161.1     (232.0     (611.1

Financing activities

     32.9       (36.3     492.8  

Cash Flows from Operating Activities

Cash provided by operating activities was $73 million in 2010. Cash flows associated with favorable operating performance were somewhat offset by cash outflows of $184 million for interest, payments of $58 million related to severance and exit activities and cash income taxes of $44 million. Other factors included the timing of collections of accounts receivable and increased inventory.

Cash provided by operating activities totaled $266 million in 2011, with cash flows from favorable operating performance due to the factors discussed previously somewhat offset by cash interest payments of $165 million, severance and other exit activities payments of $41 million, and cash income taxes of $34 million, combined with higher inventories and accounts receivable. Days sales outstanding (“DSO”) improved to 68 days at the end of 2011, compared to 69 days at the end of 2010. Inventory months on hand were 5.2 and 5.1 at the end of 2011 and 2010, respectively.

Cash provided by operating activities totaled $321 million in 2012, mainly due to cash flows from the operating factors discussed above, somewhat offset by $148 million in payments for interest and cash income taxes paid of $76 million. In addition, accounts receivable increased from the prior year (reflecting sales performance), as did inventories. DSO improved to 63 days at the end of 2012, compared to 68 days at the end of 2011. Inventory months on hand were 5.6 and 5.2 at the end of 2012 and 2011, respectively.

Cash Flows from Investing Activities

We used $161 million for investing activities in 2010. This mainly reflected $87 million in capital spending, payments made in connection with the acquisitions of Zirgan, certain distributor operations, and the Miochol-E product lines from affiliates of Novartis ($64 million in aggregate) and an additional $15 million investment in the TPV joint venture.

We used $232 million for investing activities in 2011, mainly consisting of $132 million in capital expenditures, €40 million ($57 million) associated with advances to, and payment for, an option to purchase remaining shares we did not already own of the TPV joint venture, and the acquisition of Waicon ($23 million).

We used $611 million for investing activities in 2012. This was mainly due to $466 million net cash paid for the acquisition of ISTA, as well as $120 million in capital spending and €20 million ($25 million) of advances to TPV.

 

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Cash Flows from Financing Activities

Cash inflows from financing activities were $33 million in 2010, mainly due to $80 million net borrowings under our U.S. revolving credit facility and $24 million net borrowings under our new Japanese revolving credit facility, discussed in “—Liquidity and Capital Resources—Japanese Debt” below, partially offset by a $64 million repayment of our prior Japanese term loan upon its maturity in July 2010.

Cash outflows from financing activities were $36 million in 2011. This was primarily due to $30 million in net repayment of amounts drawn under revolving credit facilities and $24 million required principal payments on our senior secured term loans, partially offset by $16 million in net proceeds from additional Japanese revolver borrowings.

Cash inflows from financing activities were $493 million in 2012. Proceeds from the issuance of debt totaled $2,984 million and were mainly due to our refinancing and upsizing of our senior secured credit facilities, discussed in “Sources of Liquidity” below, and borrowing under our delayed draw term loan facilities. Repayment of debt totaling $2,415 million mainly related to the repayment of our former senior secured credit facilities and repayment of $300 million principal of senior notes.

Indebtedness

Our reported long-term debt, including current portion, totaled $3,304 million at December 29, 2012, compared to $2,697 million at the end of 2011. The increase in outstanding debt since the prior year end is mainly attributable to our refinancing and upsizing our credit facilities in anticipation of the ISTA acquisition, offset by our early redemption of $300 million of senior notes, described below. For purposes of this discussion, we refer to Bausch & Lomb Holdings Incorporated as “Holdco” and to our wholly owned operating subsidiary, Bausch & Lomb Incorporated, as “Opco.”

Holdco Senior Unsecured Term Loan Facility. On March 19, 2013, Holdco borrowed $700 million under a new senior unsecured term loan facility (which we refer to as the “Holdco Senior Term Loans”). We used the proceeds of the Holdco Senior Term Loans to pay a portion of the March 2013 Dividend. Outstanding borrowings under this facility were $700 million at March 22, 2013. We expect to use the net proceeds from this offering to repay the Holdco Senior Term Loans.

The Holdco Senior Term Loans will mature on May 31, 2018. On or after March 19, 2014, the lenders will have the option to exchange the Holdco Senior Term Loans for senior exchange notes with terms substantially similar to the term loans, including with respect to interest rate and covenants. Interest on the Holdco Senior Term Loans may be PIK Interest, except that the first two interest payments must be paid in cash. Thereafter, interest must be paid in cash to the extent Holdco is permitted to receive cash dividends or distributions from its subsidiaries under their respective financing documents, under applicable law and to the extent of our cash on hand (on an unconsolidated basis).

Until March 19, 2014 (or earlier, between October 1, 2013 and March 19, 2014, under certain circumstances), the Holdco Senior Term Loans will bear interest at a rate per annum equal to 5.25 percent (or 6.00 percent if paid as PIK Interest) plus LIBOR, provided that LIBOR rates are subject to a floor of 1 percent per annum; on and after March 19, 2014 (or earlier, between October 1, 2013 and March 19, 2014, under certain circumstances), the Holdco Senior Term Loans will bear interest at a rate per annum equal to 9.50 percent (or 10.25 percent if paid as PIK Interest).

Opco Senior Secured Credit Facilities. On May 18, 2012, Opco completed a refinancing and upsizing of its former senior secured credit facilities. As part of this refinancing it repaid dollar-denominated term and revolving credit loans totaling $1,490 million and euro-denominated term loans totaling €391 million, and entered into a

 

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credit agreement providing for the following senior secured financing (the “Opco Senior Secured Credit Facilities”):

 

   

A seven-year dollar-denominated senior secured U.S. term loan facility in the aggregate amount of $1,935 million borrowed in full at the closing date. Outstanding borrowings under this facility were $1,916 million at December 29, 2012;

 

   

A seven-year euro-denominated senior secured Dutch term loan facility in the amount of €460 million, borrowed in full at the closing date by Opco’s Dutch subsidiary. Outstanding borrowings under the Dutch term loan facility totaled €456 million ($603 million) at December 29, 2012;

 

   

Commitments for a three-year $400 million senior secured delayed draw term loan facility which was undrawn at the closing date. On June 6, 2012, Opco borrowed $170 million under this facility to partially fund the acquisition of ISTA. Subsequently, on August 22, 2012, Opco borrowed an additional $80 million to partially fund the payment for a portion of the senior notes that were tendered for purchase (see discussion below) and on September 24, 2012, it borrowed the remaining $150 million as partial prefunding for the redemption of a portion of the senior notes on November 1, 2012 (see discussion below). At December 29, 2012 outstanding borrowings under the delayed draw term loan facility totaled $400 million, and

 

   

A five-year $500 million senior secured revolving credit facility which is available in dollars and certain other currencies. This senior secured revolving credit facility includes sub-facilities available for letters of credit and for same-day borrowings, referred to as swing line loans. Other than amounts issued under the letter of credit sub-facility, Opco did not make any borrowings under the revolving credit facility in 2012. On March 14, 2013, Opco borrowed $45 million under the facility for working capital purposes. On March 19, 2013, Opco borrowed $100 million under the facility and subsequently distributed $83 million to Holdco to fund a portion of the March 2013 Dividend.

Borrowings under the Opco Senior Secured Credit Facilities bear interest at a rate per annum equal to an applicable credit spread plus, at Opco’s option:

 

   

for loans denominated in dollars: (a) LIBOR, or (b) a base rate determined by reference to the greater of (i) the prime rate, (ii) the federal funds effective rate plus one-half of 1 percent and (iii) one-month LIBOR plus 1 percent;

 

   

for loans denominated in euro: EURIBOR, and

 

   

provided that LIBOR and EURIBOR rates are each subject to a floor equivalent to 1 percent per annum.

In 2012, dollar-denominated term loans under the Opco Senior Secured Credit Facilities bore interest based on LIBOR plus a credit spread of 4.25 percent, dollar-denominated delayed draw term loans bore interest based on LIBOR plus a credit spread of 3.75 percent and euro-denominated term loans bore interest based on EURIBOR plus a credit spread of 4.75 percent.

In addition to paying interest on the outstanding principal under the Opco Senior Secured Credit Facilities, Opco is required to pay a facility fee of 0.5 percent per annum to the lenders under the revolving credit facility, based on the outstanding commitments thereunder (whether drawn or undrawn). Opco also pays customary letter of credit and agency fees.

The credit agreement governing the Opco Senior Secured Credit Facilities requires Opco to prepay outstanding term loans and delayed draw term loans under the following conditions:

 

   

commencing in fiscal 2014, 50 percent (which percentage will be reduced to 25 percent and zero percent if Opco’s senior secured leverage ratio is less than certain specified thresholds) of the prior year’s annual excess cash flow (as defined in the credit agreement);

 

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100 percent (which percentage will be reduced to 75 percent if Opco’s senior secured leverage ratio is less than a specified threshold) of the net cash proceeds of certain non-ordinary course asset sales and casualty and condemnation events, if Opco does not reinvest those proceeds in assets to be used in its business or toward certain other permitted investments, and

 

   

100 percent of the net cash proceeds of an incurrence of debt other than debt permitted under the Opco Senior Secured Credit Facilities.

There have been no mandatory prepayments to date.

The term loans amortize in an amount equal to one percent per annum of the total amount borrowed, payable in equal quarterly installments which began in September 2012 for the U.S. and Dutch term loans and in March 2013 for the delayed draw term loan, with any remaining amounts payable in full on the final maturity date.

Opco may voluntarily prepay in whole or in part outstanding loans under the Opco Senior Secured Credit Facilities at any time without premium or penalty, other than customary “breakage” costs with respect to LIBOR or EURIBOR loans. However, if on or prior to May 18, 2013, the first anniversary of the closing date, Opco prepays or refinances the term loans with long-term bank debt financing for the primary purpose of reducing the effective interest or weighted average yield, it will pay a repricing premium of 1 percent of the principal amount that is refinanced. Opco has not made any voluntary prepayments of U.S., Dutch, or delayed draw term loans to date.

All obligations under the Opco Senior Secured Credit Facilities are unconditionally guaranteed jointly and severally by Holdco and, subject to certain exceptions, each of the existing and future wholly owned domestic subsidiaries of Opco. In addition, all obligations of Opco’s Dutch subsidiary under the Opco Senior Secured Credit Facilities are unconditionally guaranteed jointly and severally by certain material restricted subsidiaries of that subsidiary. All obligations under the Opco Senior Secured Credit Facilities, and the guarantees of such obligations, are secured by substantially all of Opco’s assets and the assets of each guarantor, subject to certain customary exceptions and exclusions.

Former Opco Senior Secured Credit Facilities. On October 26, 2007, Opco entered into a credit agreement providing for the following senior secured financing (which we refer to collectively as the “Opco Former Senior Secured Credit Facilities”). These facilities were refinanced on May 18, 2012 as described above. They provided for:

 

   

a seven-and-one-half-year dollar-denominated senior secured term loan facility in the aggregate amount of $1,200 million, borrowed in full at the closing date. Outstanding borrowings under the U.S. term loan totaled $1,152 million at December 31, 2011;

 

   

a seven-and-one-half-year euro-denominated senior secured term loan facility in the amount of €409 million, borrowed in full at the closing date by Opco’s Dutch subsidiary. Outstanding borrowings under the euro-denominated term loan totaled €392 million ($512 million) at December 31, 2011;

 

   

a $300 million senior secured delayed draw term loan facility which was undrawn at the closing date. Outstanding borrowings under the delayed draw term loan facility totaled $281 million at December 31, 2011, and

 

   

a six-year $500 million senior secured revolving credit facility which was available in dollars and certain other currencies. Outstanding borrowings under the revolving credit facility totaled $50 million at December 31, 2011.

All outstanding borrowings under the Opco Former Senior Secured Credit Facilities were repaid with proceeds received under the Opco Senior Secured Credit Facilities.

 

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Opco 9.875% Senior Notes. On October 26, 2007, Opco issued $650 million of senior notes due 2015. The senior notes are unsecured and effectively subordinate in right of payment to borrowings under the Opco Senior Secured Credit Facilities. All obligations under the senior notes are unconditionally guaranteed jointly and severally by, subject to certain exceptions, each of Opco’s existing and future wholly owned domestic subsidiaries.

Opco may redeem the senior notes, in whole or part, at an applicable redemption price as specified in the indenture, plus accrued and unpaid interest, if any, to the applicable redemption date.

If Opco were to experience certain change of control events, it must offer to repurchase all of the senior notes at 101 percent of their principal amount, plus accrued and unpaid interest, if any, to the repurchase date. If Opco sells assets under certain circumstances, it will be required to make an offer to purchase the senior notes at a purchase price of 100 percent of the principal amount thereof, plus accrued and unpaid interest to the purchase date.

On July 23, 2012, Opco announced a tender offer to purchase, for cash, up to $300 million of these notes. On August 20, 2012, Opco announced that senior notes with an aggregate principal value of $75 million were validly tendered and accepted. Opco funded the tender offer with an incremental borrowing of $80 million under the delayed draw term loan facility, along with cash on hand.

On October 1, 2012, Opco provided notice to holders of the senior notes that it would be exercising, on November 1, 2012, its option to redeem $225 million aggregate principal amount of notes at a price of 102.469 percent of the principal redeemed plus accrued interest. To partially fund this redemption, on September 24, 2012, Opco borrowed $150 million under the delayed draw term loan facility. The remainder of the redemption price was paid using cash on hand.

Japanese Debt. Opco’s Japanese subsidiary has a Japanese yen-denominated variable-rate asset backed secured revolving credit facility allowing for borrowing up to a maximum of 3.36 billion Japanese yen. Borrowings are secured by an interest in certain eligible accounts receivable and inventory of the subsidiary as defined in the agreement, and are guaranteed by Opco. The facility had an initial term of one year and is renewable annually. During the second quarter of 2012, the facility was renewed and the new expiration date is July 7, 2013. All terms of the renewed facility were consistent with those of the prior facility, except that the rate on borrowings was reduced from TIBOR plus 1 percent per annum to TIBOR plus 0.75 percent per annum as of October 1, 2012. Borrowings under the facility as of December 29, 2012 were 2.0 billion yen ($24 million).

Covenant Compliance. The Holdco Senior Unsecured Term Loan Facility, the Opco Senior Secured Credit Facilities and the indenture governing the Opco 9.875% Senior Notes contain a number of covenants that, among other things, restrict our ability and the ability of our Restricted Subsidiaries (as defined in the respective credit agreements and indenture) to incur additional indebtedness, pay dividends on our capital stock or redeem, repurchase or retire our capital stock or indebtedness, make investments, loans, advances or acquisitions, create restrictions on the payment of dividends or other amounts to us from our Restricted Subsidiaries, engage in transactions with our affiliates, sell assets, including capital stock of our subsidiaries, consolidate or merge, create liens and enter into sale and lease-back transactions. They also contain certain customary affirmative covenants and events of default.

Under the terms of the credit agreement governing the Opco Senior Secured Credit Facilities and the indenture governing the Opco 9.875% Senior Notes, Opco is generally restricted, subject to certain exceptions, from making cash dividends, loans and advances to Holdco. These restrictions have resulted in the restricted net assets (as defined in Rule 4-08(e)(3) of Regulation S-X) of Opco and its subsidiaries exceeding 25% of Holdco’s consolidated net assets and its subsidiaries. Going forward, if Opco’s cumulative consolidated net income increases, its restricted net assets will decrease. Because we expect to repay the Holdco Senior Term Loans with the proceeds from this offering, Holdco will not have any debt service obligations after this offering. See “Use of Proceeds” and “Capitalization.”

 

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The Opco Senior Secured Credit Facilities also contain a financial covenant for the benefit of the revolving credit lenders only. The financial covenant requires Opco to maintain a maximum ratio of Consolidated Senior Secured Indebtedness to Consolidated EBITDA (both as defined in the credit agreement) as of the last day of any fiscal quarter in which any revolving credit or swing line loans were outstanding, or the aggregate amount of outstanding letters of credit exceeded $75 million. The financial covenant was not applicable for the quarter ended December 29, 2012 because Opco’s outstanding letters of credit did not exceed the $75 million limit during the quarter and it had not made any borrowings under the revolving credit facility.

The terms of the Japanese facility contain covenants including requiring the Japanese subsidiary to maintain certain levels of net worth and a maximum inventory turnover ratio.

We were in compliance with all applicable covenants as of March 22, 2013.

Interest Rate Risk Management. In connection with establishing the former senior secured credit facilities, we simultaneously executed four interest rate swap agreements that converted the variable rate LIBOR or EURIBOR component of interest on a portion of the term loans to specified fixed rates. The last of these swaps matured on December 31, 2010.

As of December 31, 2011, we had four interest rate swap agreements outstanding. These contracts were in loss positions of $1 million and were reported as “Accrued Liabilities” on our Balance Sheets. Two of these agreements became effective September 30, 2010 and matured on September 30, 2012. These two agreements swapped variable-rate interest payments on $200 million of dollar-denominated debt to fixed rates of 4.07 percent and 4.05 percent, respectively. The second two swap agreements became effective December 31, 2010 and were settled on December 28, 2012. These two agreements each swapped variable-rate interest payments on $250 million dollar-denominated debt to fixed rates of 3.96 percent. We designated each of these four interest rate swap agreements as a cash flow hedge on its inception date. As of January 1, 2012, we de-designated these swaps as cash flow hedges. Accordingly, beginning with the first quarter of 2012, changes in the fair value of the swaps were recorded directly to income and were no longer recorded as other comprehensive income. Upon de-designation, previously deferred losses were frozen in other comprehensive income. Subsequently, as a result of the repayment of borrowings under the former senior secured credit facilities, we determined that the underlying cash flows associated with the swaps were no longer likely to occur as originally projected, and we reclassified the remaining pre-tax portion of the deferred losses in accumulated other comprehensive income to interest expense.

Other Outstanding Debt. As of December 29, 2012 and December 31, 2011, $12 million of other debt was also outstanding, most of which matures in 2028.

A number of subsidiary companies outside the United States maintain credit facilities to meet their liquidity requirements. Borrowings under such agreements were $3 million at December 29, 2012 and less than $1 million at December 31, 2011. There were no covenant violations under the non-U.S. credit facilities during 2012 or 2011.

 

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Contractual Cash Obligations

At December 29, 2012, we had the following contractual cash obligations due by the following periods (all dollar amounts expressed in millions):

 

     Total      Less
than 1
Year
     1-3
Years
     4-5
Years
     More
than 5
Years
 

Contractual Obligations

              

Long-term debt (including current portion) 1

   $ 3,322       $ 52       $ 798       $ 57       $ 2,415   

Interest on long-term debt (including current portion) 2

     1,241         192         461         412         176   

Purchase obligations 3

     65         40         16         9         —     

Minimum operating lease commitments

     106         33         35         23         15   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total 4, 5, 6

   $ 4,734       $ 317       $ 1,310       $ 501       $ 2,606   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

1 Represents maturities of our long-term debt obligation as presented in our Balance Sheets.
2 Represents interest payments on outstanding debt, calculated using year-end exchange rates for non-U.S. debt and estimated EURIBOR and LIBOR interest rates for floating rate debt, including consideration of the interest rate floor included in the terms of the credit facilities.
3 Purchase obligations include minimum obligations to purchase goods and services, or to make royalty payments, under agreements that are enforceable and legally binding on us.
4 We expect to contribute approximately $15 million to all pension benefit plans in 2013 which includes $9 million to our U.S. defined benefit pension plan. Future funding requirements for our pension and other benefit liabilities have not been determined; therefore, they have not been included in this table. Based on the U.S. defined benefit pension plan’s current assets and liabilities and using the current statutory minimum funding requirements and interest rates, including the provisions of the Pension Protection Act of 2006, the minimum required employer contributions for the years 2013-2017 are estimated to range from $7 million to $13 million per year.
5 The future cash outflows of the “Other Long-Term Liabilities” of $8 million and “Income Tax Liabilities” of $46 million presented in our Balance Sheets are uncertain and are therefore excluded from this table.
6 As of December 29, 2012, we may be required to make potential future milestone payments to third parties of up to approximately $95 million (including up to approximately $13 million in 2013) as part of our various licensing and development programs. These contingent milestone payments are not considered contractual obligations and have not been recorded in our financial statements since the successful achievement of certain development, regulatory or commercial milestones has not occurred. These amounts have been excluded from the table due to the uncertainty of the potential payments.

Off-Balance Sheet Arrangements

We have obligations under certain guarantees, letters of credit, indemnifications and other contracts that contingently require us to make payments to guaranteed parties upon the occurrence of specified events. By way of example, we have agreed to indemnify certain retailers and distributors of our contact lens care products in connection with asserted MoistureLoc matters, and we have extended broader and more general indemnity protection to officers, directors and employees, through our by-laws. We believe the likelihood is remote that material payments will be required under these contingencies, and that they do not pose potential risk to our future liquidity, capital resources or results of operations.

Market Risk

As a result of our global operating and financing activities, we are exposed to changes in interest rates and foreign currency exchange rates that may adversely affect our results of operations and financial position. In seeking to reduce the risks and/or costs associated with such activities, we manage exposure to changes in

 

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interest rates and foreign currency exchange rates primarily through the use of derivatives. We do not use financial instruments for trading or other speculative purposes, nor do we use leveraged financial instruments.

We primarily use foreign exchange forward contracts to hedge foreign currency transactions. For contracts outstanding at the end of 2012, currencies purchased were primarily euros, British pounds and Japanese yen and foreign currencies sold were primarily Russian rubles and Japanese yen. For contracts outstanding at the end of 2011, foreign currencies purchased were primarily British pounds, euros and Japanese yen and foreign currencies sold were primarily Russian rubles, British pounds and Japanese yen.

A sensitivity analysis to measure the potential impact that a change in foreign currency exchange rates would have on our net income indicates that a ten percent adverse movement in quoted foreign currency exchange rates (primarily in relation to the U.S. dollar and the euro) could result in realized net losses of approximately $3 million on foreign exchange forward contracts outstanding at December 29, 2012. Similar analysis conducted at the end of 2011 indicated that a ten percent adverse movement in quoted foreign currency exchange rates could have resulted in realized net losses of approximately $1 million on foreign exchange forward contracts outstanding at that time. Such losses would be substantially offset by gains from the revaluation or settlement of the underlying positions hedged.

We may enter into interest rate derivative instruments to effectively limit exposure to interest rate movements within the parameters of our interest rate hedging policy. A sensitivity analysis to measure the potential impact that a change in interest rates would have on our results of operations indicates that a 100 basis point increase in interest rates above current levels would increase our net financial expense by approximately $5 million on an annualized basis, taking into account our December 29, 2012 floating rate assets and floating rate liabilities, and the impact of current LIBOR and EURIBOR interest rate levels being below the one percent floor discussed at Note 7—Debt in our accompanying Notes to Financial Statements. Similar analysis conducted at the end of 2011 indicated that a 100 basis point increase in interest rates would have increased our net financial expense by approximately $10 million, based on 2011 year-end positions.

Counterparties to the financial instruments discussed above expose us to credit risks to the extent of their potential non-performance. The credit ratings of the counterparties, which consist of a diversified group of high quality investment or commercial banks, are regularly monitored and thus credit loss arising from counterparty non-performance is not anticipated. However, there can be no assurances that these actions will protect us against or limit our exposure to all counterparty or market risks.

Critical Accounting Policies

Our accompanying consolidated financial statements and notes to consolidated financial statements contain information that is pertinent to this MD&A. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results may differ from these estimates and assumptions.

We believe that the critical accounting policies discussed below involve the most complex management judgments due to the sensitivity of the methods, assumptions and estimates necessary in determining the related asset, liability, revenue and expense amounts. The impact of and any risks related to these policies on our business operations are discussed below. Senior management has discussed the development and selection of the critical accounting policies and estimates, and the related disclosure included herein, with the Audit Committee of our Board of Directors.

Mergers and Acquisitions

We account for mergers and acquisitions in accordance with the provisions of Topic 805, which provides guidance for recognition and measurement of identifiable assets and goodwill acquired, liabilities assumed, and any noncontrolling interest in the acquiree at fair value.

 

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In a business combination, the assets acquired, liabilities assumed and any noncontrolling interest in the acquiree are recorded as of the date of the merger or acquisition at their respective fair values with limited exceptions. Any excess of the purchase price (consideration transferred) over the estimated fair values of net assets acquired is recorded as goodwill. Transaction costs and costs to restructure the acquired company are expensed as incurred. The operating results of the acquired business are reflected in our consolidated financial statements after the date of the merger or acquisition. If we determine the assets acquired do not meet the definition of a business under the provisions of Topic 805, the transaction will be accounted for as an acquisition of assets rather than a business combination and, therefore, no goodwill will be recorded. The fair values of intangible assets, including IPR&D projects, are determined utilizing information available near the merger or acquisition date based on expectations and assumptions that are deemed reasonable by management. The IPR&D intangible assets represent the value of projects that had not reached technological feasibility as of the date of the merger or acquisition. Amounts allocated to IPR&D intangible assets are capitalized and accounted for as indefinite-lived intangible assets.

In connection with the ISTA acquisition, we recorded $63 million of the purchase price as IPR&D intangible assets, associated with three research and development projects. Of the three projects, the two projects involving nasal products are more significant.

We expect the products relating to these projects to begin generating sales and positive cash flows in one to four years. Additional research and development will be required for the two nasal projects before they reach technological feasibility. Each of the nasal projects is in Phase 2 development. All of the IPR&D projects are subject to the inherent risks and uncertainties in new product development and it is possible that we will not be able to successfully develop and complete the IPR&D projects and profitably commercialize the underlying product candidates. The time periods to receive approvals from the FDA and other regulatory agencies are subject to uncertainty. Significant delays in the approval process, or our failure to obtain approval at all, will delay or prevent us from realizing revenues from these products which could adversely affect our future operating results.

Revenue Recognition

We recognize revenue when it is realized or realizable and earned and when substantially all the risks and rewards of ownership have transferred to the customer. We believe our revenue recognition policies are appropriate, and that our policies are reflective of complexities arising from customer arrangements. We offer IOLs to surgeons and hospitals on a consignment basis and recognize revenue when the IOL is implanted during surgery. We record estimated reductions to revenue for customer programs. These include rebates to managed healthcare plans and government entities, contractual pricing allowances, cash discounts, promotional and advertising allowances, volume discounts, and specifically established customer product return programs. If market conditions were to change, we may take actions to expand these customer offerings, which may result in incremental reductions to revenue. Also, under certain conditions, we may offer other customer programs that do not impact revenue such as extended credit terms.

We closely monitor and evaluate customer incentives and other customer programs, such as extended credit terms. Reductions to gross revenues for rebates to managed healthcare plans and government entities, contractual pricing allowances, certain customer incentive programs such as cash discounts, promotional and advertising allowances, and volume discounts, consumer rebates and coupons, provisions for specifically established customer return programs and other contra-revenue items represented 19 percent of gross customer sales in 2012, 17 percent of gross customer sales in 2011 and 15 percent of gross customer sales in 2010. The increase as a percentage of sales in 2012 as compared to 2011 was mainly due to sales mix. As a result of the ISTA acquisition, prescription pharmaceuticals represent a higher proportion of total company revenues in 2012. Selling prices for these products to managed care organizations, government entities and distributors are often mandated by contract, and result in higher discounts and allowances between the list (gross) and net sales price. The increase as a percentage of sales in 2011 as compared to 2010 was mainly due to increased pharmaceuticals

 

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segment contractual pricing allowances associated with government contracts and sales mix shifts toward products to which these allowances apply.

Allowances for discounts, contractual adjustments and returns that reduced gross sales are summarized as follows:

 

Dollar Amounts in Millions

   December 25,
2010
    Years Ended
December 31,
2011
    December 29,
2012
 

Gross sales

   $ 3,038.3     $ 3,416.6     $ 3,742.1  

Chargebacks

     139.9       200.9       245.7  

Discounts and other contractual adjustments

     251.0       302.0       390.3  

Returns

     70.5       68.3       68.5  
  

 

 

   

 

 

   

 

 

 

Total allowances

   $ 461.4     $ 571.2     $ 704.5  
  

 

 

   

 

 

   

 

 

 

Percent of gross sales

     15.2     16.7     18.8

Net sales

   $ 2,576.9     $ 2,845.4     $ 3,037.6  
  

 

 

   

 

 

   

 

 

 

Reserve balances included in Accrued Liabilities on our Balance Sheets are as follows:

 

Dollar Amounts in Millions

   December 25,
2010
     Years Ended
December 31,
2011
     December 29,
2012
 

Chargebacks

   $ 18.2      $ 18.2      $ 29.2  

Discounts and other contractual adjustments

     101.8        110.8        159.6  

Returns

     35.2        40.5        54.3  
  

 

 

    

 

 

    

 

 

 

Total allowances

   $ 155.2      $ 169.5      $ 243.1  
  

 

 

    

 

 

    

 

 

 

Inventory Allowances

We provide estimated inventory allowances for excess, slow moving and obsolete inventory as well as inventory that has carrying value in excess of net realizable value. These reserves are based on current assessments about future demands, market conditions and related management initiatives. If market conditions and actual demands are less favorable than those projected by management, additional inventory write-downs may be required. We value inventory at the lower of cost or net realizable market values. We regularly review inventory quantities on hand and record a provision for excess and obsolete inventory based primarily on estimated forecasts of product demand and production requirements for the next twelve months. Several factors may influence the realizability of our inventories, including decisions to exit a product line, technological change and new product development. These factors could result in an increase in the amount of obsolete inventory quantities on hand. Additionally, estimates of future product demand may prove to be inaccurate, in which case the provision required for excess and obsolete inventory may be understated or overstated. Once inventory is written down, it will continue to be carried at the lower of cost or net realizable value.

Therefore, although we make every effort to ensure the accuracy of forecasts of future product demand, including the impact of planned future product launches, any significant unanticipated changes in demand or technological developments could have a significant impact on the value of inventory and our reported operating results. We recorded $18 million, $19 million and $17 million in provisions to our statements of operations for excess, slow moving and obsolete inventory in 2012, 2011 and 2010, respectively. At this time, management does not believe that anticipated product launches would have a material adverse effect on the recovery of our existing net inventory balances.

 

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Impairment of Long-lived Assets including Goodwill and Intangible Assets

In accordance with the provisions of FASB ASC Topic 350 (“Topic 350”), we test goodwill and indefinite lived intangible assets for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may not be fully recoverable. These factors include, but are not limited to, significant underperformance relative to expected historical or projected future operating results, significant changes in the manner or use of the underlying assets and significant adverse industry or market economic trends. We have elected our October fiscal close date as our annual impairment test measurement date.

Goodwill. Goodwill represents the excess of the consideration transferred over the fair value of net assets of businesses purchased. The impairment test of goodwill is at a level of reporting referred to as a reporting unit. A reporting unit is defined as an operating segment or one level below an operating segment (also known as a component). A component of an operating segment is a reporting unit if the component constitutes a business for which discrete financial information is available and segment management regularly reviews the operating results of that component. When two or more components of an operating segment have similar economic characteristics, the components are aggregated and deemed a single reporting unit. An operating segment is deemed to be a reporting unit if all of its components are similar, if none of its components is a reporting unit or if the segment comprises onl