-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FHNZ9YOk/xOZgHnUI3MY5i6QZHQKue8Lv+HOIcLeIxIq9UkQ0H4cKpdi9A7N0/Cu 4tvDAlZHBZ0emj3p22e+Lw== 0000010427-96-000053.txt : 19961113 0000010427-96-000053.hdr.sgml : 19961113 ACCESSION NUMBER: 0000010427-96-000053 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960928 FILED AS OF DATE: 19961112 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BAUSCH & LOMB INC CENTRAL INDEX KEY: 0000010427 STANDARD INDUSTRIAL CLASSIFICATION: OPHTHALMIC GOODS [3851] IRS NUMBER: 160345235 STATE OF INCORPORATION: NY FISCAL YEAR END: 1228 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-04105 FILM NUMBER: 96659062 BUSINESS ADDRESS: STREET 1: BAUSCH & LOMB INCORPORATED STREET 2: ONE BAUSCH & LOMB PLACE CITY: ROCHESTER STATE: NY ZIP: 14604-2701 BUSINESS PHONE: 7163388444 MAIL ADDRESS: STREET 1: ONE BAUSCH & LAMB PLACE STREET 2: P O BOX 54 CITY: ROCHESTER STATE: NY ZIP: 14604-2701 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarter Ended Commission File September 28, 1996 Number: 1-4105 BAUSCH & LOMB INCORPORATED (Exact name of registrant as specified in its charter) New York 16-0345235 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) One Bausch & Lomb Place, Rochester NY 14604-2701 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (716)338-6000 Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No The number of shares of Common stock of the registrant outstanding as of September 28, 1996 was 55,508,599 consisting of 54,782,849 shares of Common Stock and 725,750 shares of Class B Stock which are identical with respect to dividend and liquidation rights and vote together as a single class for all purposes. PART I - FINANCIAL INFORMATION Item 1. Financial Statements Unaudited consolidated financial statements of Bausch & Lomb Incorporated and Consolidated Subsidiaries for the third quarters of 1996 and 1995 are presented on the following pages. The audited balance sheet at December 30, 1995 is presented for comparative purposes. Financial statements for the nine months ended September 28, 1996 have been prepared by the Company in accordance with its usual accounting policies and are based in part on approximations. In the opinion of management, all adjustments necessary for a fair presentation of the consolidated financial statements in accordance with generally accepted accounting principles have been included. All such adjustments were of a normal recurring nature. BAUSCH & LOMB INCORPORATED AND CONSOLIDATED SUBSIDIARIES STATEMENT OF EARNINGS
Third Quarter Ended Nine Months Ended Dollar Amounts In Thousands - September 28, September 30, September 28, September 30, Except Per Share Data 1996 1995 1996 1995 Net Sales $ 477,189 $ 476,757 $1,492,016 $1,477,817 Costs And Expenses Cost of products sold 219,769 205,495 661,454 657,949 Selling, administrative and general 177,546 173,764 588,820 574,707 Research and development 18,758 15,981 55,974 47,634 Restructuring charges - - 15,077 - 416,073 395,240 1,321,325 1,280,290 Operating Earnings 61,116 81,517 170,691 197,527 Other (Income) Expense Investment income (9,512) (9,310) (28,490) (28,839) Interest expense 12,995 11,013 37,818 34,999 (Gain)/loss from foreign currency, net (632) 2,294 (586) 4,258 Loss(gain) on divestiture 26,069 - 26,069 (35,902) Litigation provision 16,100 - 16,100 16,000 45,020 3,997 50,911 (9,484) Earnings Before Income Taxes And Minority Interest 16,096 77,520 119,780 207,011 Provision for income taxes (3,877) 28,682 36,836 75,744 Earnings Before Minority Interest 19,973 48,838 82,944 131,267 Minority interest in subsidiaries 5,539 5,324 15,738 15,880 Net Earnings $ 14,434 $ 43,514 $ 67,206 $ 115,387 Retained Earnings At Beginning Of Period 923,423 889,578 900,095 846,245 Cash Dividends Declared: Common stock ($0.26 and $0.78 per share in 1996 and $0.26 and $0.75 per share in 1995) 14,671 14,829 44,115 43,369 Retained Earnings At End Of Period $ 923,186 $ 918,263 $ 923,186 $ 918,263 Net Earnings Per Common Share $ 0.25 $ 0.75 $ 1.18 $ 1.98 Average Common Shares Outstanding (000s) 56,793 58,247 See Notes To Financial Statements
BAUSCH & LOMB INCORPORATED AND CONSOLIDATED SUBSIDIARIES BALANCE SHEET
September 28, December 30, Dollar Amounts In Thousands 1996 1995 ASSETS Current Assets Cash and cash equivalents $ 150,980 $ 193,814 Short-term investments, at cost which approximates market 1,277 803 Trade receivables, less allowances of $13,898 and $11,232, respectively 275,199 250,587 Inventories, net 327,338 304,298 Deferred taxes, net 88,826 82,557 Other current assets 125,265 98,288 968,885 930,347 Property, Plant And Equipment, net 547,442 550,366 Goodwill And Other Intangibles, less accumulated amortization of $82,278 and $96,597, respectively 419,681 381,495 Other Investments 556,269 561,232 Other Assets 133,997 126,626 Total Assets $2,626,274 $2,550,066 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Notes payable $ 354,640 $ 284,510 Current portion of long-term debt 42,608 98,990 Accounts payable 65,934 81,927 Accrued compensation 86,097 79,767 Accrued liabilities 298,383 275,936 Federal and foreign income taxes 14,799 38,347 862,461 859,477 Long-Term Debt, less current portion 323,327 190,974 Other Long-Term Liabilities 126,310 139,925 Minority Interest 430,786 430,390 Total Liabilities 1,742,884 1,620,766 Shareholders' Equity 4% Cumulative Preferred Stock, par value $100 per share - - Class A Preferred Stock, par value $1 per share - - Common Stock, par value $0.40 per share, 60,198,322 shares issued 24,079 24,079 Class B Stock, par value $0.08 per share, 1,086,489 and 1,268,578 shares issued, respectively 88 101 Capital in excess of par value 95,244 107,788 Cumulative translation adjustment 83,119 85,122 Retained earnings 923,186 900,095 1,125,716 1,117,185 Common and Class B Stock in treasury, at cost, 5,776,212 and 4,525,844 shares, respectively (224,924) (178,730) Unearned compensation (10,341) (9,155) Unrealized holding loss on other investments (7,061) - Total Shareholders' Equity 883,390 929,300 Total Liabilities And Shareholders' Equity $2,626,274 $2,550,066 See Notes To Financial Statements
BAUSCH & LOMB INCORPORATED AND CONSOLIDATED SUBSIDIARIES STATEMENT OF CASH FLOWS
Nine Months Ended Dollar Amounts In Thousands September 28, September 30, 1996 1995 CASH FLOWS FROM OPERATING ACTIVITIES Net earnings $ 67,206 $ 115,387 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation of property, plant and equipment 66,235 65,894 Amortization 15,538 12,108 Decrease/(increase) in deferred income taxes 69 (6,478) Restructuring charges, net of taxes 10,898 - Loss (gain) on divestitures, after taxes 6,254 (20,823) Provision for litigation expense, after taxes 9,982 10,560 Loss on retirement of fixed assets 2,667 3,616 Exchange loss 5,906 9,804 Increase/(decrease) in minority interest 1,304 (173) Increase in accounts receivable (27,366) (5,901) Increase in inventories (32,122) (16,417) (Increase)/decrease in other current assets (25,943) 12,623 (Decrease)/increase in accounts payable and accruals (28,422) 28,136 (Decrease)/increase in tax liabilities (9,411) 2,396 Decrease in other long-term liabilities (13,512) (10,548) Net cash provided by operating activities 49,283 200,184 CASH FLOWS FROM INVESTING ACTIVITIES Payments for purchases of property, plant and equipment (82,901) (58,046) Proceeds from sale of equipment 9,615 - Acquisition of businesses (81,294) (2,564) Proceeds from divestitures 20,343 76,291 Other investments - (9,425) Other (11,736) 8,314 Net cash (used in) provided by investing activities (145,973) 14,570 CASH FLOWS FROM FINANCING ACTIVITIES Repurchases of Common shares (55,873) (83,248) Exercise of stock options 4,642 4,764 Restricted stock awards - 2,586 Net proceeds from issuance (repayments) of notes payable 71,243 (40,279) Proceeds from issuance of long-term debt 135,239 - Repayment of long-term debt (55,539) (7,157) Payment of dividends (44,284) (42,873) Net cash provided by (used in) financing activities 55,428 (166,207) Effect of exchange rate changes on cash, cash equivalents and short-term investments (1,098) 3,783 Net (decrease) increase in cash, cash equivalents and short-term investments (42,360) 52,330 Cash, cash equivalents and short-term investments, beginning of period 194,617 232,542 Cash, cash equivalents and short-term investments, end of period $ 152,257 $ 284,872 Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 40,150 $ 37,092 Income taxes $ 79,271 $ 70,365 See Notes To Financial Statements
BAUSCH & LOMB INCORPORATED AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS NOTE A: Earnings Per Share Net earnings per Common share are based on the weighted average number of Common and Class B shares outstanding during the period, adjusted for the assumed conversion of dilutive stock options. In computing the per share effect of assumed conversion, funds which would have been received from the exercise of options are considered to have been used to purchase Common shares at current market prices, and the resulting net additional Common shares are included in the calculation of average Common shares outstanding. The number of Common shares used to calculate net earnings per Common share were 56,793,312 at September 28, 1996 and 58,247,318 at September 30, 1995. See Exhibit 11 filed with this Report for details regarding the computation of earnings per share. NOTE B: Inventories Inventories consisted of the following: September 28, December 30, (Dollar Amounts In Thousands) 1996 1995 Raw materials and supplies $ 91,673 $ 76,834 Work in process 19,549 21,905 Finished products 225,412 214,901 336,634 313,640 Less - Reserve for valuation of certain U.S. inventories at last-in, first-out cost 9,296 9,342 $327,338 $304,298 NOTE C: Property, Plant And Equipment Major classes of property, plant and equipment consisted of the following: September 28, December 30, (Dollar Amounts In Thousands) 1996 1995 Land $ 22,170 $ 22,124 Leasehold improvements 33,618 33,720 Buildings 403,035 396,954 Machinery and equipment 661,666 629,952 1,120,489 1,082,750 Less - Accumulated depreciation 573,047 532,384 $ 547,442 $ 550,366 NOTE D: Legal Proceedings In its 1995 Annual Report on Form 10-K and as updated in the Company's first and second quarter forms 10-Q for 1996, the Company discussed an action pending in the United States District Court for the Northern District of Alabama on behalf of a nationwide class pursuing claims relating to the Company's marketing and sales of Optima FW, Medalist and SeeQuence2 contact lens systems and other related proceedings. On July 31, 1996, the court preliminarily approved a settlement, which is subject to final approval following a fairness hearing scheduled for November 1996. Under the terms of the settlement, consumers who bought the lenses in question during specified time periods are eligible to receive cash and product certificates for each lens purchase. Consumers who purchased Medalist lenses between January 1, 1991 through December 31, 1995, Optima FW lenses between November 1, 1990 through December 30, 1995 and Criterion Ultra FW lenses between November 1, 1990 through April 30, 1996 are eligible to participate in this proposed settlement. The Company has recorded a charge against third quarter earnings in the amount of $16 million which, in addition to existing litigation reserves, is deemed adequate to satisfy the costs of the proposed settlement. Additionally, on October 3, 1996, the Company was served with a statement of claim filed in British Columbia, Canada, naming the Company and Bausch & Lomb Canada. The plaintiff seeks to represent a class of Canadian consumers alleging similar claims. Management continues to vigorously defend the marketing of these lens systems. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. This financial review, which should be read in conjunction with the accompanying financial statements, contains management's discussion and analysis of the Company's results of operations, liquidity and progress towards stated financial objectives. Bausch & Lomb strives to maximize total return to shareholders through a combination of long-term growth in share price and the payment of cash dividends. The Company systematically measures its financial progress against the Standard & Poors Healthcare Composite Group, with the goal of placing Bausch & Lomb among the top performers for each of its selected financial objectives. To achieve this goal, the Company has established multi-year objectives of compound annual sales and earnings growth in the range of 10% and, on a longer term basis, a return on equity of approximately 20%. The Company also emphasizes the need for operational stability, predictability and profitability. The Company's management team is firmly committed to achieving these performance objectives on a going-forward basis. RESULTS OF OPERATIONS Comparability Of Business Segment Information Comparisons of 1996 and 1995 third quarter and nine-month operating results are complicated by certain significant events described below. As announced in September 1996, the Company completed the sale of its Oral Care Division, which marketed the Interplak line of products, to Conair. The Company recorded a non-recurring after-tax loss on the divestiture of $6 million, or $0.11 per share, which is reflected in the Company's third quarter earnings. Oral care revenues were reported in the personal health sector of the Company's healthcare segment and for the 1996 third quarter were $6 million, a decrease of $7 million or 54% from the 1995 third quarter. For the first nine months of 1996, revenues were $22 million, a decrease of $14 million or 39% from the same period in 1995. As announced in August 1996, the Company reached a settlement of a class action lawsuit concerning the marketing of its Medalist, Optima FW and Criterion Ultra FW soft contact lenses. Although the settlement is preliminary and awaits final court approval, a charge against third quarter earnings in the amount of $16 million before taxes, or $10 million after taxes was recorded. This charge reduced earnings per share by $0.18. The Company believes that this amount, in addition to existing litigation reserves, will be adequate to provide for the costs of the proposed settlement. As announced in June 1996, the Company's Board of Directors approved plans to restructure portions of the sunglass, solutions and contact lens businesses, as well as certain corporate administrative functions and a restructuring charge of $15 million before taxes, or $11 million after taxes, was recorded in the second quarter. This charge reduced earnings per share by $0.19. The action is part of the Company's continuing efforts to enhance its competitive position and to reduce the annual impact of general and administrative overhead, logistics and distribution costs. As announced on May 1, 1995, the Company completed the sale of its Sports Optics Division, which marketed binoculars, riflescopes and telescopes. 1995 results reflect the operations of this business for only the first three months of the year. The sports optics business contributed optics segment revenues of $18 million and break even operating earnings for the nine-month period ended September 1995. Net Sales By Business Segment Bausch & Lomb's results are reported in two business segments. The healthcare segment includes personal health, medical and biomedical products. In the personal health sector, major lines include contact lens care products, eye care solutions, over-the- counter medications and skin care products. Medical products include contact lenses and lens materials, prescription pharmaceuticals, hearing aids and dental implants. Biomedical products include purpose-bred laboratory animals for biomedical research, specific pathogen-free eggs for vaccine production and a variety of biotechnical and professional services provided to the scientific research community. Healthcare segment results for 1996 and 1995 also include the Company's Oral Care Division. Bausch & Lomb's optics segment includes sunglasses and optical thin film coating services and products. Optics segment results for 1995 also include the Company's Sports Optics Division. Consolidated revenues of $477 million for the third quarter ended September 28, 1996 were even with the third quarter of 1995. Changes in foreign currency exchange rates had a negative impact of 2% on sales comparisons to 1995. When results for the divested Oral Care Division are excluded, sales improved $7 million or 2% over 1995. For the first nine months of 1996, sales totaled $1,492 million, compared with $1,478 million in the same period of 1995, an increase of 1%. Changes in foreign currency exchange rates reduced 1996 revenues in U.S. dollars by 2% on a year-to-date basis when compared to 1995. When results for the divested Oral Care and Sports Optics Divisions are excluded from 1996 and 1995 results, sales totaled $1,470 million compared with $1,424 million, an increase of 3%. Net Sales By Business Segment Third Quarter Nine Months (Dollar Amounts In Millions) 1996 1995 1996 1995 Healthcare $359.0 $345.4 $1,061.8 $1,014.9 Optics 118.2 131.4 430.2 462.9 Net Sales $477.2 $476.8 $1,492.0 $1,477.8 Healthcare Segment Revenues Revenues in the healthcare segment increased $14 million or 4% over the 1995 third quarter. On a year-to-date basis, healthcare segment revenues advanced $47 million or 5%. When results for the divested Oral Care Division are excluded, healthcare segment revenues increased $21 million or 6% over the 1995 third quarter and increased $61 million or 6% over the first nine months of 1995. Major product sector revenues as a percentage of total healthcare segment sales are presented below: Healthcare Segment Net Sales By Product Sector Third Quarter Nine Months 1996 1995 1996 1995 Personal Health 45% 51% 47% 50% Medical 41% 36% 39% 36% Biomedical 14% 13% 14% 14% Within the personal health sector, 1996 third quarter revenues decreased $12 million or 7%. When the Oral Care Division results are excluded, revenues decreased $5 million or 3%. Sales of the Company's ReNu multipurpose solution continued to report solid gains worldwide, while revenues from the Company's Boston line of rigid gas permeable lens care solutions reflected a 9% decrease, primarily due to timing of promotional activities. The overall result was a 2% decrease in the Company's lens care solutions business. Sales gains by the Company's line of skin care products were led by strong sales of Curel. These were more than offset by sales declines of over-the-counter drugs produced by Dr. Mann Pharma, which decreased $3 million or 29%. Medical sector revenues increased 17% from the third quarter of 1995, due primarily to worldwide contact lens sales, which rose 19%. Sales of planned replacement lenses, including SofLens66, reflected 39% worldwide growth, led by the U.S., Asia and Europe, while the acquisition of Award plc aided sales in Europe. Sales of traditional lenses declined 1%, reflecting the continuing shift toward planned replacement lenses outside the U.S. Worldwide prescription pharmaceutical revenues improved 14% with sales in the U.S. accounting for the majority of this increase. This improvement was largely attributable to the success of Crolom, as well as Minoxidil, a product introduced to the Company's portfolio this year. Medical sector sales also benefited from increased demand for dental implants and hearing aids. Biomedical sector sales increased 10% over the 1995 third quarter aided primarily by product line extensions. Optics Segment Revenues Third quarter revenues in the optics segment decreased $13 million or 10% from 1995. On a year-to-date basis, optics segment revenues decreased $33 million or 7%. Excluding the results of the divested Sports Optics Division from the year-to- date comparison, the decrease from 1995 was $15 million or 3%. Worldwide sunglass sales declined 9% from last year's third quarter. Significant shortfalls were reported in Ray-Ban products in all regions, with the U.S. representing more than half of the decline. Continued strong sales of new products, including Orbs and Side Street sunglasses were more than offset by the erosion of sales of older Ray-Ban products, including classic and traditional styles as well as reduced orders by the Company's largest customer in the U.S. sunglass specialty channel. Killer Loop, Arnette and Revo sunglass sales continued to gain, contributing 21% of the Company's 1996 third quarter sunglass revenues compared to 8% in the comparable 1995 period. Revenues for thin film coating products and services declined 23% due primarily to significant competitive challenges outside of the U.S. Net Sales By Geographic Region The following analysis of trends excludes 1996 and 1995 revenues from the Oral Care Division. Sales in markets outside the U.S. totaled $223 million in the third quarter, a decrease of $3 million or 1% from 1995, and represented 47% of consolidated revenues, compared to 49% in 1995. Sales in Europe and Latin America were consistent with the same period last year. Sales in Asia declined 3% due mainly to unfavorable exchange rate fluctuations in Japan. U.S. sales totaled $248 million in the third quarter, a gain of $11 million or 5% from 1995. The improvement was primarily due to growth for planned replacement lenses and pharmaceutical products and incremental sales from the acquisition of the Arnette sunglass lines. Costs And Expenses The cost of products sold ratio was 46% for the 1996 third quarter versus 43% for the comparable 1995 period. The increase in this ratio was due primarily to the impact of currency rate changes, reductions in sunglass orders and deterioration of margins in the divested Oral Care Division. For the nine-month period, this ratio was 44% for 1996 and 45% for 1995. Selling, administrative and general expenses were 37% of sales in the third quarter of 1996 and 36% in 1995. For the nine- month period, these expenses were 40% of sales in 1996 compared to 39% in 1995. This increase reflects higher spending for global sunglass, global contact lens and U.S. lens care advertising and amortization expense related to newly acquired businesses as well as one-time period costs associated with relocation and training of personnel related to the Company's effort to reduce annualized costs by $50 million. On a year-to- date basis, corporate administration expense was 2.4% of sales in 1996 and 1995. Research and development expenses for the nine- month periods was 3.8% of sales in 1996 versus 3.2% for 1995. The increase in spending is intended to enhance the Company's technical leadership in the pharmaceuticals, contact lens and lens care businesses. Restructuring Reserves As previously described, in the second quarter of 1996, the Company's Board of Directors approved plans to further restructure portions of the sunglass, solutions and contact lens operations, as well as certain corporate administrative functions. A pre-tax restructuring charge of $15 million was recorded. Additionally, in the fourth quarter of 1995, the Company announced plans to restructure its sunglass, pharmaceutical and biomedical operations and recorded a pre-tax restructuring charge of $27 million. The following table sets forth the activity in the restructuring reserves through September 28, 1996:
Dollar Amounts In Millions Contact Corporate Sunglass Biomedical Lens Solutions Administration Total Restructuring Provisions: Total 1995 $15.8 $4.8 $3.1 $3.0 $26.7 1996 5.0 - 4.1 $4.5 1.5 15.1 Less charges against 1995 reserve: Non-cash items 3.4 2.2 3.1 - 1.0 9.7 Cash payments 2.8 2.3 - - 0.6 5.7 Less charges against 1996 reserve: Non-cash items 0.6 - 0.4 0.7 - 1.7 Cash payments 0.5 - - 1.0 0.4 1.9 Balance at September 28, 1996 $13.5 $0.3 $3.7 $2.8 $2.5 $22.8
Reserves remaining at September 28, 1996 primarily represent liabilities for continuing severance payments and are believed to be adequate. Operating Earnings Operating earnings totaled $61 million, a decrease of $20 million or 25% from the 1995 third quarter. The continued return to profitability for contact lens products and improved operating results for hearing aids were offset by shortfalls in the sunglass business and the divested Oral Care Division. Other Income And Expenses Income from investments totaled $10 million for the third quarter of 1996, an increase of 2% over the third quarter of 1995. Interest expense of $13 million for the 1996 third quarter increased $2 million over the third quarter of 1995. This increase was due primarily to higher debt resulting from lower cash provided by operations, higher capital expenditures and increased outlays for acquisitions. The Company realized a net foreign currency gain of $0.6 million in the third quarter of 1996, representing an increase of $2.9 million from the net $2.3 million loss realized in 1995. This was caused largely by premium income associated with hedging activities relating to Germany and Japan. During the 1996 third quarter the Company sold its Oral Care Division and recorded a pretax loss of $26 million on the transaction. Additionally, during the 1996 third quarter the Company recorded a $16 million reserve for settlement of the aforementioned consumer class action case. The Company's reported income tax rates for the three- and nine-month periods were (24.1%) and 30.8% in 1996 compared to 37.0% and 36.6% in 1995, respectively. The lower rates in 1996 reflect the tax benefit recognized on the loss on sale of the Oral Care Division. This benefit resulted from differences between the tax and book bases which arose upon a previous writedown of goodwill for financial statement purposes. When this benefit is excluded, the tax rates for the three- and nine- month periods were 37.8% and 38.8%, respectively. Liquidity And Financial Resources Cash Flows From Operating Activities Cash flows provided by operating activities totaled $49 million through September 1996, a decrease of $151 million from the prior year period. This change was primarily attributable to lower earnings, a higher increase in trade receivables during 1996 versus the comparable period in 1995, a build in inventories related to newly acquired businesses and in support of new contact lens product introductions in 1996, the timing of tax payments and payments against litigation reserves. Cash Flows Provided By Investing Activities Cash flows used in investing activities were $146 million, versus $15 million provided by investing activities in 1995. Purchases of property, plant and equipment totaled $83 million, $25 million higher than 1995. Increased capital spending in the current year has been primarily in support of the development of new planned replacement contact lens technology and enhanced sunglass manufacturing capacity. Capital expenditures are expected to total approximately $110 million in 1996. Investing activities during 1996 included the acquisitions of Arnette Optic Illusions, a U.S.-based company marketing sunglasses to the sport market, and Award plc, manufacturer of a high-water content daily disposable lens based in Scotland. Other investing activities included the disposition of the Oral Care Division in 1996 and the Sports Optics Division in 1995. Cash Flows From Financing Activities Through September 1996, $55 million in cash was provided by financing activities primarily through the issuance of U.S. short- term debt and medium-term notes. Repurchases of the Company's common shares have totaled $56 million in 1996 compared to $83 million in 1995. Free Cash Flow Management continues to emphasize the generation of cash flow and management of its working capital requirements. The Company's goal is to maximize free cash flow which is defined as cash generated before financing activities and the acquisition and divestiture of businesses. Free cash flow for the three- and nine-month periods was $44 million and negative $37 million in 1996 compared to $54 million and $154 million in 1995. The change from the prior year is primarily attributable to the operating cash flow factors described earlier. Financial Position The Company's total debt, consisting of short- and long-term borrowings, increased $146 million from year-end 1995 to $721 million at the end of the 1996 third quarter. Bausch & Lomb's ratio of total debt to equity stood at 82% in September 1996 and 57% in September 1995. Cash and short-term investments totaled $152 million and $285 million at the end of the third quarter of 1996 and 1995, respectively. This change reflects the 1995 fourth quarter investment of approximately $136 million in securities issued by a subsidiary of a triple-A rated financial institution. Access to Financial Markets The Company maintains U.S. revolving credit agreements, typically with 364-day credit terms, totaling $290 million. The interest rate under the agreements is the prime rate, or, at the Company's option, a mutually acceptable market rate. No debt was outstanding under these agreements at September 28, 1996. In August 1996, the Company issued $100 million of thirty-year notes under its $300 million medium-term note program. It was the first borrowing under this program. The notes were issued at a fixed rate of 6.56% and may be put back to the Company in August 2001, at the sole option of the holders. Proceeds from the issuance were used to reduce outstanding short-term borrowings. In addition, the Company maintains bank lines of credit for its financing requirements. The availability of adequate credit facilities provides the Company with a high degree of flexibility to meet its obligations, fund capital expenditures and invest in growth opportunities. On August 7, 1996, Moody's Investors Service downgraded the Company's long-term debt rating from A2 to A3. This downgrade will result in future long-term debt being issued at a slightly higher rate of interest. Working Capital Working capital amounted to $106 million at September 1996, versus $71 million at year-end 1995 and $262 million in September 1995. Working capital benefited from the $100 million issuance of medium-term notes described earlier. The significant decrease from the third quarter of the prior year reflects the $136 million investment described previously. The current ratio was 1.1 at September 28, 1996 and December 30, 1995 and 1.4 at September 30, 1995. OTHER FINANCIAL DATA Dividends declared on Common stock were $0.26 per share in both the third quarters of 1996 and 1995. The return on average shareholders' equity of 7% for the twelve-month period ended September 28, 1996 was negatively impacted by the restructuring charges recorded in December 1995 and June 1996. This return was 6% for the twelve-month period ended September 30, 1995. Excluding 1994 goodwill impairment and the restructuring charges, the return on average shareholders' equity would have been 10% in 1996 versus 11% in 1995. OUTLOOK The healthcare segment should continue to benefit from growth in the contact lens business, due primarily to planned replacement and disposable lenses. In addition, the growth trend in the lens care solutions business outside of the U.S. is expected to continue. In the near term, sales in the optics segment are expected to be sluggish, due to erosion in sales of traditional styles of sunglasses and reduced orders by the Company's largest customer in the U.S. specialty sunglass channel. Although development of new sunglass styles has been accelerated, this is not expected to completely offset the aforementioned declines until after the end of this year. Earnings performance in future years is projected to benefit from the progress of announced efforts to reduce annualized costs by $50 million by 1998 and the recently announced restructuring efforts. Foreign currency exchange rate changes, particularly in Japan, are expected to continue to negatively impact sales comparisons to 1995. The Company will continue its regular evaluation of its portfolio of businesses to pursue opportunities to maximize shareholder return. OTHER INFORMATION The statements in this financial review contain various forward- looking statements based on the Company's beliefs as well as assumptions made by and information currently available to the Company. When used in this document, the words "expect", "anticipate", "project", "should" and similar expressions are intended to and do identify forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievement of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Among the key factors that may have a direct bearing on the Company's results are: global economic conditions; fluctuations in the rate of consumer spending in the U.S. and the world; changes in U.S. and foreign interest rates; fluctuations in foreign currencies, particularly in those countries in Europe and Asia where the Company has several principal manufacturing plants; the rate and success of development of new manufacturing technologies including initiatives in the contact lens and sunglass businesses; the timely flow of competitive new products and market acceptance of those products; the pricing and availability of equipment, materials and supplies; brand awareness; the existence or absence of adverse publicity; changing trends in consumer preferences and tastes; production, distribution and supply constraints or difficulties; new product development and regulatory approval risks, particularly for personal health and medical sector products; and changes in the financial markets relating to the Company's capital structure and cost of capital. PART II - OTHER INFORMATION Item 1. Legal Proceedings. In its 1995 Annual Report on Form 10-K as updated in the Company's first and second quarter forms 10-Q for 1996, the Company discussed an action pending in the United States District Court of the Northern District of Alabama on behalf of a nationwide class pursuing claims relating to the Company's marketing and sales of Optima FW, Medalist and SeeQuence2 contact lens systems and other related proceedings. On October 3, 1996, the Company was served with a statement of Claim filed in British Columbia, Canada, naming the Company and Bausch & Lomb Canada. The plaintiff seeks to represent a class of similarly situated Canadian consumers. Reference is made to Item 1 of the Company's Annual Report on Form 10-K for the fiscal year ended December 30, 1995, and Item 1 contained in the Company's Form 10-Q for the first and second quarter for 1996, filed on March 30, 1996 and June 29, 1996, respectively. Item 5. Other Significant Matters (a) Appointment of Chief Executive Officer On October 24, 1996, the Company announced that its Board of Directors had approved a leadership transition plan in which William M. Carpenter, currently the Company's President and Chief Operating Officer, will become Chief Executive Officer on January 1, 1997. William M. Waltrip, the Company's present Chairman and Chief Executive Officer, will continue as Chairman. (b) Appointment of Directors On October 23, 1996, the Company announced the appointment of two new Directors. Domenico De Sole and Jonathan S. Linen will serve until April 1997, at which time they will be nominated for election by the Company's shareholders. Item 6. Exhibits and Reports on Form 8-K. (a) Item 601 Exhibits Those exhibits required to be filed by Item 601 of Regulation S-K are listed in the Exhibit Index immediately preceding the exhibits filed herewith and such listing is incorporated herein by reference. (b) Reports on Form 8-K No reports on Form 8-K were filed by the Company during the quarter for which this Report is filed. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BAUSCH & LOMB INCORPORATED Date: November 12, 1996 By: Stephen A. Hellrung Senior Vice President, Secretary and General Counsel Date: November 12, 1996 By: Stephen C.McCluski Senior Vice President, Finance EXHIBIT INDEX S-K Item 601 No. Document (4)-a Certificate of Incorporation of Bausch & Lomb Incorporated (filed as Exhibit (4)-a to the Company's Annual Report on Form 10-K for the fiscal year ended December 29, 1985, File No. 1-4105, and incorporated herein by reference). (4)-b Certificate of Amendment of Bausch & Lomb Incorporated (filed as Exhibit (4)-b to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, File No. 1-4105, and incorporated herein by reference). (4)-c Certificate of Amendment of Bausch & Lomb Incorporated (filed as Exhibit (4)-c to the Company's Annual Report on Form 10-K for the fiscal year ended December 26, 1992, File No. 1-4105, and incorporated herein by reference). (4)-d Form of Indenture, dated as of September 1, 1991, between the Company and Citibank, N.A., as Trustee, with respect to the Company's Medium-Term Notes (filed as Exhibit (4)-a to the Company's Registration Statement on Form S-3, File No. 33- 42858, and incorporated herein by reference). (4)-e Rights Agreement between the Company and The First National Bank of Boston, as successor to Chase Lincoln First Bank, N.A. (filed as Exhibit 1 to the Company's Current Report on Form 8-K dated July 25, 1988, File No. 1-4105, and incorporated herein by reference). (4)-f Amendment to the Rights Agreement between the Company and The First National Bank of Boston, as successor to Chase Lincoln First Bank, N.A. (filed as Exhibit 1 to the Company's Current Report on Form 8-K dated July 31, 1990, File No. 1-4105, and incorporated herein by reference). (11) Statement Regarding Computation of Per Share Earnings (filed herewith). (12) Statement Regarding Computation of Ratio of Earnings to Fixed Charges (filed herewith). (27) Financial Data Schedule (filed herewith). Exhibit 11 Statement Regarding Computation of Per Share Earnings
NINE MONTHS ENDED Dollars And Shares In Thousands- September 28, September 30, Except Per Share Data 1996 1995 Net earnings $67,206 $115,387 Actual outstanding Common shares at beginning of year 56,941 58,992 Average Common shares issued for stock options and effects of assumed exercise of Common stock equivalents and repurchase of Common shares (148) (745) Average Common shares outstanding 56,793 58,247 Net earnings per Common and Common share equivalent $ 1.18 $ 1.98
Exhibit 12 Statement Regarding Computation of Ratio of Earnings to Fixed Charges
September 28, December 30, Dollar Amounts In Thousands 1996 1995 Earnings before provision for income taxes and minority interest $119,780 $211,847 Fixed charges 39,224 47,584 Capitalized interest, net of current period amortization 240 260 Total earnings as adjusted $159,244 $259,691 Fixed charges: Interest (including interest expense and capitalized interest) $ 37,818 $ 45,765 Portion of rents representative of the interest factor 1,406 1,819 Total fixed charges $ 39,224 $ 47,584 Ratio of earnings to fixed charges 4.062 5.461
1 Excluding the effect of the gain on sale of Sports Optics Division and restructuring charges recorded in 1995, the ratio of earnings to fixed charges at December 30, 1995 would have been 5.26. 2 Excluding the effects of the restructuring charges recorded in 1996 and the loss on divestiture of the Oral Care Division, the ratio of earnings to fixed charges at September 28, 1996 would have been 5.11. EX-27 2 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5 9-MOS QTR-3 SEP-28-1996 SEP-30-1996 SEP-28-1996 SEP-30-1996 150,980 150,980 1,277 1,277 289,097 289,097 (13,898) (13,898) 327,338 327,338 968,885 968,885 1,120,489 1,120,489 573,047 573,047 2,626,274 2,626,274 862,461 862,461 323,327 323,327 24,167 24,167 0 0 0 0 859,223 859,223 2,626,274 2,626,274 1,492,016 477,189 1,492,016 477,189 661,454 219,769 661,454 219,769 659,871 196,304 6,774 3,194 37,818 12,995 119,780 16,096 36,836 (3,877) 67,206 14,434 0 0 0 0 0 0 67,206 14,434 1.18 .25 1.18 .25 Income Before Taxes and Minority Interest
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