-----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, QqF6dfML/soxHwqHYiNmFmRg4gFratHz03yB+0TjvO3+1CQtgitCNIn2Hk4pD8J9 JVh1+zCu44t/+bc8iHfi8w== 0000010427-97-000016.txt : 19970806 0000010427-97-000016.hdr.sgml : 19970806 ACCESSION NUMBER: 0000010427-97-000016 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970628 FILED AS OF DATE: 19970805 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: 97651276 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 June 28, 1997 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 June 28, 1997 was 55,421,096, consisting of 54,794,129 shares of Common stock and 626,976 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 for the second quarters of 1997 and 1996 of Bausch & Lomb Incorporated and Consolidated Subsidiaries are presented on the following pages. The audited balance sheet at December 28, 1996 is presented for comparative purposes. Financial statements for the six months ended June 28, 1997 have been prepared by the company in accordance with the accounting policies stated in the 1996 Annual Report and should be read in conjunction with the Notes to Financial Statements appearing therein, 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 Second Quarter Ended Six Months Ended Dollar Amounts In Millions - June 28, June 29, June 28, June 29, Except Per Share Data 1997 1996 1997 1996 Net Sales $523.2 $545.6 $974.4 $1,014.8 Costs And Expenses Cost of products sold 231.5 233.8 458.7 441.7 Selling, administrative and general 201.8 214.0 382.8 411.2 Research and development 16.1 19.4 31.7 37.2 Restructuring charges 26.1 15.1 38.9 15.1 475.5 482.3 912.1 905.2 Operating Earnings 47.7 63.3 62.3 109.6 Other (Income) Expense Interest and investment income (9.4) (9.3) (19.4) (19.0) Interest expense 14.1 12.5 27.7 24.8 (Gain) loss from foreign currency, net (2.7) .1 (3.8) .1 2.0 3.3 4.5 5.9 Earnings Before Income Taxes And Minority Interest 45.7 60.0 57.8 103.7 Provision for income taxes 19.3 24.2 23.6 40.7 Earnings Before Minority Interest 26.4 35.8 34.2 63.0 Minority interest in subsidiaries 6.1 5.5 10.7 10.2 Net Earnings $ 20.3 $ 30.3 $ 23.5 $ 52.8 Retained Earnings At Beginning Of Period 913.6 907.9 924.7 900.1 Cash Dividends Declared: Common stock, $0.26 and $0.52 per share in both 1997 and 1996 14.5 14.7 28.8 29.4 Retained Earnings At End Of Period $919.4 $923.5 $919.4 $ 923.5 Net Earnings Per Common Share $ 0.36 $ 0.54 $ 0.42 $ 0.93 Average Common Shares Outstanding (000s) 55,688 57,034 See Notes to Financial Statements BAUSCH & LOMB INCORPORATED AND CONSOLIDATED SUBSIDIARIES BALANCE SHEET June 28, December 28, Dollar Amounts In Millions 1997 1996 ASSETS Current Assets Cash, cash equivalents and short-term investments $ 136.7 $ 167.8 Trade receivables, less allowances of $14.8 and $13.3, respectively 409.5 268.4 Inventories, net 318.7 339.8 Recoverable income taxes - 6.0 Deferred taxes, net 52.4 48.6 Other current assets 148.6 117.0 1,065.9 947.6 Property, Plant And Equipment, net 565.7 566.7 Goodwill And Other Intangibles, less accumulated amortization of $99.2 and $83.8, respectively 420.8 390.9 Other Investments 548.5 560.3 Other Assets 139.6 137.9 Total Assets $2,740.5 $2,603.4 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Notes payable $ 457.8 $ 394.1 Current portion of long-term debt 86.9 88.0 Accounts payable 75.1 71.1 Accrued compensation 73.9 82.2 Accrued liabilities 331.1 293.7 Federal and foreign income taxes 6.7 - 1,031.5 929.1 Long-Term Debt, less current portion 319.9 236.3 Other Long-Term Liabilities 106.1 124.0 Minority Interest 433.9 432.1 Total Liabilities 1,891.4 1,721.5 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 24.1 24.1 Class B stock, par value $0.08 per share, 961,644 and 1,150,409 shares issued, respectively 0.1 0.1 Capital in excess of par value 85.7 96.1 Retained earnings 919.4 924.7 Common and Class B stock in treasury, at cost, 5,738,870 and 5,944,982 shares, respectively (218.6) (230.5) Other Shareholders' Equity 38.4 67.4 Total Shareholders' Equity 849.1 881.9 Total Liabilities And Shareholders' Equity $2,740.5 $2,603.4 See Notes To Financial Statements BAUSCH & LOMB INCORPORATED AND CONSOLIDATED SUBSIDIARIES STATEMENT OF CASH FLOWS Six Months Ended June 28, June 29, Dollar Amounts In Millions 1997 1996 CASH FLOWS FROM OPERATING ACTIVITIES Net earnings $ 23.5 $ 52.8 Adjustments to reconcile net earnings to net cash flows from operating activities: Depreciation 42.9 44.6 Amortization 10.3 10.4 Change in deferred income taxes 1.0 1.4 Restructuring charges, net of taxes 26.0 10.9 Loss on retirement of fixed assets 7.3 5.1 Changes in assets and liabilities: Trade receivables (76.8) (62.2) Inventories 14.9 (26.6) Other current assets (33.7) (29.9) Accounts payable and accruals (2.1) (8.4) Income taxes 32.7 (5.6) Other long-term liabilities (15.3) (11.3) Net cash provided by (used in) operating activities 30.7 (18.8) CASH FLOWS FROM INVESTING ACTIVITIES Payments for purchases of property, plant and equipment (52.3) (56.2) Proceeds from sale of equipment - 9.6 Net cash paid for acquisition of businesses (44.1) (81.3) Other (5.5) (14.5) Net cash used in investing activities (101.9) (142.4) CASH FLOWS FROM FINANCING ACTIVITIES Repurchases of Common and Class B shares (10.2) (20.3) Exercise of stock options 9.2 3.8 Net proceeds from notes payable 63.6 167.7 Proceeds from issuance of long-term debt 15.0 34.3 Repayment of long-term debt (2.6) (51.1) Payment of dividends (28.8) (29.6) Net cash provided by financing activities 46.2 104.8 Effect of exchange rate changes on cash, cash equivalents and short-term investments (6.1) (0.9) Net decrease in cash, cash equivalents and short-term investments (31.1) (57.3) Cash, cash equivalents and short-term investments, beginning of period 167.8 194.6 Cash, cash equivalents and short-term investments, end of period $136.7 $137.3 Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 27.4 $ 23.9 Income taxes $ 14.6 $ 48.1 See Notes To Financial Statements BAUSCH & LOMB INCORPORATED AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS Dollar Amounts In Millions - Except Per Share Data NOTE A: Accounting Policies In January 1997 the SEC issued Financial Reporting Release 48, "Disclosure of Accounting Policies for Derivative Financial Instruments and Derivative Commodity Instruments and Disclosure of Quantitative and Qualitative Information About Market Risk Inherent in Derivative Financial Instruments, Other Financial Instruments, and Derivative Commodity Instruments". The release requires specific qualitative disclosures regarding the company's accounting policies for derivative financial instruments. Below are additional disclosures required by the release not already contained in the 1996 Annual Report. Derivative Financial Instruments Foreign currency (forward, option and swap) contracts are accounted using either hedge or deferral accounting treatment in accordance with the requirements of Statement of Financial Accounting Standards (SFAS) No. 52. The company hedges exposures on a continuing basis, employing foreign exchange contracts in a variety of currencies that effectively neutralize the after-tax impact of exchange rate fluctuations on the underlying exposures. The portfolio of contracts is adjusted at least monthly to reflect changes in exposure positions as these changes become known. When possible and practical, the company matches the maturity of the hedging instrument to that of the underlying exposure. Interest rate swap agreements are entered into only to hedge underlying investment or debt obligations and are accounted for using settlement accounting, in accordance with the requirements of Emerging Issues Task Force Issue 84-36. The company enters into interest rate swap and cap agreements to effectively limit exposure to interest rate movements within the parameters of its interest rate hedging policy. This policy limits the amount by which floating-rate assets may exceed, or be less than, floating- rate liabilities. Interest rate instruments are entered into for periods no greater than the life of the underlying transactions being hedged or, in the case of floating-rate to fixed-rate swaps, for periods no longer than the underlying floating-rate exposure is expected to remain outstanding. Interest rate derivatives are normally held to maturity, but may be terminated early, particularly if the underlying exposure is similarly extinguished. NOTE B: 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 55,688,000 at June 28, 1997 and 57,034,000 shares at June 29, 1996. See Exhibit 11 filed as a part of this report for details regarding the computation of earnings per share. Effective for the quarter ending December 27, 1997, the company will be required to adopt SFAS No. 128, "Earnings Per Share." SFAS No. 128 replaces the presentation of primary earnings per share with a presentation of basic earnings per share and requires dual presentation of basic and diluted earnings per share on the face of the income statement. Had earnings per share been determined consistent with SFAS No. 128, the company's pro forma basic earnings per share would have been $0.37 and $0.53 for the quarters ended June 28, 1997 and June 29, 1996, respectively. Pro forma diluted earnings per share would have been $0.36 and $0.53 for each period, respectively. For the six months ended June 28, 1997 and June 29, 1996, pro forma basic earnings per share would have been $0.42 and $0.93, respectively. Pro forma diluted earnings per share would have been $0.42 and $0.92, respectively. NOTE C: Inventories Inventories consisted of the following: June 28, December 28, 1997 1996 Raw materials and supplies $ 86.0 $ 89.4 Work in process 20.8 20.1 Finished products 219.6 238.3 326.4 347.8 Less: Allowance for valuation of certain U.S. inventories at last-in, first-out cost 7.7 8.0 $318.7 $339.8 NOTE D: Property, Plant And Equipment Major classes of property, plant and equipment consisted of the following: June 28, December 28, 1997 1996 Land $ 21.6 $ 22.1 Leasehold improvements 34.0 33.1 Buildings 390.6 403.7 Machinery and equipment 709.2 689.7 1,155.4 1,148.6 Less: Accumulated depreciation 589.7 581.9 $ 565.7 $ 566.7 NOTE E: Adoption Of SFAS No. 125 Beginning in the first quarter of 1997, the company adopted SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities." Under this pronouncement, an accounts receivable sale agreement entered into by the company is now required to be presented as a financing arrangement. As a result, the balance sheet at June 28, 1997 reflects $75 in receivables and borrowings related to this agreement. Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations Dollar Amounts In Millions - Except Per Share Data 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 toward 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 & Poor's 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. In that regard, the company recently adopted a new financial management performance measurement system, Economic Value Added (EVA), which has been implemented in 1997. EVA combines earnings and capital management objectives into one index by subtracting from earnings a capital charge for the utilization of assets employed to generate those earnings. It seeks to align business decisions made by the company with shareholder expectations that capital is being utilized effectively. RESULTS OF OPERATIONS Comparability Of Business Segment Information Comparison of the company's 1997 and 1996 second quarter and six-month operating results requires the consideration of certain significant events. As announced in April 1997, the company's board of directors approved plans to restructure portions of each of the company's four business segments, as well as certain corporate administrative functions. As a result, pre-tax restructuring charges of $13 and $26 were recorded in the first and second quarters of 1997, respectively. The after-tax impact of these charges was $18 or $0.33 per share in the second quarter of 1997 and $26 or $0.47 per share on a year-to-date basis. 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 pre- tax restructuring charge of $15 ($11 or $0.19 per share after taxes) was recorded in the second quarter of 1996. During 1996, the company divested two of its non-strategic businesses whose results were reported in the healthcare segment. The dental implant business, which was sold in November 1996, and the Oral Care Division, which was divested in September 1996, contributed combined revenues of $16 and $31 for the three- and six-month periods, respectively, ending June 1996. Combined operating losses of these divested businesses for the three- and six-month periods was $2 and $4, respectively. NET SALES BY BUSINESS SEGMENT Bausch & Lomb's operating results are reported in four business segments: vision care, eyewear, pharmaceuticals and healthcare. The vision care segment includes contact lenses and materials and lens care products. The eyewear segment is comprised of sunglasses and thin film coating services. The pharmaceuticals segment includes prescription ophthalmics and over-the- counter (OTC) medications. The healthcare segment is comprised of biomedical products, hearing aids, skin care products and the divested oral care and dental implant businesses. The following is a summary of sales by business segment: Net Sales By Business Segment Second Quarter Six Months 1997 1996 1997 1996 Vision Care $233.3 $224.4 $434.7 $ 422.0 Eyewear 157.0 178.7 278.4 316.1 Pharmaceuticals 54.0 56.6 103.1 105.1 Healthcare - ongoing 78.9 69.6 158.2 140.4 523.2 529.3 974.4 983.6 Healthcare - divested - 16.3 - 31.2 Net Sales $523.2 $545.6 $974.4 $1,014.8 Consolidated revenues for the quarter ended June 28, 1997 were $523, a decrease of $22 or 4% from the 1996 second quarter. When results for divested businesses are excluded from 1996 results, the revenue decrease from 1996 was $6 or 1%. Changes in foreign currency exchange rates reduced sales in U.S. dollars by 3% compared to the prior year period. For the first six months of 1997, net sales declined by $40 from the comparable 1996 period. When sales from divested businesses are excluded from 1996 results, the revenue decrease was $9 or 1%. Foreign currency exchange rate changes reduced 1997 year-to-date sales by 3% compared to 1996. For the three- and six-month periods, revenue declines in the eyewear segment were largely offset by increases in the vision care and ongoing healthcare segments. Vision Care Segment Results The vision care segment includes results of the contact lens and lens care businesses, with lenses comprising approximately 45% of second quarter and year-to-date 1997 revenues and lens care representing approximately 55%. For the second quarter of 1997, revenues improved $9, or 4%, over the same period in 1996, resulting primarily from a 9% increase in contact lens sales. Year-to-date vision care revenues exceeded 1996 by $13 or 3% with a 10% increase in contact lens sales offset by a 2% decline in lens care sales. Excluding the effects of foreign currency exchange rate changes, vision care segment revenues increased 7% and 6% over the prior year for the three- and six-month periods, respectively. Continued strong performance in contact lenses was driven by double- digit increases in shipments of planned replacement and disposable lenses (collectively PRP) in all geographic areas. Traditional lens sales reflected a modest decline compared to prior year results as the anticipated shift toward PRP lenses continued. Rigid gas permeable (RGP) lens revenues were also modestly below prior year as declines in the U.S. and Europe were partially offset by an increase in the Asia-Pacific region. Revenues from lens care products were flat compared to the second quarter of 1996 and decreased 2% on a year-to-date basis, with moderate declines in the U.S. offsetting gains outside the U.S. Results in the U.S. were negatively impacted by increased competition during the period, but were in line with management's expectations. Outside the U.S., excluding currency, double-digit growth was experienced in the Europe and Asia- Pacific regions. Eyewear Segment Revenues Eyewear segment revenues decreased 12% for the second quarter and six- months ended June 1997 versus the same periods in 1996, driven by sunglasses, the major product line in the segment. This decrease was due to the expected drop in sales to the segment's largest customer, market conditions in the U.S. and the effect of currency, particularly in the Europe and Asia-Pacific regions. Excluding the effect of currency, sunglass sales decreased 10% for the quarter and were down 9% for the first six months. In the U.S., sales decreased 20% for the quarter and 18% year to date reflecting the aforementioned sales decrease to the segment's largest customer, adverse market conditions and a decline in market share for Ray-Ban(R) products. Sales outside the U.S., excluding the effects of currency, decreased 2% for the quarter and year to date. Aggressive competition on pricing in the Asia-Pacific market moderated growth experienced in other non-U.S. markets. Pharmaceuticals Segment Revenues Revenues in the pharmaceuticals segment were down 5% from the 1996 second quarter and decreased 2% on a year-to-date basis. Adverse currency movements impacted worldwide sales in U.S. dollars by 4% and 5% for the three- and six-month periods, respectively. Within the U.S., sales advanced 23% over 1996 for the quarter and year to date, largely attributable to the successful launch of a generic equivalent of Polytrim(R), an anti-infective drug for the eye, and continued growth in sales of Crolom(R) for ocular inflammation, Ocutricin, and Minoxidil. European revenues declined 31% from the same 1996 quarter and were down 12% on a year-to-date basis. These shortfalls were largely attributed to continued difficult market conditions in Germany that particularly impacted sales of OTC pharmaceuticals, government mandated reimbursement reductions for prescription products and the adverse effect of currency rate changes. Healthcare Segment Revenues Ongoing healthcare segment revenues for the second quarter of 1997 were $79, an increase of $9 or 13% over the comparable period in 1996. Year to date, revenues increased $18 or 13%. The adverse impact of currency rate fluctuations reduced sales growth by 7% and 5% for the three- and six-month periods, respectively. Sales of biomedical products rose 11% for the quarter and six-month period, driven primarily by increases in sales of purpose-bred animals due to product line extensions and significant increases in sales of pathogen- free eggs and other professional services. Hearing aid revenues showed double-digit growth over 1996 aided by an increase in the number of company- owned retail outlets and increased sales of new products. Skin care product sales increased 24% for the quarter and 13% year to date driven by gains for the Curel(R) brand. Net Sales By Geographic Region The following analysis of trends excludes 1996 revenues from the oral care and dental implant businesses. Sales in markets outside the U.S. totaled $265 in the second quarter of 1997, about even with the 1996 period, and represented approximately 51% of consolidated revenues compared to 50% in 1996. Year to date, non-U.S. sales were $489, also even in comparison to the same period in 1996. Changes in currency exchange rates weakened non-U.S. sales comparisons for the three- and six-month periods by 7%. Second quarter sales in the Asia- Pacific region advanced 8% (15% excluding the effect of currency) and year- to-date increased 6% (14% adjusted for currency) above 1996 due to double- digit growth in sales of PRP lenses and soft lens care solutions offset by lower sunglass sales. Reported sales for the quarter in the European region declined 4%, but advanced 4% excluding the effect of currency. For the year-to-date period, reported sales in that region declined 2%, but were 5% above 1996 when adjusted for currency. The constant dollar results reflect double-digit growth for PRP lenses, significant increases for one- day disposable lenses, strong single-digit growth for solutions and higher sunglass revenues which offset double-digit declines in OTC medications. Sales in Canada and Latin America declined 6% and 5% for the three- and six- month periods respectively, primarily due to declines in soft lens care solutions. U.S. sales totaled $258 in the second quarter, a decline of $6 or 2% from 1996. Year-to-date U.S. sales of $485 were $9 or 2% below the comparable 1996 period. Sales declines in sunglasses were moderated by growth in the pharmaceutical and healthcare segments. Costs And Expenses The following analysis of trends excludes 1996 results from the oral care and dental implant businesses. The ratio of cost of products sold to sales was 44.2% for the 1997 second quarter versus 42.5% for the comparable 1996 period. For the six- month period, this ratio was 47.1% for 1997 and 43.2% for 1996. The year- to-date unfavorable ratio in 1997 reflected a $9 provision for the projected cost of exiting certain Ray-Ban(R) product lines recorded in the first quarter and unfavorable manufacturing volume variances in sunglasses as well as lower margins for vision care and pharmaceutical products. The Ray-Ban(R) products were discontinued as a result of recent additions and expansions to the company's product portfolio, which the company believes can more effectively reach the market niches in which these brands compete. Excluding the provision, the ratio of cost of products sold to sales would have been 46.2% year to date. Selling, administrative and general expenses (including corporate administration) were 38.6% of sales in the second quarter of 1997 compared to 39.0% in 1996. Year to date, these expenses were 39.3% of sales versus 40.2% in the prior year. The year-over-year favorable ratio reflects decreases in marketing and advertising, mainly due to the timing of promotions, and a decline in selling expense due to efforts being made to consolidate certain responsibilities in the vision care segment. Offsetting these favorable variances is a $2 provision recorded in the first quarter for the write-off of the company's equity investment in a start-up eyewear technology venture. For the quarter, corporate administration expense was 2.3% of sales versus 2.6% in 1996. Year to date, corporate administration expense was 2.5% of sales versus 2.7% a year ago reflecting expense reductions through company-wide restructuring efforts. Research and development expense for the 1997 second quarter was 3.1% of sales versus 3.4% for 1996. On a year-to-date basis, research and development expense was 3.2% of sales versus 3.5% in 1996. The decrease in costs was due to favorable project spending as efforts are being made to consolidate research and development functions in the vision care segment. Restructuring Reserves In the first quarter of 1997, the company's board of directors approved plans to further restructure all business segments as well as certain corporate administrative functions. This restructuring effort is expected to significantly reduce the company's fixed cost structure and realign the organization to meet its strategic objectives. These actions resulted in the recording of pre-tax restructuring charges of $39 during the first six months of 1997, $26 of which was during the second quarter, with additional amounts to be recorded in future periods. The total amount of charges expected to be incurred is approximately $80. The program is expected to generate annual savings of approximately $100 by 1999. Approximately one third of the savings will be generated from projects related to the company's manufacturing processes, including plans to phase out sunglass component manufacturing at the company's Frame Center in Rochester, New York, and to optimize manufacturing operations located in San Antonio, Texas, Waterford, Ireland and Hong Kong. Those projects are expected to result in improved operating margins, particularly in the eyewear business. The remainder of the savings will come from restructuring administrative functions. A substantial portion of those savings will be reallocated to revenue generating activities, such as new product development and increased marketing efforts. As described in previous filings, the company's board of directors approved a plan, announced in late 1995 and early 1996, to restructure portions of all business segments as well as certain corporate administrative functions. As a result, pre-tax restructuring charges of $15 and $27 were recorded in second quarter of 1996 and fourth quarter of 1995, respectively. The following table sets forth the activity in the restructuring reserves through June 28, 1997: Vision Corporate Care Eyewear Pharmaceuticals Healthcare Administration Total Restructuring Provisions: Total 1995 and 1996 $11.7 $20.8 $ - $4.8 $4.5 $41.8 1997 13.0 15.1 4.9 1.6 4.3 38.9 Less charges against 1995 and 1996 reserves: Non-cash items 4.1 4.4 - 2.2 1.0 11.7 Cash payments 4.0 14.2 - 2.6 3.0 23.8 Less charges against 1997 reserve: Non-cash items 2.4 2.7 - 0.4 0.3 5.8 Cash payments 3.9 2.2 0.7 0.5 2.5 9.8 Balance at June 28, 1997 10.3 12.4 4.2 0.7 2.0 29.6
Reserves remaining at June 28, 1997 primarily represent liabilities related to employee separations. Operating Earnings Operating earnings totaled $48 for the second quarter of 1997, a decrease of $16 or 25% compared to the 1996 second quarter. Excluding restructuring charges recorded in the second quarters of both 1997 and 1996, operating earnings would have been $74 and $78, respectively. Second quarter operating results primarily reflect the unfavorable sales performance of sunglasses. Other Income And Expenses Income from investments totaled $9 for the second quarter of 1997, an increase of 1% over the second quarter of 1996. Interest expense of $14 increased $2 over the second quarter of 1996, primarily due to higher debt levels. The company recognized a $3 foreign currency gain in the second quarter of 1997. This was primarily due to premium income generated from hedging activities. LIQUIDITY AND FINANCIAL RESOURCES Cash Flows From Operating Activities Cash provided by operating activities was $31 through the first six months of 1997 compared to negative $19 for the comparable 1996 period. Although net earnings adjusted for after-tax restructuring charges were $14 below the first six months of 1996, other operating factors, including a decrease in inventory during the first half of 1997, compared to rising inventory for the comparable 1996 period, and the timing of tax payments, contributed to the favorable comparison versus the prior year. Cash Used In Investing Activities Cash used in investing activities was $102 through June 1997, a $40 reduction from the comparable 1996 period primarily attributable to reduced expenditures for acquisitions. Capital spending of $52 was $4 lower than the comparable prior year period and is expected to total approximately $125 for 1997, a significant portion of which will support expanded contact lens manufacturing capacity. Acquisitions in 1997 included the purchase of Killer Loop S.p.A., a manufacturer of sunglasses based in Italy, with whom, prior to its acquisition, Bausch & Lomb had an exclusive agreement to market its eyewear products. Cash Provided By Financing Activities Through June 1997, $46 in cash was provided by financing activities, primarily through the issuance of short-term debt. The 1997 amount was $59 lower than the comparable 1996 amount, primarily due to increased borrowings in the prior year to fund acquisitions. Cash used to repurchase Common and Class B shares was $10 compared to $20 in 1996. All 250,000 Common shares authorized for repurchase by the board of directors in December 1996 were repurchased during the second quarter of 1997. In June 1997, an additional 250,000 Common shares was authorized of which 245,744 remain available for repurchase at the end of the second quarter. Free Cash Flow The company has a stated goal to maximize free cash flow, which is defined as cash generated before the payment of dividends, the borrowing or repayment of debt, stock repurchases and the acquisition and divestiture of businesses. Free cash flow through the second quarter of 1997 was a usage of $33, which was $48 favorable to the comparable 1996 period. The improvement 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 from year end 1996 due to increases in both long- and short- term debt. The long-term debt increase was due primarily to, as previously explained in Note E, $75 associated with the adoption of SFAS 125, which impacted the accounting treatment of the company's new U.S. factoring agreement implemented in April 1997. The remaining debt increase was primarily to fund acquisitions and capital expenditures. The ratio of total debt to equity was 101.8% and 78.3% for the quarters ended June 1997 and June 1996, respectively. Cash and short-term investments totaled $137 at the end of the second quarters of both 1997 and 1996. Access To Financial Markets The company maintains U.S. revolving credit agreements, typically with 364- day credit terms, totaling $490. The interest rate under the agreements is at the prime rate, or, at the company's option, a mutually acceptable market rate. No debt was outstanding under these agreements at June 28, 1997. In addition, the company maintains bank lines of credit for its financing requirements. The company also has the ability to issue up to $200 under its $300 medium-term note program. 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. Working Capital Working capital amounted to $34 at the end of the second quarter of 1997, versus $19 at year end 1996 and $21 at June 1996. The current ratio was 1.0 at June 28, 1997, December 28, 1996 and June 29, 1996. OTHER FINANCIAL DATA Dividends declared on Common stock were $0.26 per share in the second quarters of both 1997 and 1996. The return on average shareholders' equity of 6.2% for the twelve-month period ended June 28, 1997 was negatively impacted by restructuring charges recorded in June 1997 and March 1997. This return was 10.0% for the twelve-month period ended June 1996 which included June 1996 and December 1995 restructuring charges. Excluding restructuring charges, return on average shareholders' equity would have been 11.7% for the 1997 period versus 13.1% for 1996. OUTLOOK Worldwide revenues are forecasted to grow at a moderate rate throughout the remainder of 1997. This growth will be primarily dependent on the successful launch of new products and increased sales to the largest eyewear segment customer. The momentum in the vision care segment is expected to accelerate during 1997 with the second-half launch of ReNu MultiPlus Solution(R), a lens care product which, by eliminating the need for separate enzymatic cleaning, offers consumers a significant advance in caring for contact lenses. This new product confirms the company's position as the technological leader in the lens care market and will help to maintain the premium stature of the ReNu(R) flagship brand. Benefits to vision care segment results are also expected with the continued expansion of manufacturing capacity for Award(R) one-day disposable lenses and SofLens66(R) PRP lenses. The company continues to seek U.S. regulatory approval for the Award(R) lens and is optimistic for a 1998 launch of this product in the U.S. The company continues to be cautious concerning the eyewear segment but is confident that its strategies will lead to improved performance. In the U.S., the company intends to aggressively implement marketing strategies which are yielding positive results in Europe. In addition, eyewear sales should benefit from the acceleration of 1998 new product introductions, which will occur in September 1997, four months earlier than in previous years. The pharmaceuticals segment is expected to experience continued growth within the U.S., however difficult market conditions in Germany are expected to negatively impact near-term European revenues. Increased investments in research and development are projected to result in additional product registrations and ultimately continued long-term revenue growth in this business. Earnings from ongoing operations are projected to benefit from progress toward the $50 cost reduction program announced early in 1996 and from the further restructuring actions announced in the first quarter of 1997. INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS The statements in this financial review which are not historical facts are forward-looking statements that involve risks and uncertainties. The company operates in a rapidly changing environment that involves a number of risks, some of which are beyond the company's control. The following discussion highlights some of the risks and uncertainties and the possible impact of these factors on future results of operations. Actual results, performance or achievements of the company may be materially different from the projected results, performance or achievements expressed or implied by such risks. Among the key factors that may have a direct bearing on the company's results are: Global Economic And Political Conditions The company experiences fluctuations in operating results due to seasonality and general economic conditions in the global market place. Fluctuating exchange rates between the U.S. and foreign currencies, particularly in those countries in Europe and Asia where the company has several principal manufacturing plants, may have a material adverse effect on the company's future international sales and consolidated results of operations. Additionally, there is uncertainty in the economic outlook in the Asia-Pacific region, particularly due to Hong Kong reverting to China rule, as the company has its North Asia headquarters, the Asia Distribution Center and a sunglass manufacturing facility in Hong Kong. Customer Concentration The company's two largest customers together comprised almost 10% of the company's revenues in 1996. A reduction in orders from these or other of the company's major customers could have a material adverse effect on the company's businesses in future periods. Product Development And Introduction The vision care and eyewear industries are characterized by rapid changes in technology and consumer preference. The company believes that its future results will depend largely upon its ability to offer products that compete favorably with respect to price, demand, performance and innovative design. This in turn is affected by the company's ability to develop new manufacturing technologies and to timely develop new products and gain acceptance of those products. The company has observed a trend among contact lens wearers to switch from traditional lenses to lower-margin products, such as PRP lenses. The company's ability to improve profitability will depend heavily on the ability to reduce the cost of producing and to expand production capacity for these lenses. Success in the eyewear segment will require innovative design, marketing expertise and flexible delivery and logistical capabilities. An inability to reduce high levels of inventory of certain eyewear styles or delays or difficulties with new product introductions or product enhancements could have a material adverse effect on the company's future business results. Product Concentration The company derives a substantial portion of its revenues from sales of vision care products and eyewear. Any factor adversely affecting sales of vision care products and eyewear, including such factors as product performance, changing trends in consumer preferences and tastes, consumer demand, price competition and growth of private label competition for solutions, could have a material adverse effect on the company's future business results. Regulatory Approval The company is subject to risks associated with future adverse changes in the laws and regulations affecting products, taxes, the environment and other governmentally regulated areas. In particular, growth in the pharmaceuticals business is contingent upon obtaining necessary regulatory approvals. In addition, this business anticipates shifting its current product portfolio toward a more even balance between higher-margin proprietary pharmaceuticals and lower-margin generic pharmaceuticals. Failure to shift the portfolio to a more even balance, delay in regulatory approval and increased competition in the generic pharmaceuticals business could have a material adverse impact on the company's future business results. General Litigation The cost of legal proceedings instituted by or against the company could negatively impact future results of operations. Costs And Expenses Risks associated with the company's successful implementation of the company's restructuring effort in reducing costs and expenses of manufacturing processes and administrative functions could be material to the company's consolidated financial results. In addition, expenses such as pricing and the availability of equipment, material and supplies and the cost of capital could have a significant adverse effect on results of operations. PART II - OTHER INFORMATION Item 1. Legal Proceedings In its 1996 Annual Report on Form 10-K, the company discussed the settlement of an action pending in the United States District Court for the Northern District of Alabama, brought on behalf of a nationwide class pursuing claims relating to the company's marketing and sale of the Optima FW, Medalist and SeeQuence2 contact lenses, and other related proceedings. That settlement was concluded in the second quarter of 1997. The company's litigation reserves were more than adequate to satisfy the costs of the settlement. In its 1996 Annual Report for 1996 on Form 10-K, the company discussed actions pending in the provinces of Ontario and British Columbia, Canada alleging claims similar to those in the U.S. action referred to in the preceding paragraph. On May 27, 1997, a similar action was commenced in Quebec, naming the company and Bausch & Lomb Canada, Inc. Item 4. Submission of Matters to a Vote of Security Holders The 1997 annual meeting of shareholders was held on April 29, 1997. The following matters were voted upon and received the votes set forth below: 1. The individuals named below were elected to three-year terms as directors. Votes Cast Director For Withheld Franklin E. Agnew 48,214,853 1,136,637 William M. Carpenter 48,381,993 969,497 Ruth R. McMullin 48,233,355 1,118,135 Linda Johnson Rice 48,098,563 1,252,928 Domenico De Sole 48,376,135 975,355 Jonathan S. Linen 48,400,967 950,523 2. The election of Price Waterhouse LLP as independent accountants for 1997 was ratified, with 48,961,610 shares voting for, 267,690 shares voting against and 122,190 shares abstaining. 3. A shareholder proposal recommending the engagement of an investment banker to explore alternatives to enhance the value of the company was defeated, with 3,710,879 shares voting for, 41,674,879 shares voting against and 423,931 shares abstaining. 4. A shareholder proposal requesting that the board of directors eliminate the staggered three-year terms served by board members passed with 28,308,818 shares voting for, 17,214,810 shares voting against and 286,061 shares abstaining. The Board evaluated the proposal and determined that retention of the staggered terms reduces the vulnerability of the company to abusive takeover tactics. The board concluded that it is in the best interest of the shareholders to retain the current board structure. 5. A shareholder proposal recommending that the board refrain in the future from agreeing to compensate management in the event of a change in control in the corporation was defeated, with 11,010,167 shares voting for, 33,860,597 shares voting against and 938,924 shares abstaining. 6. A shareholder proposal recommending the revocation of the shareholder purchase rights plan (the "Plan") passed with 26,264,201 shares voting for, 19,064,922 shares voting against and 480,565 shares abstaining. The board evaluated the proposal and determined to let the Plan lapse at the expiration of the Plan in June 1998. 7. A shareholder proposal recommending the establishment of minimum share ownership requirements for certain executives and directors was defeated, with 4,485,318 shares voting for, 40,956,386 shares voting against and 367,985 shares abstaining. 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: August 5, 1997 By: Robert B. Stiles Senior Vice President and General Counsel Date: August 5, 1997 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 Exhibit 11 Statement Regarding Computation of Per Share Earnings SIX MONTHS ENDED Dollar Amounts In Millions - June 28, June 29, Except Per Share Data 1997 1996 Net earnings $ 23.5 $ 52.8 Actual outstanding Common and Class B shares at beginning of year 55,404 56,941 Average Common and Class B shares issued for stock options and effects of assumed exercise of Common stock equivalents and repurchase of Common shares (000) 284 93 Average Common shares outstanding (000) 55,688 57,034 Net earnings per Common and Common share equivalent $ 0.42 $ 0.93 [CAPTION] Exhibit 12 Statement Regarding Computation of Ratio of Earnings to Fixed Charges June 28, December 28, Dollar Amounts In Millions 1997 1996 Earnings before provision for income taxes and minority interest $57.8 $168.9 Fixed charges 28.9 53.5 Capitalized interest, net of current period amortization 0.1 0.3 Total earnings as adjusted $86.8 $222.7 Fixed charges: Interest (including interest expense and capitalized interest) $27.7 $ 51.7 Portion of rents representative of the interest factor 1.2 1.8 Total fixed charges $28.9 $ 53.5 Ratio of earnings to fixed charges 3.012 4.161 1 Excluding the effects of the restructuring charge recorded in 1996 and the net gain on divestitures of the oral care and dental implant businesses, the ratio of earnings to fixed charges at December 28, 1996 would have been 4.47. 2 Excluding the effects of the restructuring charges recorded in 1997, the ratio of earnings to fixed charges at June 28, 1997 would have been 4.36.
EX-27 2
5 6-MOS DEC-27-1997 JUN-28-1997 135,114 1,563 424,285 14,781 318,728 1,065,889 1,155,435 589,711 2,740,464 1,031,492 319,903 0 0 24,156 824,914 2,740,464 974,429 974,429 458,734 458,734 453,361 3,108 27,705 57,816 23,610 23,541 0 0 0 23,541 .42 .42 Income Before Taxes and Minority Interest
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