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:
<TABLE>
Vision Corporate
Care Eyewear Pharmaceuticals Healthcare Administration Total
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
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
<TABLE>
June 28, December 28,
Dollar Amounts In Millions 1997 1996
<S> <C> <C>
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 3.01<FN>2 4.16<FN>1
<FN>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.
<FN>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.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-27-1997
<PERIOD-END> JUN-28-1997
<CASH> 135,114
<SECURITIES> 1,563
<RECEIVABLES> 424,285
<ALLOWANCES> 14,781
<INVENTORY> 318,728
<CURRENT-ASSETS> 1,065,889
<PP&E> 1,155,435
<DEPRECIATION> 589,711
<TOTAL-ASSETS> 2,740,464
<CURRENT-LIABILITIES> 1,031,492
<BONDS> 319,903
0
0
<COMMON> 24,156
<OTHER-SE> 824,914
<TOTAL-LIABILITY-AND-EQUITY> 2,740,464
<SALES> 974,429
<TOTAL-REVENUES> 974,429
<CGS> 458,734
<TOTAL-COSTS> 458,734
<OTHER-EXPENSES> 453,361
<LOSS-PROVISION> 3,108
<INTEREST-EXPENSE> 27,705
<INCOME-PRETAX> 57,816<F1>
<INCOME-TAX> 23,610
<INCOME-CONTINUING> 23,541
<DISCONTINUED> 0
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<CHANGES> 0
<NET-INCOME> 23,541
<EPS-PRIMARY> .42
<EPS-DILUTED> .42
<FN>
<F1>Income Before Taxes and Minority Interest
</FN>
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