United States
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended Commission File
September 25, 1999 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.)
Registrant's telephone number, including area code:
(716)338-6000
Indicate by checkmark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
The number of shares of Common stock of the registrant
outstanding as of September 25, 1999 was 57,710,325, consisting
of 57,198,234 shares of Common stock and 512,091 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
The accompanying unaudited interim consolidated financial
statements of Bausch & Lomb Incorporated and Consolidated
Subsidiaries have been prepared by the company in accordance with
the accounting policies stated in the company's 1998 Annual
Report on Form 10-K 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 (consisting only of normal recurring adjustments)
necessary for a fair presentation in accordance with generally
accepted accounting principles have been included in these
interim consolidated financial statements.
<TABLE>
BAUSCH & LOMB INCORPORATED AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF INCOME
<CAPTION>
Third Quarter Ended Nine Months Ended
Dollar Amounts In Millions - Sept 25, Sept 26, Sept 25, Sept 26,
Except Per Share Data 1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net Sales $446.3 $403.1 $1,289.5 $1,169.0
Costs And Expenses
Cost of products sold 176.3 157.1 516.3 502.0
Selling, administrative and
general 167.8 155.3 519.0 477.5
Research and development 26.8 18.8 72.7 54.3
Purchased in-process research
and development - - - 41.0
Restructuring charges - - - 5.4
370.9 331.2 1,108.0 1,080.2
Operating Earnings 75.4 71.9 181.5 88.8
Other (Income) Expense
Interest and investment income (9.5) (12.4) (27.6) (32.5)
Interest expense 20.7 24.9 69.0 76.2
Loss/(Gain) from foreign
currency, net 1.6 (1.4) (5.0) (5.1)
Other income (6.7) - (6.7) -
6.1 11.1 29.7 38.6
Income From Continuing Operations
Before Income Taxes And Minority
Interest 69.3 60.8 151.8 50.2
Provision for income taxes 25.0 21.9 54.6 17.2
Income From Continuing Operations
Before Minority Interest 44.3 38.9 97.2 33.0
Minority interest in
subsidiaries 2.7 5.2 11.7 14.9
Income from Continuing Operations 41.6 33.7 85.5 18.1
Discontinued Operations
Income from discontinued
operations, net of taxes 8.4 2.5 34.0 17.2
Gain on disposal of
discontinued operations,
net of taxes 181.8 - 308.1 33.0
190.2 2.5 342.1 50.2
Net Income $231.8 $ 36.2 $ 427.6 $ 68.3
Basic Earnings Per Share:
Continuing Operations $0.72 $0.60 $1.49 $0.32
Discontinued Operations 3.31 0.05 5.99 0.91
$4.03 $0.65 $7.48 $1.23
Diluted Earnings Per Share:
Continuing operations $0.71 $0.60 $1.46 $0.32
Discontinued operations 3.23 0.04 5.83 0.89
$3.94 $0.64 $7.29 $1.21
Average Shares Outstanding -
Basic (000s) 57,477 56,022 57,198 55,714
Average Shares Outstanding -
Diluted (000s) 58,862 56,501 58,695 56,264
See Notes to Financial Statements
</TABLE>
<TABLE>
BAUSCH & LOMB INCORPORATED AND CONSOLIDATED SUBSIDIARIES
BALANCE SHEET
<CAPTION>
September 25, December 26,
Dollar Amounts In Millions 1999 1998
ASSETS
Current Assets
<S> <C> <C>
Cash and cash equivalents $ 951.1 $ 129.2
Other investments, short-term 125.0 300.0
Trade receivables, less allowances
of $20.3 and $26.8, respectively 402.5 526.3
Inventories, net 250.9 440.7
Deferred taxes, net - 68.4
Other current assets 158.4 122.2
Net assets held for disposal - current 26.2 -
1,914.1 1,586.8
Property, Plant And Equipment, net 530.0 725.0
Goodwill And Other Intangibles,
less accumulated amortization
of $121.0 and $137.3, respectively 616.0 758.9
Other Investments 176.8 249.2
Other Assets 160.7 171.8
Net Assets Held For Disposal -
non-current 4.9 -
Total Assets $ 3,402.5 $ 3,491.7
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes payable $ 148.6 $ 160.4
Current portion of long-term debt 2.1 31.1
Accounts payable 87.9 92.6
Accrued compensation 80.2 110.3
Accrued liabilities 368.9 366.2
Federal, state and foreign income
taxes payable 122.8 51.8
810.5 812.4
Long-Term Debt, less current portion 977.1 1,281.3
Deferred Income Taxes 51.2 -
Other Long-Term Liabilities 96.3 106.6
Minority Interest 223.1 446.4
Total Liabilities 2,158.2 2,646.7
Shareholders' Equity
4% Cumulative Preferred stock - -
Class A Preferred stock - -
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, 741,059 and 955,791 shares
issued, respectively 0.1 0.1
Capital in excess of par value 89.9 84.2
Common and Class B stock
in treasury, at cost, 3,229,056 and
4,625,026 shares, respectively (130.6) (178.9)
Retained earnings 1,266.7 883.5
Accumulated other comprehensive income 1.5 41.0
Other shareholders' equity (7.4) (9.0)
Total Shareholders' Equity 1,244.3 845.0
Total Liabilities And Shareholders'
Equity $ 3,402.5 $ 3,491.7
See Notes To Financial Statements
</TABLE>
<TABLE>
BAUSCH & LOMB INCORPORATED AND CONSOLIDATED SUBSIDIARIES
STATEMENT OF CASH FLOWS
<CAPTION>
Nine Months Ended
Sept 25, Sept 26,
Dollar Amounts In Millions 1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net Income $ 427.6 $ 68.3
Adjustments to reconcile net earnings to
net cash provided by operating activities
Gain from divestitures (475.0) (56.0)
Depreciation 82.0 87.4
Amortization 34.0 34.7
Change in deferred income taxes 129.1 (0.9)
Restructuring charges - 11.3
Purchased in-process research and
development - 41.0
Loss on retirement of fixed assets 1.1 2.9
Changes in assets and liabilities:
Trade receivables (59.7) (53.0)
Inventories (24.5) 3.8
Other current assets (45.1) (14.0)
Accounts payable and accruals 6.7 (94.2)
Income taxes 79.7 11.8
Other long-term liabilities (4.0) (6.8)
Net cash provided by operating
activities 151.9 36.3
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (102.0) (132.6)
Net cash paid for acquisition of
businesses (43.1) (715.1)
Net cash received from divestitures 1,048.5 135.0
Proceeds from liquidation of other
investment 300.0 -
Other 11.2 11.0
Net cash provided by (used in)
investing activities 1,214.6 (701.7)
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of additional interest in Wilmington
Partners L.P. 200.5 -
Redemption of Wilmington Partners L.P.
investor's interest (400.0) -
Repurchase of Common and Class B shares (13.5) (0.2)
Exercise of stock options 55.3 27.2
Net repayments of notes payable (342.2) (143.7)
Proceeds from issuance of long-term debt - 801.2
Repayment of long-term debt - (12.0)
Payment of dividends (42.2) (43.5)
Net cash (used in) provided by financing
activities (542.1) 629.0
Effect of exchange rate changes on cash
and cash equivalents (2.5) 1.4
Net increase (decrease) in cash and cash
equivalents 821.9 (35.0)
Cash and cash equivalents - beginning of
period 129.2 183.7
Cash and cash equivalents - end of period $ 951.1 $ 148.7
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest $ 77.1 $ 71.0
Income taxes $ 42.5 $ 33.0
See Notes To Financial Statements
</TABLE>
<TABLE>
BAUSCH & LOMB INCORPORATED AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
Dollar Amounts in Millions - Except Per Share Data
NOTE A: Inventories
Inventories consisted of the following:
September 25, December 26,
1999 1998
<S> <C> <C>
Raw materials and supplies $ 51.0 $ 84.7
Work in process 21.2 39.1
Finished products 178.7 319.3
250.9 443.1
Less: Allowance for valuation
of certain U.S.
inventories at last in,
first out (LIFO) cost - 2.4
$ 250.9 $440.7
</TABLE>
The inventories valued using LIFO related to the sunglass
business which was sold during the second quarter of 1999.
<TABLE>
NOTE B: Property, Plant And Equipment
Major classes of property, plant and equipment consisted
of the following:
September 25, December 26,
1999 1998
<S> <C> <C> <C> <C>
Land $ 12.1 $ 25.4
Buildings 205.3 416.0
Leasehold improvements 34.1 41.1
Machinery and equipment 746.6 930.2
998.1 1,412.7
Less: Accumulated
depreciation 468.1 687.7
$ 530.0 $ 725.0
</TABLE>
<TABLE>
NOTE C: Comprehensive Income
The components of the company's total comprehensive income were:
Three Months Ended Nine Months Ended
Sept 25, Sept 26, Sept 25, Sept 26,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net earnings $231.8 $36.2 $427.6 $68.3
Foreign currency
translation
adjustments, net of
taxes (5.4) 12.0 (39.5) 5.2
Total Comprehensive
Income $226.4 $48.2 $388.1 $73.5
</TABLE>
NOTE D: Restructuring and Exit Activities
1997 Restructuring Program
In April 1997, the company's board of directors approved plans to
restructure all business segments as well as certain corporate
administrative functions, and cumulative pre-tax restructuring
charges of $85 were recorded through the first half of 1998. Of
these charges, $46 related to ongoing operations and are reported
as restructuring charges and $40 related to discontinued
operations and are reported as part of income from discontinued
operations.
The goal of the restructuring effort was to significantl
reduce the company's fixed cost structure and realign the
organization to meet its strategic objectives through the
closure, relocation and consolidation of manufacturing,
distribution, sales and administrative operations, and workforce
reductions. Activities under this plan are expected to be
complete by the end of the fourth quarter. The restructuring
program is expected to yield cost savings for the continuing
businesses of approximately $70 annually.
The following table sets forth the activity in the
restructuring reserve related to ongoing businesses through
September 25, 1999:
<TABLE>
Vision Pharmaceuticals/ Centrally
Care Surgical Managed Total
<S> <C> <C> <C> <C>
Restructuring Provisions $12.0 $ 5.0 $29.0 $46.0
Less charges:
Non-cash items 3.1 - 0.8 3.9
Cash payments 8.1 4.8 25.5 38.4
Balance at September 25, 1999 $ 0.8 $ 0.2 $ 2.7 $ 3.7
</TABLE>
The original reserve associated with ongoing businesses
included $32 of severance and relocation costs for approximately
1,100 employees in manufacturing, logistics and administrative
functions. To date, approximately 900 employees have been
affected by activities included under the restructuring plan, at
a cost of approximately $28.
Amounts by segment in the preceding table have been
reclassified from those disclosed in the company's 1998 Annual
Report On Form 10-K. Amounts in this table associate specific
projects with the business segment that has management
accountability for the project; those projects that are managed
centrally or that impact several segments on a predominately
geographic basis are classified as "centrally managed".
Previously, amounts related to such projects were allocated among
business segments.
Accrual for Acquisition-Related Exit Activities
On December 29, 1997 and December 31, 1997 the company completed
the acquisitions of Chiron Vision Corporation (Chiron Vision)
from Chiron Corporation and certain stock and assets of Storz
Instrument Company, Storz Ophthalmics, Inc. and Cyanamid
Chirurgie S.A.S. (collectively Storz) from American Home Products
Corporation, and undertook a program to integrate these two
former companies into the newly-formed Bausch & Lomb Surgical
Division. As part of this integration, management developed a
formal plan that included the shutdown of duplicate facilities in
the U.S., Europe and Asia, the elimination of duplicate product
lines and the consolidation of certain administrative functions.
The exit activities were committed to by management and formally
communicated to employees shortly after the acquisitions were
consummated.
The following table sets forth activity in the exit
activities accrual accounts through September 25, 1999:
<TABLE>
Employee Facilities
Severance and Closure Contract
Relocation Costs Terminations Total
<S> <C> <C> <C> <C>
Original Provisions $21.7 $5.5 $0.9 $28.1
Less charges:
Non-cash items - 0.9 - 0.9
Cash payments 9.8 0.7 0.9 11.4
Balance at September 25, 1999 $11.9 $3.9 $ - $15.8
</TABLE>
The accrual for employee severance and relocation related to
approximately 600 employees in production, R&D, selling and
administration. As of September 25, 1999 approximately 250 of
these employees had been terminated. The facilities closure costs
primarily represent leasehold termination payments and fixed
asset writedowns relating to duplicate facilities. The closures
and consolidations in the U.S. are expected to be started or
substantially completed in 1999. Closures and consolidations
outside the U.S. are expected to commence in 1999 and be
substantially complete in 2000.
NOTE E: Business Segment Information
The company is organized by product line for management reporting
with operating earnings being the primary measure of segment
profitability. Certain distribution and general and
administrative expenses, including some centralized services, are
allocated amongst the segments for management reporting. No items
below operating earnings are allocated to segments. Restructuring
charges and charges related to certain significant events,
described below, although related to specific product lines, are
also excluded from management basis results. The accounting
policies used to generate segment results are the same as the
company's overall accounting policies.
The company's continuing operating results are reported in two
business segments: vision care and pharmaceuticals/surgical. The
vision care segment includes contact lenses, lens care products
and vision accessories. The pharmaceuticals/surgical segment
includes prescription ophthalmics, over-the-counter (OTC)
medications, and cataract, refractive and other ophthalmic
surgery products.
The following tables present sales and operating earnings by
business segment for the quarters and nine months ended
September 25, 1999 and September 26, 1998. The company does not
have material intersegment sales.
<TABLE>
Third Quarter
1999 1998
Net Oper. Net Oper.
Sales Earnings Sales Earnings
<S> <C> <C> <C> <C>
Vision Care $265.1 $58.2 $251.6 $61.2
Pharmaceuticals/Surgical 181.2 31.3 151.5 22.4
446.3 89.5 403.1 83.6
Corporate administration - (14.1) - (11.7)
$446.3 $75.4 $403.1 $71.9
</TABLE>
<TABLE>
Nine Months Ended
Sept 25, 1999 Sept 26, 1998
Net Oper. Net Oper.
Sales Earnings Sales Earnings
<C> <C> <C> <C>
Vision Care $ 758.9 $139.8 $ 715.9 $139.8
Pharmaceuticals/Surgical 530.6 89.3 453.1 60.9
1,289.5 229.1 1,169.0 200.7
Corporate administration - (47.6) - (33.5)
Restructuring - - - (5.4)
Other significant charges - - - (73.0)
$1,289.5 $181.5 $1,169.0 $ 88.8
</TABLE>
The 1998 "other significant charges" related to the
pharmaceuticals/surgical segment. As referred to in Note D,
during the first quarter of 1998, the company acquired Chiron
Vision and Storz, forming the company's surgical business. Part
of the purchase price was allocated to purchased in-process
research and development (R&D) and, in accordance with applicable
accounting rules, a pre-tax charge of $41.0 was recorded in the
first quarter of 1998. In addition to the purchased in-process
R&D charge, purchase accounting rules required that acquired
inventory be recorded at its fair value. This resulted in a
higher cost of sales of $32.0 during the first half of 1998 as
the acquired inventory was sold during this period.
NOTE F: Discontinued Operations
On June 26, 1999, the company completed the sale of its sunglass
business to Luxottica Group S.p.A. for approximately $640.0 in
cash. The company recorded an after-tax gain of $126.3 or $2.14
per share, which included the costs associated with exiting the
business, such as severance pay and additional pension costs.
The results of the sunglass business have been reported as
discontinued operations in the Consolidated Statements of Income
for both 1999 and 1998. Revenues of this business were $5.6 and
$250.0 for the three- and nine-month periods ended September 25,
1999 and $95.3 and $350.6 for the three- and nine-month periods
ended September 26, 1998. Third quarter 1999 results relate to
certain non-U.S. sunglass businesses subject to deferred
closings.
The sale of sunglass business units in certain non-U.S.
locations has been deferred due to local regulatory and legal
considerations, all of which should be resolved to enable
closings to occur within a 12-month period from the original date
of sale, with the exception of the company's interest in the
sunglass business of Bausch & Lomb India Limited, which is
expected to occur within 24 months from the original date of
sale. Three of the deferred closings were completed during the
third quarter. Net assets from the remaining units were
classified as net assets held for disposal in the company's
September 25, 1999 balance sheet. The net assets of the sunglass
business still subject to deferred closings, totaled $31.1 at
September 25, 1999, and consisted primarily of inventory,
receivables, property, plant and equipment, accrued liabilities
and payables.
On August 30, 1999 the company completed the sale of its
Miracle-Ear hearing aid business to Amplifon S.p.A., a privately
held Italian company. The company recorded an after-tax gain of
$11.1 or $0.19 per share, including costs associated with exiting
the business.
Also during the third quarter, the company completed the
sale of Charles River Laboratories, its research laboratory
animal and services business, to DLJ Merchant Banking Partners
II, L.P., an affiliate of the investment banking firm of
Donaldson, Lufkin and Jenrette, for approximately $400 in cash
and $43 in promissory notes. The company retained a 12.5% equity
interest in the Charles River Laboratories business. The company
recorded an after-tax gain of $170.7 or $2.90 per share,
including costs associated with exiting the business.
Miracle-Ear, Charles River Laboratories and the skin care
business, (which was sold in 1998) collectively, comprised the
company's healthcare segment. The results of the healthcare
segment have been reported as discontinued operations in the
Consolidated Statements of Income for both 1999 and 1998.
Revenues of this segment were $78.4 and $241.0 for the three- and
nine-month periods ended September 25, 1999 and $77.2 and $244.1
for the three- and nine-month periods ended September 26, 1998.
Earnings from discontinued operations as reported on the
company's Consolidated Statements of Income were net of taxes of
$5.1 and $20.6 for the three- and nine-month periods ended
September 25, 1999 and $2.1 and $11.2 for the three- and nine-
month periods ended September 26, 1998.
The balance sheet at December 27, 1998 and the statement of
cash flows for the nine-months ended September 26, 1998 have not
been restated to reflect either the sunglass business divestiture
or the divestitures of the healthcare businesses.
NOTE G: Minority Interest
In 1993, four wholly-owned subsidiaries of the company
contributed operating and financial assets with an estimated
market value of $1,006 to Wilmington Partners L.P. (the
Partnership), a newly formed limited partnership, in exchange for
an aggregate 72% general and limited partnership interest.
Additionally, an outside investor contributed $400 in cash to the
Partnership in exchange for a 28% limited partnership interest.
The Partnership's purpose was to own and manage a portfolio of
assets which included financial assets, portions of the company's
biomedical business and portions of its rigid gas permeable (RGP)
contact lens and solutions business.
In June 1999 the partnership was restructured and the
original outside partner's interest was liquidated for $400. A
new partner purchased a 15% interest in the partnership for
$200.5. None of these transactions resulted in a gain or loss for
the company.
The Partnership continues to be a separate legal entity from
the company, but for financial reporting purposes, assets,
liabilities and earnings from the Partnership continue to be
included in the company's consolidated financial results. The
outside investor's limited partnership interest continues to be
recorded as minority interest in the company's consolidated
financial statements.
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 1999 outlook. Discussion of operating results
excludes the impact in both 1999 and 1998 of operations from the
discontinued businesses discussed previously in Note F. Results
of the vision care segment have been restated for both 1999 and
1998 to include results from the vision accessories business,
which was previously reported in the eyewear segment. References
within this financial review to earnings per share refer to
diluted earnings per share.
CONTINUING OPERATIONS
Net Sales By Business Segment And Geographic Region
Total net sales for the quarter and nine-months ended
September 25, 1999 were $446 and $1,290, respectively. This
represents increases of 11% and 10% over the comparable periods
in 1998. Constant dollar (that is, excluding the effect of foreign
currency exchange rates) revenue increases were essentially the
same for those periods. Revenue growth was noted in both the
vision care and pharmaceuticals/surgical segments.
Vision Care Segment Revenues
The vision care segment includes results of the contact lens,
lens care and vision accessories businesses. Revenues in this
segment were $265 for the third quarter of 1999 which represents
an increase of 5% or 4% in constant dollars over the prior year
period. Lenses comprised 46% of revenues, with lens care and
vision accessories combined making up 54% of third quarter 1999
revenues. This revenue mix is consistent with that of the third
quarter of 1998.
Contact lens revenues increased 9%. U.S. contact lens sales
were down 7% as growing demand for the recently launched
SofLens66 toric and PureVision lenses was offset by declines in
sales of traditional lenses and weaker demand for the company's
conventional two-week disposable lenses including SofLens66. Lens
revenues grew by 18% outside the U.S., driven by strong growth of
planned replacement lenses. Lens care revenues grew 2% with gains
driven primarily by strong sales around the world of the ReNu
line of lens care products, especially in Japan where ReNu
Multipurpose solution was introduced earlier this year. Declines
in sales of the older Sensitive Eyes lines, especially in the
U.S., partially offset these gains.
Year-to-date, vision care revenues increased 6% or 5% in
constant dollars, reflecting improved results for both contact
lens and lens care products.
Pharmaceuticals/Surgical Segment Revenues
Third quarter 1999 revenues in the pharmaceuticals/surgical
segment were $181, an increase of 20% from the same period last
year, or 21% in constant dollars.
Pharmaceuticals revenue increased 29% for the quarter. In
the U.S., revenues increased 48% from the third quarter of 1998.
Contributing to these results were increased revenues from sales
of generic ear drops, which benefited from the exit of a
competitor in late 1998, and market share gains in the company's
proprietary ophthalmic anti-inflammatory products, Lotemax and
Alrex. Outside the U.S., pharmaceuticals sales decreased 1% for
the quarter. These results reflect lower over-the-counter sales
in Germany as well as a weakened Deutsche Mark, both of which
affected the company's Dr. Mann Pharma subsidiary.
Revenues from the company's surgical business increased 14%
for the quarter. The U.S. surgical business delivered solid third
quarter results, as revenues grew by 13% over the equivalent 1998
period. The growth was driven mainly by sales of products for
refractive surgery, but was partially offset by modestly lower
sales in the cataract surgery products business. Outside the
U.S., sales grew 16%, driven by strong sales in products for
refractive surgery.
For the year-to-date period, segment sales increased 17% in
both actual and constant dollars, with constant dollar
pharmaceuticals and surgical sales increasing 26% and 12%,
respectively.
Net Sales By Geographic Region
Sales in markets outside the U.S. totaled $206 in the third
quarter of 1999, an increase of $23 or 12% compared with the 1998
period, and represented 46% of consolidated revenues in both
years. Year to date, sales were $598 compared to $542 in 1998, an
increase of 10%, representing 46% of consolidated revenues for
1999 and 1998. On a consolidated basis, currency exchange rates
had a negligible impact on sales for the three-month period.
Third-quarter sales in the Asia-Pacific region increased 25%
versus 1998, or 9% in constant dollars, while revenues in Europe
increased 3% or 9% in constant dollars.
U.S. sales totaled $240 in the third quarter, an increase of
$20 or 9% from 1998. For the year, sales totaled $691, an
increase of $65 or 10% over 1998.
Costs & Expenses and Operating Earnings
Amounts in this section are calculated on a "management basis"
and, in addition to excluding results from discontinued
operations, exclude 1998 restructuring charges and other
significant charges described in Note E, "Business Segment
Information".
The ratio of costs of products sold to sales was 39.5%
during the third quarter of 1999, versus 39.0% for the same
period of 1998. For the nine-month period, this ratio was 40.0%
in 1999 compared to 40.2% in 1998. Margin improvements in the
pharmaceuticals/surgical segment offset declining margins in the
vision care segment resulting from higher manufacturing variances
on conventional lenses.
Comparable basis selling, administrative and general
expenses, including corporate administration, were 37.6% of sales
in the third quarter of 1999 compared to 38.5% in 1998. Year to
date, these expenses were 40.3% versus 40.8%. Increased
pharmaceutical sales combined with efficiencies in the surgical
business gained through integration of the former Chiron Vision
and Storz businesses drove the improvement, partially offset by
increased marketing expenditures on new vision care products.
Corporate administration expenses were 3.2% of sales in the
third quarter of 1999, versus 2.9% in the same period of 1998.
Year to date, the amounts were 3.7% versus 2.9%. Costs associated
with year 2000 and financial systems upgrades contributed to the
increase.
Research and development expenses totaled $27 in the third
quarter of 1999, an increase of $8 over 1998. This represented
6.0% of sales in 1999, up from 4.7% in 1998. For the year, the
ratio was 5.6% versus 4.6% in 1998. Increases were driven
primarily by incremental investments made in the pharmaceuticals
business to develop drug delivery technology for the treatment of
retinal disease.
Operating earnings for the third quarter of 1999 improved to
$75, a 4.9% improvement from the prior year period. For the year-
to-date period, the improvement was 8.5%. Results were aided by a
shift in product mix in the vision care segment, as well as by
higher sales revenue and favorable cost reductions in the
pharmaceuticals/surgical segment.
Other Income And Expenses
Income from investments totaled $10 for the third quarter of
1999, a decrease of $3 compared to the same period in 1998. The
decrease was due primarily to the 1998 gain on the redemption
from an equity investment acquired as part of a 1996 divestiture.
Interest expense of $21 decreased $4, primarily reflecting lower
debt levels which resulted from the use of cash received from the
business divestitures, and slightly lower interest rates. Foreign
currency losses of $2 during the third quarter of 1999 compared
unfavorably to the prior year period by $3. This result was
primarily associated with Japanese yen hedging contracts. The
hedging losses effectively neutralized positive currency impacts
reflected in operating earnings.
The results for the third quarter of 1999 also reflect a one-
time $7 gain from the redemption of a preferred stock investment
received as part of a 1995 divestiture.
LIQUIDITY AND FINANCIAL RESOURCES
Cash Flows From Operating Activities
Cash provided by operating activities was $152 through the third
quarter of 1999, compared to $36 for the same 1998 period. For
1999, tax deferrals associated with the refinancing of Wilmington
Partners L.P., as well as increased profitability from continuing
operations, contributed to the positive cash flow. This was
partially offset by increases in inventory and receivables of the
continuing businesses. The adjustment to reclassify the gain from
divestitures is presented on a pre-tax basis with the related tax
impact included under income taxes. In 1998, a $42 payment for a
litigation settlement and lower profitability caused in part by
integration costs associated with the acquisition of the surgical
businesses were contributing factors to the lower cash flow from
operations relative to 1999.
Cash Flows From Investing Activities
Cash provided by investing activities was $1,215 through the
third quarter of 1999 versus a cash outflow of $702 for the
comparable period in 1998. The amount for 1999 included inflows
of $1,048 from divestitures, and $300 from a redemption of
securities. The net cash outflow in 1998 was primarily due to the
first quarter acquisition of the surgical businesses. Capital
spending of $102, which decreased $31 compared to the prior year
period, is expected to be approximately $150 for 1999.
Cash Flows From Financing Activities
Through nine months of 1999, $542 was used in financing
activities, due mostly to net repayments of notes payable with
cash generated from the sale of the sunglass business, and as a
result of transactions involving Wilmington Partners L.P. (as
explained in Note G). In the comparable 1998 period, $629 was
provided by financing activities, mostly from new borrowings
needed to consummate the surgical acquisitions.
In July 1998, the board of directors authorized the repurchase
of up to 250,000 Common shares. During the third quarter of 1999,
the company repurchased 157,248 of common shares. This represents
the repurchase of Bausch & Lomb stock from the defined
contribution plan accounts of former sunglass employee
participants. The board of directors has made no further share
repurchase authorizations subsequent to July 1998.
Free Cash Flow
The company strives to maximize its free cash flow, defined as
cash generated before the payment of dividends, the borrowing or
repayment of debt, stock repurchases and the acquisition or
divestiture of businesses. Free cash flow through nine months of
1999 was $59, an improvement of $153 from the prior year period.
The increase is due mostly to the operational cash flow factors
described above. Free cash flow for the third quarter of 1999 was
$71.
Free cash flow results for 1999 have been consistent with
historical trends whereby the company has negative free cash flow
during the first half of the year and generates positive free
cash flow during the second half.
Financial Position
The company's total debt, consisting of short- and long-term
borrowings, was $1,128 at the end of the third quarter of 1999,
down $345 from year-end 1998, and lower than the September 1998
amount by $374. The ratio of total debt to capital has improved
to 47.5% at the end of the third quarter of 1999 versus 63.5% at
the end of 1998.
Cash and cash equivalents totaled $951 and $149 at the end
of the third quarters of 1999, and 1998, respectively, and $129
at the end of 1998. The increase in cash at September 1999 is
primarily the result of the sunglass and healthcare divestitures
as well as the liquidation of the short-term portion of a long-
term investment.
Access to Financial Markets
During the second quarter of 1999, the company restructured its
revolving credit agreements and now maintains 364-day bilateral
revolving credit agreements totaling $500. The interest rate
under these agreements is based on LIBOR, or at the company's
option, such other rate as may be agreed upon by the company and
the bank. No debt was outstanding under these agreements at
September 25, 1999. In addition, the company maintains other
lines of credit on which it may draw to meet its financing
requirements. The company believes its existing credit facilities
provide adequate liquidity to meet obligations, fund capital
expenditures and invest in potential growth opportunities.
Previous to the restructuring of the agreements, the
company's revolving credit agreements included both short- and
long-term portions. The long-term portions were used to support
$300 of unsecured promissory notes, which were classified as long-
term debt. With the elimination of the long-term revolving credit
agreements, these promissory notes have been classified as short-
term within the notes payable line in the September 25, 1999
balance sheet.
Working Capital
Working capital was $1,104 and $454 at the end of the third
quarters of 1999 and 1998, respectively. At year-end 1998,
working capital was $774. The improvement over the third quarter
of 1998 is due primarily to the increase in cash resulting from
the sale of the sunglass and healthcare businesses. The current
ratio was 2.4 and 1.5 at the end of September 1999 and September
1998, respectively, and 2.0 at year-end 1998.
OTHER FINANCIAL DATA
Dividends declared on common stock were $0.26 per share in the
third quarters of both 1999 and 1998. The return on average
shareholders' equity of 41.3% for the twelve-month period ended
September 25, 1999 reflects the gain on divestiture from both the
sunglass and healthcare businesses recorded in 1999 partially
offset by a fourth quarter 1998 goodwill impairment charge. This
ratio was 9.3% for the twelve-month period ending September 26,
1998, and included restructuring and litigation charges as well
as one-time charges associated with the surgical acquisitions.
RISKS ASSOCIATED WITH YEAR 2000 DATE ISSUES
The company has been addressing the potential risks associated
with the year 2000 date issue. It has established a formal
program to assess and renovate internal information technology
("IT") and non-information technology ("non-IT") operations that
are at risk, and further, to evaluate the year 2000 readiness of
key third-party suppliers and recipients of products, services,
materials or data. Year 2000 issues are being addressed through a
combination of software replacement, system upgrades and, in
limited instances, source code modifications (collectively,
"renovation"). Ongoing reengineering projects have had the
incidental benefit of remediating several major year 2000 issues.
The assessment phase of IT systems is complete. All key IT
systems have been tested and deemed compliant, with the exception
of one project in Europe to consolidate certain business
processes which is expected to be fully implemented and tested
for year 2000 compliancy prior to the end of 1999. The company
defines "compliant" as meaning that neither performance nor
functionality will be adversely affected by the processing of
dates prior to, during or after the year 2000. Most other IT
systems should be tested and compliant by the end of 1999. For
non-IT systems, the company engaged a leading production systems
integration firm specializing in year 2000 assessment and
remediation of manufacturing, distribution and R&D facilities.
The assessment phase is complete. All key non-IT systems have
been tested and deemed compliant, with the exception of two
systems relating to manufacturing record keeping and
documentation that are expected to be tested for year 2000
compliancy during November 1999. The company has assessed and
tested equipment sold by the company's surgical division. The
results of this testing concluded that none of the equipment is
affected in terms of performance, safety or efficacy as a result
of the year 2000 rollover.
The company has been assessing the readiness of key
suppliers and customers since early 1998. To further facilitate
this assessment, the company has interacted with each major
supplier or recipient of data, materials, products or services,
including face-to-face interviews with those considered to be
critical to the company. The company has made significant
progress towards confirming the year 2000 compliancy of such
suppliers and has or will develop contingency plans with regard
to such suppliers who have not satisfactorily demonstrated
compliance. Anticipated costs, comprised of both period expenses
and capital expenditures, of identifying and remediating year
2000 issues in the above-described areas is expected to be
approximately $54, of which approximately $48 has been incurred
to date. Of the total anticipated costs, approximately three
quarters is expected to be capitalized as part of system upgrades
and replacements. Management believes that its year 2000 program
will substantially reduce the risk of a material adverse impact
on future financial results caused by the year 2000 issue.
However, there can be no assurance that the company's year 2000
program will eliminate all year 2000 issues. Potential risks of a
failure to address a year 2000 issue (whether IT, non-IT or
external) that could have a materially detrimental impact to the
company include the inability to manufacture or ship products,
the inability to receive and fill orders, and problems with
customers or suppliers, including the loss of electrical power or
the failure of a key customer or supplier to purchase products or
provide anticipated goods and services. The company believes the
greatest potential risks are the possible failure to successfully
implement the European business process consolidation project
described above and the possible failure of a key supplier to
provide materials or services coupled with difficulty in
identifying and qualifying an alternate source.
Contingency plans deemed necessary for critical systems, and
for addressing a potential failure concerning key customers and
suppliers are either already complete or are expected to be
completed by the end of the fourth quarter of 1999. These plans
include, where appropriate, identifying alternate manufacturing
strategies, identifying alternate suppliers, identifying manual
methods for continuing certain operations and closely monitoring
appropriate raw material inventories and purchasing additional
amounts of certain materials if deemed necessary. Even where the
company has identified or developed such contingency plans, there
can be no guarantee that the plans will address all problems that
may arise or that such plans, if implemented, will operate
successfully. The estimated costs of remediation and the expected
completion dates described above are based on information
available at this time and may be updated as additional
information and assessment phase results become available.
Readers are referred to the section of this filing labeled
"Information Concerning Forward-Looking Statements" which
addresses forward-looking statements made by the company.
THE EURO
On January 1, 1999, 11 of the 15 member countries of the European
Union began operating with a new currency, the euro, which was
established by irrevocably fixing the value of legacy currencies
against this new common currency. The euro may be used in
business transactions along with legacy currencies until 2002, at
which time it will become the sole currency of the participating
countries.
The company has processes in place to address the issues
raised by this currency conversion, including the impact on
information technology and other systems, currency risk,
financial instruments, taxation and competitive implications. The
company expects no material impact to its financial position or
its results of operations arising from the euro conversion.
OUTLOOK
The vision care business is well positioned to deliver full-year
revenue growth in the mid-single digits. The emphasis for growth
in the contact lens business continues to be on new, premium-
priced products which command higher margins. PureVision, the
revolutionary extended-wear lens which received FDA approval
during the first quarter of 1999, continues its roll-out in the
U.S and Europe and is now being distributed by vision care
professionals in more than 6,000 offices. The company is expected
to continue to gain distribution and market share for its brand
of soft toric lenses in the U.S., Europe and selected markets in
Asia. Growth of new product sales will be somewhat mitigated by
softness in U.S. sales of the company's established PRD lenses.
Although lens care sales growth has moderated somewhat in the
second half of 1999, the business should continue to benefit from
the roll-out of ReNu multipurpose solution in Japan, which after
only one full quarter since introduction, has secured a 15% share
in the Japanese single-bottle cold chemical disinfectant market.
The pharmaceuticals/surgical segment is expected to continue
to grow in the fourth quarter of 1999, with full-year revenue
growth expected to be in the mid-teens. As has been the case
throughout 1999, revenue growth in the pharmaceuticals business
should be driven by the U.S. prescription business, primarily
through incremental generic otic sales (although the benefit is
expected to moderate as competition forces prices down) and from
continuing momentum in sales of the proprietary Alrex and Lotemax
ophthalmic anti-inflammatory products. Expectations for the
surgical business for the year continue to be strong, with
expected full year 1999 revenue growth exceeding 10%. Growth is
expected mainly from refractive surgery products, including
continued strength in sales of the Hansatome line of
microkeratomes, and the disposable blades that accompany these
products, as well as growing demand outside the U.S. for
Technolas excimer lasers.
With the sale of all non-strategic businesses now complete,
the objective of exiting 1999 with a singular focus on the eye
care lines has been accomplished.
INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
When used in this discussion, the words "anticipate," "should,"
"expect," "estimate," "project" and similar expressions are
intended to identify forward-looking statements. The forward-
looking statements contained in this report are made pursuant to
the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. These statements involve predictions of
future company performance, and are thus dependent on a number of
factors affecting the company's performance. Where possible,
specific factors that may impact performance materially have been
identified in connection with specific forward-looking
statements. Additional risks and uncertainties include, without
limitation, the impact of competition, seasonality and general
economic conditions in the global vision care and ophthalmic
surgical and pharmaceutical markets, where the company's
businesses compete, changes in global and localized economic and
political conditions (for example, the company does business in
Asia and Brazil, where, recently, economies and associated
currency risks have been volatile), changing trends in
practitioner and consumer preferences and tastes, changes in
technology, medical developments relating to the use of the
company's products, legal proceedings initiated by or against the
company, changes in government regulation of the company's
products and operations, changes in private and regulatory
schemes providing for the reimbursement of patient medical
expenses, difficulties or delays in the development, production,
testing, regulatory approval, marketing of products, the effect
of changes within the company's organization, and such other
factors as are described in greater detail in the company's
filings with the Securities and Exchange Commission, including
its 1998 Annual Report on Form 10-K.
Item 3. Quantitative and Qualitative Disclosures About Market
Risk
Due to the company's divestitures, as discussed in Note F, the
company is in a position in which its floating rate assets exceed
its floating rate liabilities. Although this is expected to be a
short-term situation, it represents a change in the interest rate
exposure as disclosed in Item 7(a) of the company's 1998 Form 10-
K. A sensitivity analysis to measure the potential impact that
a change in interest rates would have, net of hedging, on the
company's net income indicates that a one percentage point
decrease in interest rates would increase the company's net
interest expense by approximately $9.5 million.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In its 1998 Annual Report on Form 10-K, the company
discussed a class action lawsuit pending before a New
York State Supreme Court, alleging that the company
misled consumers in its marketing and sale of
Sensitive Eyes Rewetting Drops, Boston Rewetting Drops,
ReNu Rewetting Drops and Bausch & Lomb Eyewash. The
plaintiffs had appealed the dismissal of all of their
claims by the trial court. On September 16, 1999, the
New York Appellate Division, First Department, reversed
the trial court's ruling, reinstating the plaintiffs'
claims. The company has moved to decertify the matter as
a class action.
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
A report on Form 8-K describing the disposition of the
company's healthcare segment (including the September
29, 1999 disposition of Charles River Laboratories) ,
and attaching pro forma financial statements, was filed
by the company on October 13, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
BAUSCH & LOMB INCORPORATED
Date: November 4, 1999 By:
Robert B. Stiles
Senior Vice President
and General Counsel
Date: November 4, 1999 By:
Stephen C. McCluski
Senior Vice President and
Chief Financial Officer
EXHIBIT INDEX
S-K Item 601 Document
No.
(2)-a Recapitalization Agreement among Bausch & Lomb
Incorporated, Endosafe, Inc., CRL Holdings,
Inc., Charles River Laboratories, Inc., Charles
River Spafas, Inc., Bausch & Lomb International,
Inc., Wilmington Partners, L.P., Bausch & Lomb
Canada, Inc., CRL Acquisition LLC and DLJ
Merchant Banking Partners II, L.P. dated as of
July 25, 1999, (filed as Exhibit 2(a) to the
company's Current Report on Form 8-K, dated
October 13, 1999, File No. 1-4105, and
incorporated herein by reference).
(2)-b Amendment No. 1 to Recapitalization Agreement
dated as of September 29, 1999 by and among
Bausch & Lomb Incorporated and CRL Acquisition
LLC (filed as Exhibit 2(b) to the company's
Current Report on Form 8-K, dated October 13,
1999, File No. 1-4105, and incorporated herein
by reference).
(2)-c Investors' Agreement dated as of September 29,
1999 among CRL Holdings, Inc. and the several
Stockholders from time to time parties hereto
(filed as Exhibit 2(c) to the company's Current
Report on Form 8-K, dated October 13, 1999, File
No. 1-4105, and incorporated herein by
reference).
(2)-d Recap Co Subordinated Discount Note due 2010
(filed as Exhibit 2(d) to the company's Current
Report on Form 8-K, dated October 13, 1999, File
No. 1-4105, and incorporated herein by
reference).
(3)-a Certificate of Incorporation of Bausch & Lomb
Incorporated (filed as Exhibit (3)-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).
(3)-b Certificate of Amendment of Bausch & Lomb
Incorporated (filed as Exhibit (3)-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).
(3)-c Certificate of Amendment of Bausch & Lomb
Incorporated (filed as Exhibit (3)-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).
(3)-d By-Laws of Bausch & Lomb Incorporated, as
amended, effective October 26, 1998 (filed as
Exhibit (3)-a to the company's Form 10-Q for the
quarter ended September 26, 1998, File No. 1-
4105, and incorporated herein by reference).
(4)-a See Exhibit 3(a).
(4)-b See Exhibit 3(b).
(4)-c See Exhibit 3(c)
(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 Supplemental Indenture No. 1, dated May 13,
1998, between the company and Citibank, N.A.
(filed as Exhibit 3.1 to the company's Current
Report on Form 8-K, dated July 24, 1998, File
No. 1-4105, and incorporated herein by
reference).
(4)-f Supplemental Indenture No. 2, dated as of July
29, 1998, between the company and Citibank N.A.
(filed as Exhibit 3.2 to the company's Current
Report on Form 8-K, dated July 24, 1998, File
No. 1-4105, and incorporated herein by
reference).
(11) Statement Regarding Computation of Per Share
Earnings (filed herewith).
(12) Statement Regarding Computation of Ratio of
Earnings to Fixed Charges (filed herewith).
(27 Financial Data Schedule (filed herewith).
<TABLE>
Bausch & Lomb Incorporated
Exhibit 11
Statement Regarding Computation of Per Share Income
(Share Amounts in Thousands Except Per Share Data)
<CAPTION>
Three Months Ended Nine Months Ended
Sept 25, Sept 26, Sept 25, Sept 26,
Earnings in Millions 1999 1998 1999 1998
<S> <C> <C> <C> <C>
Income from continuing
operations $ 41.6 $ 33.7 $ 85.5 $ 18.1
Income from discontinued
operations<F1> 190.2 2.5 342.1 50.2
Net Income $231.8 $ 36.2 $427.6 $ 68.3
Actual outstanding Common
and Class B shares at
beginning of period 57,420 55,888 56,529 55,209
Sum of weighted average
activity of Common and
Class B shares issued for
stock options, repurchases
of Common and Class B
shares, restricted stock
awards and cancellations,
and net activity of shares
held in a deferred
compensation plan. 57 134 669 505
Weighted basic shares 57,477 56,022 57,198 55,714
Effect of assumed exercise
of Common stock equivalents 1,385 479 1,497 550
Weighted diluted shares 58,862 56,501 58,695 56,264
Basic Earnings Per Share:
Continuing Operations $0.72 $0.60 $1.49 $0.32
Discontinued Operations 3.31 0.05 5.99 0.91
Net Earnings $4.03 $0.65 $7.48 $1.23
Diluted Earnings Per Share:
Continuing operations $0.71 $0.60 $1.46 $0.32
Discontinued Operations 3.23 0.04 5.83 0.89
Net Earnings $3.94 $0.64 $7.29 $1.21
<FN>
<F1>Includes after-tax gain on disposal of discontinued operations.
</FN>
</TABLE>
<TABLE>
Bausch & Lomb Incorporated
Exhibit 12
Statement Regarding Computation of Ratio of Earnings to Fixed
Charges
(Dollar Amounts In Millions)
Sept 25, 1999 December 26, 1998
<S> <C> <C>
Continuing earnings before provision
for income taxes and minority
interests $151.8 $119.7
Fixed charges 70.0 102.6
Capitalized interest,
net of current period amortization 0.2 0.3
Total earnings as adjusted $222.0 $222.6
Fixed charges:
Interest (including interest expense
and capitalized interest) $ 69.0 $100.7
Portion of rents representative of
the interest factor 1.0 1.9
Total fixed charges $70.0 $102.6
Ratio of earnings to fixed charges 3.2 2.2
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-26-1999
<PERIOD-END> SEP-25-1999
<CASH> 850550
<SECURITIES> 100518
<RECEIVABLES> 422837
<ALLOWANCES> (20325)
<INVENTORY> 250915
<CURRENT-ASSETS> 1914056
<PP&E> 998068
<DEPRECIATION> (468,043)
<TOTAL-ASSETS> 3402501
<CURRENT-LIABILITIES> 810476
<BONDS> 977112
0
0
<COMMON> 24126
<OTHER-SE> 1220225
<TOTAL-LIABILITY-AND-EQUITY> 3402501
<SALES> 1289486
<TOTAL-REVENUES> 1289486
<CGS> 516248
<TOTAL-COSTS> 516248
<OTHER-EXPENSES> 591695
<LOSS-PROVISION> 7645
<INTEREST-EXPENSE> 69000
<INCOME-PRETAX> 151803<F1>
<INCOME-TAX> 54647
<INCOME-CONTINUING> 85507
<DISCONTINUED> 342121
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 427628
<EPS-BASIC> 7.48
<EPS-DILUTED> 7.29
<FN>
<F1>Income Before Taxes, Minority Interest and Discontinued Operations
</FN>
</TABLE>
