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
June 26, 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.)
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 26, 1999 was 57,419,621, consisting of
56,786,025 shares of Common stock and 633,596 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.
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BAUSCH & LOMB INCORPORATED AND CONSOLIDATED SUBSIDIARIES
STATEMENT OF EARNINGS
Second Quarter Ended Six Months Ended
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Dollar Amounts In Millions - June 26, June 27, June 26, June 27,
Except Per Share Data 1999 1998 1999 1998
Net Sales $ 453.3 $ 408.4 $ 843.2 $ 765.9
Costs And Expenses
Cost of products sold 177.4 178.5 339.9 344.9
Selling, administrative and
general 186.3 169.4 351.2 322.2
Research and development 25.2 19.1 45.9 35.5
Purchased in-process research
and development - - - 41.0
Restructuring charges - 3.6 - 5.4
388.9 370.6 737.0 749.0
Operating Earnings 64.4 37.8 106.2 16.9
Other (Income) Expense
Interest and investment income (8.4) (10.2) (18.0) (20.1)
Interest expense 24.1 26.0 48.3 51.3
Gain from foreign currency, net (3.7) (1.8) (6.6) (3.7)
12.0 14.0 23.7 27.5
Earnings (Loss) From Continuing
Operations Before Income Taxes
And Minority Interest 52.4 23.8 82.5 (10.6)
Provision for income taxes 18.9 9.1 29.7 (4.7)
Earnings (Loss) From Continuing
Operations Before Minority
Interest 33.5 14.7 52.8 (5.9)
Minority interest in
subsidiaries 4.6 5.3 8.9 9.7
Earnings (Loss) from Continuing
Operations 28.9 9.4 43.9 (15.6)
Discontinued Operations
Earnings from discontinued
operations, net of taxes 18.2 12.9 25.6 14.6
Gain on disposal of discontinued
operations, net of taxes 126.3 33.0 126.3 33.0
144.5 45.9 151.9 47.6
Net Earnings $ 173.4 $ 55.3 $ 195.8 $ 32.0
Basic Earnings Per Share:
Continuing Operations 0.50 0.17 0.77 (0.28)
Discontinued Operations 2.53 0.82 2.66 0.86
$ 3.03 $ 0.99 $ 3.43 $ 0.58
Diluted Earnings Per Share:
Continuing operations 0.49 0.17 0.75 (0.28)
Discontinued operations 2.45 0.81 2.59 0.86
$ 2.94 $ 0.98 $ 3.34 $ 0.58
Average Shares Outstanding -
Basic (000s) 57,280 55,787 57,002 55,560
Average Shares Outstanding -
Diluted (000s) 59,047 56,582 58,555 55,560
See Notes to Financial Statements
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<TABLE>
BAUSCH & LOMB INCORPORATED AND CONSOLIDATED SUBSIDIARIES
BALANCE SHEET
June 26, December 26,
<S> <C> <C>
Dollar Amounts In Millions 1999 1998
ASSETS
Current Assets
Cash and cash equivalents $ 433.3 $ 129.2
Other investments, short-term 275.0 300.0
Trade receivables, less allowances
of $19.1 and $26.8, respectively 409.2 526.3
Inventories, net 248.0 440.7
Deferred taxes, net 66.3 68.4
Other current assets 168.9 122.2
Net assets held for disposal - current 94.4 -
1,695.1 1,586.8
Property, Plant And Equipment, net 524.4 725.0
Goodwill And Other Intangibles,
less accumulated amortization
of $111.6 and $137.3, respectively 623.5 758.9
Other Investments 110.6 249.2
Other Assets 168.3 171.8
Net Assets Held For Disposal - non-current 168.0 -
Total Assets $3,289.9 $3,491.7
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes payable $ 256.1 $ 160.4
Current portion of long-term debt 2.7 31.1
Accounts payable 66.8 92.6
Accrued compensation 67.5 110.3
Accrued liabilities 427.3 366.2
Federal, state and foreign income taxes
payable 152.2 51.8
972.6 812.4
Long-Term Debt, less current portion 977.9 1,281.3
Other Long-Term Liabilities 97.8 106.6
Minority Interest 224.9 446.4
Total Liabilities 2,273.2 2,646.7
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,
880,711 and 955,791 shares
Issued, respectively 0.1 0.1
Capital in excess of par value 86.2 84.2
Common and Class B stock
in treasury, at cost, 3,659,442 and
4,625,026 shares, respectively (142.7) (178.9)
Retained earnings 1,049.5 883.5
Accumulated other comprehensive income 6.9 41.0
Other shareholders' equity (7.4) (9.0)
Total Shareholders' Equity 1,016.7 845.0
Total Liabilities And Shareholders' Equity $3,289.9 $3,491.7
See Notes To Financial Statements
</TABLE>
<TABLE>
BAUSCH & LOMB INCORPORATED AND CONSOLIDATED SUBSIDIARIES
STATEMENT OF CASH FLOWS
Six Months Ended
June 26 June 27,
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Dollar Amounts In Millions 1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 195.8 $ 32.0
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities
Gain from divestitures (210.5) (56.0)
Depreciation 58.3 56.3
Amortization 24.0 22.7
Change in deferred income taxes 5.2 1.3
Restructuring charges - 11.3
Purchased in-process research and development - 41.0
Loss on retirement of fixed assets 2.9 3.1
Changes in assets and liabilities:
Trade receivables (71.4) (72.7)
Inventories (25.8) 5.8
Other current assets (62.5) (19.0)
Accounts payable and accruals 59.9 (94.6)
Income taxes 103.7 (6.2)
Other long-term liabilities (1.4) (9.9)
Net cash provided by (used in) operating
activities 78.2 (84.9)
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (74.4) (90.0)
Net cash paid for acquisition of businesses (43.1) (715.0)
Net cash received from divestitures 637.2 135.0
Proceeds from liquidation of other investment 150.0 -
Other (11.4) 8.0
Net cash provided by (used in) investing
activities 658.3 (662.0)
CASH FLOWS FROM FINANCING ACTIVITIES
Purchase of additional interest in
partnership (400.0) -
Proceeds from third-party investor for
partnership interest 200.5 -
Repurchase of Class B shares (1.5) -
Exercise of stock options 35.8 19.7
Net (repayments of) proceeds from notes payable (203.5) 424.7
Proceeds from issuance of long-term debt - 304.3
Repayment of long-term debt (29.5) (7.5)
Payment of dividends (29.6) (28.8)
Net cash (used in) provided by financing
activities (427.8) (712.4)
Effect of exchange rate changes on cash and
cash equivalents (4.6) (1.7)
Net increase (decrease) in cash and cash equivalents 304.1 (36.2)
Cash and cash equivalents - beginning of period 129.2 183.7
Cash and cash equivalents - end of period $ 433.3 $ 147.5
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest $ 41.2 $ 50.5
Income taxes $ 32.3 $ 24.0
See Notes To Financial Statements
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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:
June 26, December 26,
1999 1998
Raw materials and supplies 48.7 84.7
Work in process 19.8 39.1
Finished products 179.5 319.3
248.0 443.1
Less: Allowance for valuation of
certain U.S. inventories
at last in, first out (LIFO) cost - 2.4
$248.0 $440.7
The inventories valued using LIFO related to the sunglass business, which was
sold during the second quarter of 1999.
NOTE B: Property, Plant And Equipment
Major classes of property, plant and equipment consisted
of the following:
June 26, December 26,
1999 1998
Land $ 12.1 $ 25.4
Buildings 203.8 416.0
Leasehold improvements 33.5 41.1
Machinery and equipment 722.7 930.2
972.1 1,412.7
Less: Accumulated depreciation 447.7 687.7
$ 524.4 $ 725.0
NOTE C: Comprehensive Income
The components of the company's total comprehensive income were:
Three Months Ended Six Months Ended
June 26, June 27, June 26, June 27,
1999 1998 1999 1998
Net earnings $173.4 $ 55.3 $195.8 $32.0
Foreign currency
translation
adjustments, net of taxes (11.2) 6.6 (34.2) (6.8)
Total Comprehensive
Income $162.2 $61.9 $161.6 $25.2
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 significantly
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. 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
June 26, 1999:
Vision Pharmaceuticals/ Centrally
Care Surgical Managed Total
Restructuring Provisions $12.0 $ 5.0 $29.0 $46.0
Less charges:
Non-cash items 3.1 - 0.8 3.9
Cash payments 7.9 4.8 25.5 38.2
Balance at June 26, 1999 $ 1.0 $ 0.2 $ 2.7 $ 3.9
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. The
remaining reserves at June 26, 1999 represent liabilities for
severance payments related to approximately 200 employees,
primarily in administrative functions.
Amounts by segment in the preceding table have been reclasssified
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 businesses 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 June 26, 1999:
Employee Facilities
Severance and Closure Contract
Relocation Costs Terminations Total
Original Provisions $21.7 $5.5 $0.9 $28.1
Less charges:
Non-cash items - 0.6 - 0.6
Cash payments 9.0 0.7 0.9 10.6
Balance at June 26, 1999 $12.7 $4.2 $ - $16.9
The accrual for employee severance and relocation related to approximately
600 employees in production, R&D, selling and administration. As of
June 26, 1999 approximately 190 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 table presents sales and operating earnings by
business segment for the quarters and six months ended June 26, 1999
and June 27, 1998. The company does not have material intersegment sales.
Second Quarter
1999 1998
Net Operating Net Operating
Sales Earnings Sales Earnings
Vision Care $264.1 $ 48.0 $245.5 $ 45.6
Pharmaceuticals/Surgical 189.2 34.1 162.9 22.8
453.3 82.1 408.4 68.4
Corporate administration - (17.7) - (11.0)
Restructuring - - - (3.6)
Other significant charges - - - (16.0)
$453.3 $64.4 $408.4 $ 37.8
Six Months Ended
June 26, 1999 June 27, 1998
Net Operating Net Operating
Sales Earnings Sales Earnings
Vision Care $493.8 $ 81.7 $464.3 $ 78.6
Pharmaceuticals/Surgical 349.4 58.0 301.6 38.5
843.2 139.7 765.9 117.1
Corporate administration - (33.5) - (21.8)
Restructuring - - - (5.4)
Other significant charges - - - (73.0)
$843.2 $ 106.2 $765.9 $ 16.9
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 $16.0 in the 1998 second quarter and
$32.0 for the first six months of 1998 as the acquired inventory was sold
during these periods.
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 in cash. The company
recorded an after-tax gain of $126 or $2.14 per share, which includes 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 Statement of Earnings for both 1999 and 1998.
Revenues of this business were $137.1 and $244.4, for the three- and
six- month periods ended June 26, 1999, respectively, and $145.8 and $255.3
for the three- and six- month periods ended June 27, 1998.
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 1-12 month period.
Net assets from these units are classified as "net assets held for disposal" in
the company's June 26, 1999 balance sheet. The net assets of the sunglass
business which are subject to deferred closings, totaled $67.0 at
June 26, 1999, and consisted primarily of inventory, receivables, property,
plant and equipment, accrued liabilities and payables.
On July 12, 1999, the company announced that it has reached a
definitive agreement to sell its Miracle-Ear subsidiary to Amplifon S.p.A.
The company expects the transaction to close by the end of the third
quarter, subject to regulatory review. The transaction is expected to
generate an after-tax gain of approximately $12 or $0.22 per share, which
includes the realization of certain tax benefits associated with the goodwill
impairment charge recorded in the fourth quarter of 1998.
The company announced on July 26, 1999 that it had has reached a
definitive agreement to sell Charles River Laboratories, its research
laboratory animal and service business, to Global Health Care Partners, a unit
of DLJ Merchant Banking. The transaction is expected to close by the end
of the third quarter, subject to regulatory review. The sale amount
consists of a $400 cash payment and a $43 promissory note. The company will
retain a 12.5% investment in the divested business. The company expects to
record an after-tax gain in the range of $2.80-$2.90 per share.
Miracle-Ear, Charles River Laboratories and the skin care business
(which was sold in 1998) collectively comprised the company's healthcare
segment. Since approved divestiture plans are now in place, the results of
the healthcare business have been reported as discontinued operations in the
Consolidated Statement of Earnings for both 1999 and 1998. Revenues of the
healthcare segment were $85.0 and $162.7 for the three- and six- month
periods ended June 26, 1999, respectively, and $80.9 and $166.9 for the
three- and six-month periods ended June 27, 1998. The remaining net assets
of the June 26, 1999 healthcare segment, reclassified to as net assets held
for disposal in the balance sheet, were $195.4 at June 26, 1999 and consisted
primarily of inventory, receivables, property, plant and equipment other
short- and long-term assets, accounts payable, accrued liabilities and
minority interest.
In the second quarter of 1998, the company sold its skin care business.
As a result, a non-recurring gain of $56 ($33 or $0.59 per share after taxes)
was recorded.
Earnings from discontinued operations as reported on the company's
consolidated statement of earnings are net of taxes of $10.7, $7.8, $15.4
and $9.2 for the second quarters and the six months ended June 1999 and 1998,
respectively.
The balance sheet at December 27, 1998 and the statement of cash flows
for the six-month ended June 27, 1998 have not been restated to reflect
either the sunglass business divestiture or the pending sale 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 restructured partnership for $200 in cash. None of these
transactions resulted in gains or losses 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 an updated 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 six-months ended June 26,
1999 were $453 and $843, 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 increases were 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 $264 for the quarter which represents an increase of
8% or 7% in constant dollars over the second quarter of 1998.
Lenses comprised 46% of revenues, with lens care and vision
accessories making up 53% and 1% of second quarter revenues,
respectively. This revenue mix is consistent with that of the
second quarter of 1998.
Contact lens revenues increased 7% in constant dollars
driven primarily by double-digit growth of planned replacement
and disposable lenses (collectively PRD) including very strong
results for SofLens one day disposable lenses in Europe as
well as for Medalist lenses in Japan. Growth in the U.S. contact
lens market was driven primarily by the success of the SofLens66 toric
lens, which was launched last year, and initial sales of the
PureVision lens for 7-day continual continuous wear. Lens care revenues
grew 5% in constant dollars with gains driven primarily by strong sales
around the world of the ReNu line of lens care products.
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
Second quarter 1999 revenues in the pharmaceuticals/surgical
segment were $189, an increase of 16% from the same period last
year, or 17% in constant dollars.
Pharmaceuticals revenue increased 24% for the quarter or 25%
in constant dollars. In the U.S., pharmaceuticals revenues
increased 33% from the second quarter of 1998. Contributing to
these results was increased sales of generic ear drops, which
benefited from the exit of a competitor in late 1998. Outside
the U.S., pharmaceuticals sales increased 6% 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 11%
for the quarter, or 12% in constant dollars. The U.S. surgical
business delivered solid second quarter results, as revenues grew
by 14% over the equivalent 1998 period. The growth was driven
mainly by sales of products for refractive surgery, but was
constrained by essentially flat sales in the cataract surgery
products business. Outside the U.S., sales grew 8%, driven
also by the strong sales in products for refractive surgery.
For the year-to-date period, segment sales were upincreased
16% in both actual and constant dollars, with nearly equal
percentage increases in both the pharmaceuticals and surgical
businesses.
Net Sales By Geographic Region
Sales in markets outside the U.S. totaled $210 in the second
quarter of 1999, an increase of $17 or 9% compared with the 1998
period, and represented 46% of consolidated revenues compared to
47% in 1998. Year to date, sales were $392 compared to $359 in
1998, an increase of 9%, representing 46% and 47% of consolidated
revenues for 1999 and 1998, respectively. On a consolidated
basis, currency exchange rates had a negligible impact on sales
for the three-month period. Second-quarter sales in the Asia-Pacific
region increased 15% versus 1998, or 7% in constant dollars. This
increase was primarily evidenced in Japan where revenues grew
33% over 1998, 18% in constant dollars. Much of the growth came from
strong initial sales of ReNu multipurpose solution and the success of
the Medalist lens. Revenues in Europe increased 2% or 6% in constant
dollars, reflecting continued strong sales of SofLens one day contact
lenses. The growth in the Asia-Pacific and European regions were
partially offset by negative trends in Latin America where currency
issues adversely impacted revenues.
U.S. sales totaled $243 in the second quarter, an increase
of $28 or 13% from 1998. For the year, sales increased $44 or
11% over 1998, reflecting growth in both segments. Vision Care's
U.S. revenues benefited from growth in sales of PRD lenses, as
well as continued market share gains in the ReNu line of lens
care products in the second quarter. U.S. pharmaceuticals/surgical
revenues increased 22% and 21% for the three- and six-month periods.
The pharmaceuticals business benefited by increased revenues from
generic ear drops. In the surgical business, growth was demonstrated by
improved U.S. sales of products used in refractive surgery.
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 39.1%
during the second quarter of 1999, versus 39.8% for the same
period of 1998. For the six-month period, this ratio was 40.3%
in 1999 compared to 40.8% in 1998. The 1999 ratios reflected
margin improvements in both segments.
Comparable basis selling, administrative and general
expenses, including corporate administration, were 41.1% of sales
in the second quarter of 1999 compared to 41.5% in 1998. Year to
date, these expenses were 41.7% versus 42.1%. Higher revenues
driven by increased marketing and advertising spending on new
vision care products, as well as selling efficiencies in the
surgical business gained through continued integration of the
former Chiron Vision and Storz businesses, contributed to the
favorability.
Corporate administration expenses were 3.8% of sales in the
second quarter of 1999, versus 2.7% in the same period of 1998.
Year to date, the amounts were 4.0% versus 2.9%. Costs
associated with year 2000 and financial systems upgrades, as well
as increased expense recorded for deferred compensation plans
resulting from the adoption of new accounting rules, contributed
to the increase.
Research and development expenses totaled $25 in the second
quarter of 1999, an increase of $6 over 1998. This represented
5.6% of sales in 1999, up from 4.7% in 1998. For the year,
the ratio was 5.4% versus 4.6% in 1998. Increases were driven
primarily by incremental investments made in the pharmaceuticals
business to develop drug delivery technology to treat retinal disease.
Operating earnings for the second quarter of 1999 improved
to $64, a 12% improvement from the prior year period. For the
year-to-date period, the improvement was 11%. In addition to the
overall favorable expense comparison to 1998, the results were
aided by a shift in product mix in the vision care segment, as
well as by price increases in the U.S. pharmaceuticals business.
Other Income And Expenses
Income from investments totaled $8 for the second quarter of
1999, a decrease of $2 compared to the same period in 1998. The
decrease was due primarily to lower interest rates on the
company's investment portfolio, partially offset by an increase
in income due to the new accounting treatment for deferred
compensation plans referenced previously. Interest expense of
$24 decreased $2, primarily reflecting lower debt levels and
interest rates. Foreign currency gains of $4 during the second
quarter of 1999 increased $2 over the prior year, primarily the
result of foreign currency hedging activities. The hedging gains
effectively neutralized negative currency impacts reflected in
operating earnings.
Income Taxes
The company's reported tax rate from continuing operations was
36.0% for the second quarter of 1999 compared to 38.2% for the
same 1998 period. The higher rate in 1998 was primarily due to
the impact from the other significant charges described in Note
E. Excluding these items, the second quarter 1998 ongoing tax
rate was 36.5%.
LIQUIDITY AND FINANCIAL RESOURCES
Cash Flows From Operating Activities
Cash provided by operating activities was $78 through the second
quarter of 1999, compared to negative $85 for the same 1998
period. For 1999, increased profitability contributed to the
positive cash flow but was partially offset by increases in
inventory and receivables. 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 negative cash flow
from operations.
Cash Flows From Investing Activities
Cash provided by investing activities was $658 through the second
quarter of 1999 versus a cash outflow of $662 for the comparable
period in 1998. The amount for 1999 included inflows of $637 from
the divestiture of the sunglass business and $150 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 $74, which decreased $16 compared
to the prior year period, is expected to be in the range of $200
for 1999. A significant portion of 1999 capital spending will be
used to support expanded contact lens manufacturing capacity.
Cash Flows From Financing Activities
Through the first half of 1999, $428 was used in financing
activities, primarily due to transactions involving Wilmington
Partners L.P. (as explained in Note G), and for net repayments of
notes payable with cash made available from the sale of the
sunglass business. In the comparable 1998 period, $712 was
provided by financing activities, mostly from new borrowings
needed to consummate the surgical acquisitions.
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 the first half
of 1999 was negative $12, an improvement of $157 from the prior
year period. The increase is due mostly to the operational cash
flow factors described above.
The negative free cash flow for the first quarter of 1999 is
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 $1,237 at the end of the second quarter of 1999,
down $236 from year-end 1998, and lower than the June 1998 amount
by $342. The ratio of total debt to capital has improved to 54.9%
at the end of the second quarter of 1999 versus 63.5% at the end
of 1998 and 65.4% at June 1998.
Cash and cash equivalents totaled $433 and $148 at the end of
the second quarters of 1999 and 1998, respectively, and $129 at
the end of 1998. The increase in cash at June 1999 resulted from
the sunglass divestiture, which occurred at the end of the
quarter.
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 June
26, 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, all promissory notes have been classified as
short-term within the notes payable line in the June 26, 1999
balance sheet.
Working Capital
Working capital was $723 and negative $43 at the end of the
second quarters of 1999 and 1998, respectively. At year-end 1998,
working capital was $774. The improvement over the second quarter
of 1998 is due primarily to the increase in cash resulting from
the sale of the sunglass business. The current ratio was 1.7 and
1.0 at the end of June 1999 and June 1998, respectively, and 2.0
at year-end 1998.
OTHER FINANCIAL DATA
Dividends declared on common stock were $0.26 per share in the
second quarters of both 1999 and 1998. The return on average
shareholders' equity of 21.8% for the twelve-month period ended
June 26, 1999 reflects the gain on divestiture on the sale of the
sunglass business recorded in the second quarter of 1999 and a
fourth quarter 1998 goodwill impairment charge. This ratio was
7.1% for the twelve-month period ending June 27, 1998, and
included restructuring and litigation charges and 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. The
renovation phase is on schedule and the company plans to have all
key IT systems tested and compliant by the end of the third
quarter of 1999. Most other IT systems should be tested and
compliant by the end of 1999. For non-IT systems, the company has
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. Based on information available at this time,
the company plans to have all key non-IT systems tested and
compliant during the third or fourth quarter of 1999, depending
on the project. The company has been assessing the readiness of
key suppliers and customers since early 1998. To further
facilitate this assessment, the company will interact 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. This assessment is scheduled for
completion early in the fourth quarter of 1999.
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 $45, of which approximately $38 has been incurred
to date. Of the total anticipated costs, approximately two-thirds
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 risk is the 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, customers and suppliers are either already
complete or are expected to be completed by the end of the third
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.
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
Solid results are expected to continue for the remainder of 1999.
Results for vision care remain strong and the segment is
well positioned for quarter-over-quarter growth for the remainder
of the year with the expectation that full-year revenue growth
will be in the high single digits. The vision care business is
is benefiting from the rollout of several new products, as well
as the introduction of existing products into new markets.
PureVision, the revolutionary extended wear lens which received
FDA approval during the first quarter of 1999, continues its
launch in the U.S. and is now being distributed to vision care
professionals in approximately 2,000 offices, with penetration
expanding weekly. PureVision rollout in Europe, where the lens
is approved for 30-day continuous wear, has just begun and is
receiving positive feedback. SofLens66 toric is expected to
continue to gain distribution and market share in the U.S., and
is being launched in Europe and Asia. Although lens care sales growth
is expected to moderate somewhat in the second half of 1999, the
business should continue to benefit from the roll-out of ReNu
multipurpose solution in Japan.
The pharmaceuticals/surgical segment is expected to continue
to grow throughout 1999. Revenue growth in the pharmaceuticals
business for 1999, driven primarily by the U.S. prescription
business, is expected to be in the high teens, with approximately
half of this growth coming from incremental generic otic sales.
Sales of the proprietary Alrex and Lotemax ophthalmic anti-
inflammatory products, both of which continue to gain market
share, should provide solid results, as should the generic
equivalent to Rhone Poulenc's DDAVP, which was introduced in
early 1999. The expectations for the surgical business for 1999
continue to be for revenue growth approaching 10%. For the
remainder of the year, growth is expected to be driven mainly by
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. FDA approval of
the Technolas 217 excimer laser in the U.S. is expected later in
the year, with the potential for a late 1999 product launch.
With the sale of the sunglass business now complete and with
the pending sales of the hearing aid and biomedical products
businesses expected to be completed by the end of the third
quarter, the objective of exiting 1999 with a singular focus on
the eye care lines is within reach.
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 consumer
preferences and tastes, 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.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
The 1999 annual meeting of shareholders was held on April 27,
1999. 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
Jonathan S. Linen 49,153,381 947,194
John R. Purcell 49,140,411 960,174
Alvin W. Trivelpiece 49,137,595 962,880
William H. Waltrip 49,129,022 971,563
Directors continuing in office are Franklin E. Agnew,
William M. Carpenter, Domenico DeSole, Ruth R. McMullin,
Linda Johnson Rice, and Kenneth L. Wolfe.
2. The election of PricewaterhouseCoopers LLP as
independent accountants for 1999 was ratified, with
49,798,898 shares voting for, 123,450 shares voting
against, and 178,237 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
A report on Form 8-K describing the disposition of the
company's eyewear segment, and attaching pro forma
financial statements, was filed by the company on
July 12, 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: August 10, 1999 By:
Robert B. Stiles
Senior Vice President
and General Counsel
Date: August 10, 1999 By:
Stephen C. McCluski
Senior Vice President and
Chief Financial Officer
EXHIBIT INDEX
S-K Item 601 No. Document
(2)-a Purchase agreement Agreement between Bausch
& Lomb Incorporated and Luxottica Group S.p.A.
dated April 28, 1999 (filed as Exhibit 2(a) to
the company's Current Report on Form 8-K, dated
July 12, 1999, File No. 1-4105, and incorporated
herein by reference).
(2)-b Letter Agreement between Bausch & Lomb
Incorporated and Luxottica Group S.p.A. dated
June 25, 1999 (filed as Exhibit 2(b) to the
company's Current Report on Form 8-K, dated
July 12, 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 Earnings
(Share Amounts in Thousands Except Per Share Data)
Three Months Ended Six Months Ended
June 26, June 27, June 26, June 27,
<S> <C> <C> <C> <C>
Earnings in Millions 1999 1998 1999 1998
Earnings (loss) from continuing
operations $28.9 $9.4 $43.9 $(15.6)
Earnings from discontinued
operations (see Footnote 1) 144.5 45.9 151.9 47.6
Net Earnings $173.4 $55.3 $195.8 $ 32.0
Actual outstanding Common and
Class B shares at beginning of
period 57,044 55,610 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. 236 177 473 351
Weighted basic shares 57,280 55,787 57,002 55,560
Effect of assumed exercise of
Common stock equivalents 1,767 795 1,553 -
Weighted diluted shares 59,047 56,582 58,555 55,560
Basic Earnings Per Share:
Continuing Operations $0.50 $0.17 $0.77 $(0.28)
Discontinued Operations 2.53 0.82 2.66 0.86
Net Earnings $3.03 $0.99 $3.43 $0.58
Diluted Earnings Per Share:
Continuing operations $0.49 $0.17 $0.75 $(0.28)
Discontinued Operations 2.45 0.81 2.59 0.86
Net Earnings $2.94 $0.98 $3.34 $0.58
<F1>
Includes after-tax gain on disposal of discontinued operations.
</TABLE>
<TABLE>
Bausch & Lomb Incorporated
Exhibit 12
Statement Regarding Computation of Ratio of Earnings to Fixed Charges
(Dollar Amounts In Millions)
June 26, 1999 December 26, 1998
Continuing earnings before
<S> <C> <C>
provision for income taxes
and minority interests $ 82.5 $ 119.7
Fixed charges 49.5 102.6
Capitalized interest, net of
current period amortization 0.1 0.3
Total earnings as adjusted $132.1 $222.6
Fixed charges:
Interest (including
interest expense and
capitalized interest) $ 48.7 $100.7
Portion of rents
representative of the
interest factor 0.7 1.9
Total fixed charges $ 49.4 $102.6
Ratio of earnings to
fixed charges 2.7 2.2
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-25-1999
<PERIOD-END> JUN-26-1999
<CASH> 188988
<SECURITIES> 244272
<RECEIVABLES> 428365
<ALLOWANCES> (19124)
<INVENTORY> 247994
<CURRENT-ASSETS> 1695110
<PP&E> 972141
<DEPRECIATION> (447700)
<TOTAL-ASSETS> 3289931
<CURRENT-LIABILITIES> 972925
<BONDS> 977862
0
0
<COMMON> 24156
<OTHER-SE> 992508
<TOTAL-LIABILITY-AND-EQUITY> 3289931
<SALES> 843177
<TOTAL-REVENUES> 843177
<CGS> 339909
<TOTAL-COSTS> 339909
<OTHER-EXPENSES> 397115
<LOSS-PROVISION> 7382
<INTEREST-EXPENSE> 48739
<INCOME-PRETAX> 82531<F1>
<INCOME-TAX> 29712
<INCOME-CONTINUING> 43931
<DISCONTINUED> 151851
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 195782
<EPS-BASIC> 3.43
<EPS-DILUTED> 3.34
<FN>
<F1>Income Before Taxes, Minority Interest and Discontinued Operations
</FN>
</TABLE>
