Patterson Companies Reports Fiscal 2017 First-Quarter Operating Results

ST. PAUL, Minn.--(BUSINESS WIRE)--

Patterson Companies, Inc. PDCO today reported consolidated net sales of $1.3 billion (see attached Sales Summary for further details) in its fiscal first quarter ended July 30, 2016, up 16.6 percent over the same period last year. Sales this quarter include a full-quarter contribution from the Animal Health International, Inc. acquisition. Sales in the year-ago quarter included an extra sales week and only a six-week contribution from Animal Health International, Inc.

Reported net income from continuing operations was $38.9 million, or $0.40 per diluted share, compared to $20.3 million, or $0.20 per diluted share, in last year's fiscal first quarter. Adjusted net income from continuing operations¹, which excludes certain non-recurring and deal amortization costs, totaled $48.8 million for the first quarter of fiscal 2017, up 4.0 percent over $46.9 million in the same quarter last year. Adjusted earnings per diluted share from continuing operations¹ totaled $0.51 in the 2017 first quarter, up 8.5 percent year-over-year.

"The business turned in a solid performance overall in the first fiscal quarter. Enhancing our operational platform for growth is a top priority for Patterson, and we moved forward with efforts to boost our effectiveness and improve our ability to compete in an evolving marketplace," said Scott Anderson, chairman, president and chief executive officer. "In Dental, we implemented steps to align our go-to-market strategy with shifting customer needs. In Animal Health, our ongoing integration initiatives and progress toward planned synergies remained on track. We are confident in the platform we are building for long-term growth and efficiency."

Patterson Dental
Reported net sales for Patterson Dental, which represents approximately 43 percent of total company sales, were $555.0 million, down 3.5 percent. Sales grew 2.1 percent on a constant currency basis and excluding the extra week from the 2016 first fiscal quarter. On that same basis, year-over-year sales by category were as follows:

• Consumable dental supplies increased 0.9 percent
• Equipment sales improved 5.4 percent
• Other services and products, primarily composed of technical service, parts and labor, software support services and office supplies, rose 1.3 percent

Anderson said, "Our customers' appetite for technology adoption and equipment investment was strong, and we are well positioned to address that demand. We also recognize that purchasing patterns of our customers are evolving and our aim is to lead the industry in addressing that change. While these sales force realignment actions can cause some short-term sales disruption, we believe we were competitive during the quarter in consumable sales and were pleased with the growth in our equipment sales volumes."

Patterson Animal Health
Reported net sales for Patterson Animal Health, which comprises approximately 57 percent of the company's total sales, were $762.6 million, up 36.8 percent. Production animal sales contributed $361.9 million to the segment during the quarter. Companion animal sales grew 11.7 percent on a constant currency basis and excluding the extra week from the 2016 first fiscal quarter. U.S. companion animal sales grew 8.1 percent, adjusting for the extra sales week in the same period last year and normalizing for the changes in selling arrangements for certain products.

Anderson added, "We are pleased with the performance of our U.S. companion animal business and encouraged by the growth this quarter in our production animal business. Livestock end markets are starting to improve, and we believe our growth in the quarter outpaced our end markets. We continue to make progress in our integration and synergies, while remaining focused on sales execution."

Discontinued Operations
On August 28, 2015, Patterson Companies completed the sale of Patterson Medical to Madison Dearborn Partners for approximately $717 million. As a result of the sale, Patterson Medical is classified and reported as discontinued operations for all periods presented.

Share Repurchases and Dividends
In the fiscal 2017 first quarter, Patterson repurchased approximately 0.5 million shares of its outstanding common stock, with a value of $25.0 million, leaving approximately 16 million shares for repurchase under the current authorization. The company also paid $24.2 million in cash dividends to shareholders in the first quarter of fiscal 2017.

Business Outlook
Anderson concluded, "We are positioning Patterson Companies to achieve long-term growth and efficiency goals that build on the platform we have created. We anticipate that our range of initiatives, from our enterprise resource planning system deployment, to our optimization efforts in Dental, to our ongoing integration efforts in the Animal Health segment will further enhance our competitiveness and shareholder value. We will continue to closely monitor the conditions and variables in our end markets. With this in mind, we reiterate our adjusted earnings guidance for fiscal 2017 in the range of $2.60 to $2.70 per diluted share."

The fiscal 2017 annual financial outlook and adjusted earnings guidance:

• Assumes stable North American and international markets
• Excludes the impact of additional share repurchases
• Excludes new acquisitions
• Excludes transaction-related costs, integration and business restructuring expenses and deal amortization (See Reconciliation of GAAP and Non-GAAP Financial Measures table below)
• Includes $25 million step up in operating expense associated with the ERP implementation

¹Reconciliation of GAAP and Non-GAAP Financial Measures
The following non-GAAP table is provided to adjust reported net income and diluted earnings per share for the impact of tax affected one-time costs, current and prior-year deal amortization costs and tax costs related to cash repatriation. Management believes that the adjusted net income and diluted earnings per share amounts may provide a helpful representation of the company's current quarter performance.

(Dollars in thousands, except EPS)
		Three Months Ended
		July 30,				August 1,
		2016				2015
Net income from continuing operations - reported		$	38,906			$	20,311
Transaction-related costs			216				9,302
Deal amortization			6,637				4,612
Integration and business restructuring expenses			3,032				871
Tax impact of repatriation of cash			-				11,800
Net income from continuing operations - adjusted		$	48,791			$	46,896
Diluted earnings per share from continuing operations - reported		$	0.40			$	0.20
Transaction-related costs			-				0.09
Deal amortization			0.07				0.05
Integration and business restructuring expenses			0.03				0.01
Tax impact of repatriation of cash			-				0.12
Diluted earnings per share from continuing operations - adjusted*		$	0.51			$	0.47
*May not foot due to rounding

Our guidance is presented on a non-GAAP basis. Due to the difficulty in forecasting certain transaction and business restructuring-related expenses and the tax impact thereof, the company is unable to provide a reconciliation of adjusted earnings guidance for fiscal 2017 without unreasonable effort. Because the information necessary to provide such reconciliation is unavailable, the company is unable to predict its probable significance.

In addition, the term constant currency represents net sales adjusted to exclude foreign currency impacts. Foreign currency impact represents the difference in results that is attributable to fluctuations in currency exchange rates the company uses to convert results for all foreign entities where the functional currency is not the U.S. dollar. The company calculates the impact as the difference between the current period results translated using the current period currency exchange rates and using the comparable prior period's currency exchange rates. The company believes the disclosure of net sales changes in constant currency provides useful supplementary information to investors in light of significant fluctuations in currency rates.

First-Quarter Conference Call and Replay
Patterson's first-quarter earnings conference call will start at 10 a.m. Eastern today. Investors can listen to a live webcast of the conference call at www.pattersoncompanies.com. The conference call will be archived on Patterson's website. A replay of the first-quarter conference call can be heard for one week at 888-203-1112 and by providing the Conference ID 9243479, when prompted.

About Patterson Companies, Inc.
Patterson Companies, Inc. is a value-added distributor serving the dental and animal health markets.

Dental Market
Patterson's Dental segment provides a virtually complete range of consumable dental products, equipment and software, turnkey digital solutions and value-added services to dentists and dental laboratories throughout North America.

Animal Health Market
Patterson's Animal Health segment is a leading distributor of products, services and technologies to both the production and companion animal health markets in North America and the U.K.

This press release contains certain forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are information of a non-historical nature and are subject to risks and uncertainties that are beyond Patterson's ability to control. Forward-looking statements generally can be identified by words such as "believes," "expects," "anticipates," "foresees," "forecasts," "estimates" or other words or phrases of similar import. It is uncertain whether any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do, what impact they will have on the results of operations and financial condition of Patterson or the price of Patterson stock. These forward-looking statements involve certain risks and uncertainties that could cause actual results to differ materially from those indicated in such forward-looking statements, including but not limited to the other risks and important factors contained and identified in Patterson's filings with the Securities and Exchange Commission, such as its Quarterly Reports on Form 10-Q and Annual Reports on Form 10-K, any of which could cause actual results to differ materially from the forward-looking statements. Any forward-looking statement in this press release speaks only as of the date on which it is made. Except to the extent required under the federal securities laws, Patterson does not intend to update or revise the forward-looking statements.

PATTERSON COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
		Three Months Ended
		July 30,				August 1,
		2016				2015
Net sales		$	1,332,436			$	1,142,870
Gross profit			317,178				288,244
Operating expenses			251,762				226,067
Operating income from continuing operations			65,416				62,177
Other expense, net			(7,798	)			(11,473	)
Income from continuing operations before taxes			57,618				50,704
Income taxes			18,712				30,393
Net income from continuing operations			38,906				20,311
Net income from discontinued operations			-				9,392
Net income		$	38,906			$	29,703
Basic earnings per share:
Continuing operations		$	0.41			$	0.20
Discontinued operations			-				0.10
Net basic earnings per share		$	0.41			$	0.30
Diluted earnings per share:
Continuing operations		$	0.40			$	0.20
Discontinued operations			-				0.10
Net diluted earnings per share		$	0.40			$	0.30
Shares:
Basic			95,461				99,436
Diluted			96,090				100,162
Dividends declared per common share		$	0.24			$	0.22
Gross margin - reported			23.8		%		25.2
Operating expenses as a % of net sales - adjusted			17.7		%		18.0
Adjustments1			1.2				1.8
Operating expenses as a % of net sales - reported			18.9		%		19.8
Operating income as a % of net sales - adjusted			6.1		%		7.2
Adjustments1			(1.2	)			(1.8	)
Operating income as a % of net sales - reported			4.9		%		5.4
Effective tax rate - adjusted			33.0		%		34.4
Adjustments1			(0.5	)			25.5
Effective tax rate - reported			32.5		%		59.9
1 Refer to the press release for the definition of adjustments to reported results

PATTERSON COMPANIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
		July 30,				April 30,
		2016				2016
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	89,978			$	137,453
Receivables			719,218				796,693
Inventory			799,176				722,140
Prepaid expenses and other current assets			82,696				91,255
Total current assets			1,691,068				1,747,541
Property and equipment, net			298,104				293,315
Goodwill and other intangible assets			1,309,188				1,325,889
Long-term receivables, net and other			200,907				154,059
Total assets		$	3,499,267			$	3,520,804
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable		$	523,105			$	566,253
Other accrued liabilities			187,336				226,582
Current maturities of long-term debt			18,563				16,500
Borrowings on revolving credit			108,000				20,000
Total current liabilities			837,004				829,335
Long-term debt			1,016,184				1,022,155
Other non-current liabilities			228,042				227,568
Total liabilities			2,081,230				2,079,058
Stockholders' equity			1,418,037				1,441,746
Total liabilities and stockholders' equity		$	3,499,267			$	3,520,804

PATTERSON COMPANIES, INC.
SALES SUMMARY
(Dollars in thousands)
(Unaudited)
										Total				Foreign				Animal Health
		July 30,				August 1,				Sales				Exchange				International				Internal
		2016				2015				Growth				Impact				Impact				Growth
Three Months Ended
Consolidated net sales
Consumable		$	1,076,221			$	895,307			20.2		%		(2.0	)	%		22.0		%		0.2		%
Equipment and software			160,946				153,483			4.9				(0.4	)			-				5.3
Other			95,269				94,080			1.3				(0.7	)			(0.2	)			2.2
Total		$	1,332,436			$	1,142,870			16.6		%		(1.7	)	%		17.2		%		1.1		%
Dental
Consumable		$	332,948			$	358,052			(7.0	)	%		(0.4	)	%		-		%		(6.6	)	%
Equipment and software			150,882				143,670			5.0				(0.4	)			-				5.4
Other			71,185				73,395			(3.0	)			(0.3	)			-				(2.7	)
Total		$	555,015			$	575,117			(3.5	)	%		(0.4	)	%		-		%		(3.1	)	%
Animal Health
Consumable		$	743,273			$	537,255			38.3		%		(3.0	)	%		36.6		%		4.7		%
Equipment and software			10,064				9,813			2.6				(0.2	)			-				2.8
Other			9,294				10,229			(9.1	)			(4.6	)			(1.7	)			(2.8	)
Total		$	762,631			$	557,297			36.8		%		(3.0	)	%		35.3		%		4.5		%
Corporate
Other		$	14,790			$	10,456			41.4		%		-		%		-		%		41.4		%
Total		$	14,790			$	10,456			41.4		%		-		%		-		%		41.4		%

PATTERSON COMPANIES, INC.
SUPPLEMENTARY FINANCIAL DATA
(In thousands, except per share data)
(Unaudited)
		Three Months Ended
		July 30,				August 1,
		2016				2015
Operating income (loss)
Dental		$	60,295			$	67,252
Animal Health			14,829				12,972
Corporate			(9,708	)			(18,047	)
Total		$	65,416			$	62,177
Other income (expense)
Interest income		$	1,295			$	789
Interest expense			(10,162	)			(12,143	)
Other			1,069				(119	)
Total		$	(7,798	)		$	(11,473	)

PATTERSON COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
		Three Months Ended
		July 30,				August 1,
		2016				2015
Operating activities:
Net income		$	38,906			$	29,703
Net income from discontinued operations			-				9,392
Net income from continuing operations			38,906				20,311
Adjustments to reconcile net income from continuing operations to net cash provided by operating activities:
Depreciation & amortization			20,359				15,247
Non-cash employee compensation			9,184				6,965
Change in assets and liabilities, net of acquired			(141,228	)			(34,829	)
Net cash (used in) provided by operating activities- continuing operations			(72,779	)			7,694
Net cash used in operating activities- discontinued operations			-				(2,270	)
Net cash (used in) provided by operating activities			(72,779	)			5,424
Investing activities:
Additions to property and equipment, net of disposals			(15,042	)			(17,064	)
Acquisitions and equity investments			-				(1,104,730	)
Other investing activities			9,337				-
Net cash used in investing activities- continuing operations			(5,705	)			(1,121,794	)
Net cash used in investing activities- discontinued operations			-				(54	)
Net cash used in investing activities			(5,705	)			(1,121,848	)
Financing activities:
Dividends paid			(24,197	)			(23,128	)
Repurchases of common stock			(25,000	)			-
Proceeds from issuance of long-term debt, net			-				988,400
Retirement of long-term debt			(4,125	)			-
Draw on revolver			88,000				-
Other financing activities			(506	)			(745	)
Net cash provided by financing activities			34,172				964,527
Effect of exchange rate changes on cash			(3,163	)			(8,923	)
Net change in cash and cash equivalents		$	(47,475	)		$	(160,820	)

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