Market Overview

Patterson Companies Reports Fiscal 2019 First-Quarter Results

Share:
  • First-quarter reported net sales totaled $1.3 billion, up 2.5
    percent.
  • First-quarter GAAP loss of $0.05 per diluted share.
  • Company books reserve for anticipated settlement of In re Dental
    Supplies Litigation
    matter.
  • First-quarter adjusted earnings1 of $0.26
    per diluted share.
  • Company generated $205.5 million of cash flow from operating
    activities and reduced debt by $160.6 million in the quarter.
  • Company updates fiscal 2019 GAAP earnings range to $0.84 to $0.94
    per diluted share and adjusted earnings
    1
    range to $1.40 to $1.50 per diluted share.

Patterson Companies, Inc. (NASDAQ:PDCO) today reported consolidated net
sales of approximately $1.3 billion (see attached Sales Summary for
further details) in its fiscal first quarter ended July 28, 2018, an
increase of 2.5 percent compared to the same period last year. Internal
sales, which adjust for the effects of currency translation and changes
in product selling relationships, increased 2.3 percent.

Reported net loss attributable to Patterson Companies, Inc. for the
first quarter of fiscal year 2019 was $4.5 million, or $0.05 per diluted
share, compared to net income attributable to Patterson Companies, Inc.
of $30.8 million, or $0.33 per diluted share, in last year's fiscal
first quarter. During the quarter, Patterson booked a pre-tax reserve of
$28.3 million for the anticipated settlement of purported class action
antitrust litigation. Adjusted net income1 attributable to
Patterson Companies, Inc., which excludes deal amortization costs and a
reserve for the anticipated legal settlement, totaled $24.0 million for
the first quarter of fiscal 2019, or $0.26 per diluted share, compared
to $41.4 million in the same quarter last year, or $0.44 per diluted
share. The reported net loss and the adjusted net income attributable to
Patterson Companies, Inc. were both impacted by the decrease in
operating margins within the Dental segment.

Mark Walchirk, president and CEO of Patterson Companies, said, "Our
results for the quarter did not meet our expectations. While our ongoing
initiatives to improve the customer experience and enhance sales
execution helped drive improved top line performance, these results were
offset by competitive pricing pressures which negatively impacted our
margins. The Animal Health business performed in line with our
expectations, with solid revenue growth across both companion and
production and particular strength in our private label category. Dental
segment revenues benefited from year-over-year growth across all
equipment categories and improving trends in consumables.

"Despite improving sales results, operating margins were below our
expectations. We continue to take steps to stabilize our margins,
including a thorough evaluation of our cost structure, but expect the
pricing pressures to persist in the coming quarters. As a result, we are
updating our fiscal 2019 earnings guidance to reflect our revised
expectations for the remainder of the year."

Patterson Animal Health

Reported net sales in our Animal Health segment for the first quarter of
fiscal 2019, which comprised approximately 62 percent of the company's
total sales, were $825.2 million compared to $776.1 million in the same
quarter last year. Internal sales for the segment increased 6.0 percent
from the fiscal 2018 first quarter. Year-over-year internal sales by
category were as follows:

  • Production animal increased 6.7 percent.
  • Companion animal rose 5.5 percent.

Patterson Dental

Reported net sales in our Dental segment for the first quarter, which
represented approximately 38 percent of total company sales, were $506.1
million compared to $518.8 million in the same quarter last year.
Internal sales declined 2.7 percent compared to the fiscal 2018 first
quarter. Year-over-year internal sales by category were as follows:

  • Consumable dental supplies decreased 5.2 percent.
  • Equipment and software increased 5.4 percent.
  • Other services and products, primarily composed of technical service,
    parts and labor, software support services and office supplies
    decreased 5.6 percent.

Balance Sheet and Capital Allocation

During the first quarter of fiscal 2019, Patterson Companies generated
$205.5 million of cash from operating activities compared to a use of
$46.0 million in the same period last year, yielding an improvement of
$251.5 million year-over-year. Debt was reduced by $160.6 million in the
quarter. In the first quarter of fiscal 2019, Patterson Companies paid
$25.3 million in cash dividends to shareholders.

Legal Reserve

In August 2018, Patterson Companies commenced settlement discussions
with the plaintiffs in the In re Dental Supplies Litigation matter.
Based upon such discussions, although Patterson Companies has not yet
entered into a definitive settlement agreement and any such agreement
would be subject to court approval, Patterson Companies has established
a pre-tax reserve for this matter of $28.3 million. The company
anticipates the execution of a settlement agreement and the submission
of such agreement to the court for approval.

FY2019 Guidance

Patterson Companies today updated fiscal 2019 earnings guidance, which
is provided on both a GAAP and non-GAAP adjusted1 basis:

  • GAAP earnings are expected to be in the range of $0.84 to $0.94 per
    diluted share.
  • Non-GAAP adjusted earnings1 are expected to be in
    the range of $1.40 to $1.50 per diluted share.
  • Our non-GAAP adjusted earnings1 guidance excludes
    the after-tax impact of:

- Deal amortization expenses of approximately $31.1 million ($0.33 per
diluted share).

- Legal reserve costs of $20.7 million ($0.22 per diluted share).

Our guidance is for current operations as well as completed or
previously announced acquisitions and does not include the impact of
potential future acquisitions or similar transactions, if any, or
impairments and material restructurings beyond those previously publicly
disclosed. Our guidance assumes North American and international market
conditions similar to those experienced in fiscal 2018.

1Non-GAAP Financial Measures

The Reconciliation of GAAP to non-GAAP Measures table appearing behind
the accompanying financial information is provided to adjust reported
GAAP measures, namely operating income, income or loss before taxes,
income tax expense or benefit, net income or loss, net income or loss
attributable to Patterson Companies, Inc. and diluted earnings or loss
per share attributable to Patterson Companies, Inc., for the impact of
deal amortization, integration and business restructuring expenses and
legal reserve costs along with the related tax effects of these items,
the impact of the 2017 Tax Act and other discrete tax matters.

Management believes that these non-GAAP measures may provide a helpful
representation of the company's first-quarter performance and earnings
guidance, and enable comparison of financial results between periods
where certain items may vary independent of business performance. These
non-GAAP financial measures are presented solely for informational and
comparative purposes and should not be regarded as a replacement for
corresponding, similarly captioned, GAAP measures.

In addition, the term "internal sales" used in this release represents
net sales adjusted to exclude foreign currency impact and changes in
product selling relationships. 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 Companies' fiscal 2019 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 the Patterson Companies website.
A replay of the fiscal 2019 first-quarter conference call can be heard
for one week at 800-585-8367 and by providing the Conference ID 4196947
when prompted.

About Patterson Companies Inc.

Patterson Companies Inc. (Nasdaq: PDCO) 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. Such risks and uncertainties include,
without limitation, operations disruptions attributable to our
enterprise resource planning system implementation; our ability to
attract or retain qualified sales representatives and service
technicians who relate directly with our customers; the reduction,
modification, cancellation or delay of purchases of innovative,
high-margin equipment; material changes in our purchasing relationships
with suppliers; changes in general market and economic conditions; and
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 28,
2018
July 29,
2017
 
Net sales $ 1,336,320 $ 1,304,115
 
Gross profit 283,663 299,048
 
Operating expenses   279,149     242,215  
 
Operating income 4,514 56,833
 
Other income (expense):
Other income, net 1,253 1,512
Interest expense   (11,221 )   (11,203 )
 
Income (loss) before taxes (5,454 ) 47,142
 
Income tax expense (benefit)   (945 )   16,295  
 
Net income (loss) (4,509 ) 30,847
Net loss attributable to noncontrolling interests   (53 )   -  
Net income (loss) attributable to Patterson Companies, Inc. $ (4,456 ) $ 30,847  
 
Earnings (loss) per share attributable to Patterson Companies, Inc.:
Basic $ (0.05 ) $ 0.33  
Diluted $ (0.05 ) $ 0.33  
 
Weighted average shares:
Basic 92,529 93,350
Diluted 92,529 94,019
 
Dividends declared per common share $ 0.26 $ 0.26

PATTERSON COMPANIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
   
July 28,
2018
April 28,
2018
ASSETS
Current assets:
Cash and cash equivalents $ 91,476 $ 62,984
Receivables 520,578 826,877
Inventory 845,507 779,834
Prepaid expenses and other current assets   183,963   103,029
Total current assets 1,641,524 1,772,724
Property and equipment, net 289,658 290,590
Goodwill and other intangible assets 1,193,093 1,205,401
Long-term receivables, net and other   163,483   202,949
Total assets $ 3,287,758 $ 3,471,664
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 588,041 $ 610,368
Other accrued liabilities 218,847 205,415
Current maturities of long-term debt 78,442 76,598
Borrowings on revolving credit   32,000   16,000
Total current liabilities 917,330 908,381
Long-term debt 743,706 922,030
Other non-current liabilities   179,626   179,463
Total liabilities 1,840,662 2,009,874
Stockholders' equity   1,447,096   1,461,790
Total liabilities and stockholders' equity $ 3,287,758 $ 3,471,664
PATTERSON COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
   
Three Months Ended
July 28,
2018
July 29,
2017
 
Operating activities:
Net income (loss) $ (4,509 ) $ 30,847
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 20,857 21,104
Non-cash employee compensation 6,357 8,656
Change in assets and liabilities, net of acquired   182,756     (106,635 )
Net cash provided by (used in) operating activities 205,461 (46,028 )
Investing activities:
Additions to property and equipment (10,184 ) (6,674 )
Collection of deferred purchase price receivables 15,509 12,191
Other investing activities   2,244     -  
Net cash provided by investing activities 7,569 5,517
Financing activities:
Dividends paid (25,289 ) (25,210 )
Repurchases of common stock - (37,500 )
Retirement of long-term debt (176,633 ) -
Draw on revolver 16,000 104,000
Other financing activities   2,117     1,916  
Net cash provided by (used in) financing activities (183,805 ) 43,206
Effect of exchange rate changes on cash   (733 )   2,125  
Net change in cash and cash equivalents $ 28,492   $ 4,820  

PATTERSON COMPANIES, INC.

SALES SUMMARY

(Dollars in thousands)

(Unaudited)

           
July 28,

2018

July 29,

2017

Total

Sales

Growth

Foreign

Exchange

Impact

  Other(a)

Internal
Sales
Growth

Three Months Ended
 
Consolidated Net Sales
Consumable $ 1,109,397 $ 1,080,105 2.7 % 0.5 % (0.3 ) % 2.5 %
Equipment and software 146,898 136,949 7.3 0.1 - 7.2
Other   80,025   87,061 (8.1 )   0.2   -     (8.3 )  
Total $ 1,336,320 $ 1,304,115 2.5   % 0.5 % (0.3 ) % 2.3   %
 
Dental
Consumable $ 304,239 $ 320,178 (5.0 ) % 0.2 % - % (5.2 ) %
Equipment and software 134,957 127,863 5.5 0.1 - 5.4
Other   66,868   70,766 (5.5 )   0.1   -     (5.6 )  
Total $ 506,064 $ 518,807 (2.5 ) % 0.2 % -   % (2.7 ) %
 
Animal Health
Consumable $ 805,158 $ 759,927 6.0 % 0.7 % (0.4 ) % 5.7 %
Equipment and software 11,941 9,086 31.4 - - 31.4
Other   8,115   7,123 13.9     1.7   -     12.2    
Total $ 825,214 $ 776,136 6.3   % 0.7 % (0.4 ) % 6.0   %
 
Corporate
Other $ 5,042 $ 9,172 (45.0 ) % - % -   % (45.0 ) %
Total $ 5,042 $ 9,172 (45.0 ) % - % -   % (45.0 ) %

(a) Sales of certain products previously recognized on a gross basis
were recognized on a net basis during the three months ended July 28,
2018.

PATTERSON COMPANIES, INC.

OPERATING INCOME BY SEGMENT
(In thousands)
(Unaudited)
   
Three Months Ended
July 28,
2018
July 29,
2017
 
Operating income (loss)
Dental $ 35,873 $ 59,519
Animal Health 19,032 16,676
Corporate   (50,391 )   (19,362 )
Total $ 4,514   $ 56,833  
PATTERSON COMPANIES, INC.
RECONCILIATION OF GAAP TO NON-GAAP MEASURES
(Dollars in thousands, except per share amounts)
(Unaudited)
         

For the three months ended July 28, 2018

GAAP

Deal
amortization

Integration
and business
restructuring

expenses

Legal
reserve

Non-GAAP
Operating income $ 4,514 $ 9,966 $ - 28,263 $ 42,743
Other expense, net   (9,968 )   -   -   -   (9,968 )
Income (loss) before taxes (5,454 ) 9,966 - 28,263 32,775
Income tax expense (benefit)   (945 )   2,286   -   7,523   8,864  
Net income (loss) (4,509 ) 7,680 - 20,740 23,911
Net loss attributable to noncontrolling interests   (53 )   -   -   -   (53 )
Net income (loss) attributable to Patterson Companies, Inc. $ (4,456 ) $ 7,680 $ - $ 20,740 $ 23,964  
         
Diluted earnings (loss) per share attributable to Patterson
Companies, Inc.*
$ (0.05 ) $ 0.08 $ - $ 0.22 $ 0.26  
 
Operating income as a % of sales 0.3 % 3.2 %
Effective tax rate 17.3 % 27.0 %
 
For the three months ended July 29, 2017 GAAP

Deal
amortization

 

Integration
and business
restructuring

expenses

 

Legal
reserve

  Non-GAAP
Operating income $ 56,833 $ 9,630 $ 6,906 $ - $ 73,369
Other expense, net   (9,691 )   -   -   -   (9,691 )
Income (loss) before taxes 47,142 9,630 6,906 - 63,678
Income tax expense (benefit)   16,295     3,345   2,611   -   22,251  
Net income (loss) 30,847 6,285 4,295 - 41,427
Net loss attributable to noncontrolling interests   -     -   -   -   -  
Net income (loss) attributable to Patterson Companies, Inc. $ 30,847   $ 6,285 $ 4,295 $ - $ 41,427  
         
Diluted earnings (loss) per share attributable to Patterson
Companies, Inc.*
$ 0.33   $ 0.07 $ 0.04 $ - $ 0.44  
 
Operating income as a % of sales 4.4 % 5.6 %
Effective tax rate 34.6 % 34.9 %
 
* May not sum due to rounding

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