Patterson Companies Reports Fiscal 2017 Third-Quarter Operating Results

  • Reported net sales totaled $1.4 billion, essentially flat
    year-over-year. Sales grew 1.4 percent in constant currency.
  • GAAP earnings from continuing operations were $0.29 per diluted
    share.
  • Adjusted earnings1 from continuing
    operations totaled $0.58 per diluted share.
  • Company narrows range of fiscal 2017 adjusted earnings1 guidance
    from continuing operations.

ST. PAUL, Minn.–(BUSINESS WIRE)–Patterson Companies, Inc. (Nasdaq: PDCO) today reported consolidated net
sales of $1.4 billion (see attached Sales Summary for further details)
in its fiscal third quarter ended January 28, 2017, down 0.2 percent
over the same period last year. Adjusting for the effects of currency
translation, sales improved 1.4 percent.

Reported net income from continuing operations was $27.8 million, or
$0.29 per diluted share, compared to $57.2 million, or $0.60 per diluted
share, in last year’s fiscal third quarter. Adjusted net income1 from
continuing operations, which excludes certain non-recurring and deal
amortization costs, totaled $55.4 million for the third quarter of
fiscal 2017, down 14.9 percent from $65.1 million in the same quarter
last year. Adjusted net income1 from continuing operations
includes the previously disclosed pre-tax step-up in enterprise resource
planning expenses, which for the quarter totaled approximately $11
million. Adjusted earnings per diluted share1 from continuing
operations totaled $0.58 in the 2017 third quarter, down 14.7 percent
year-over-year.

Our performance in the fiscal 2017 third quarter reflects our ongoing
efforts to adapt and capitalize in end markets that continue to present
both challenges and opportunities,” said Scott Anderson, chairman,
president and chief executive officer. “Market conditions in our
respective business segments were similar to the first half of our
fiscal year. Our Dental strategy to better serve the full range of
customers with a wider core equipment product portfolio, delivered and
supported at a higher level of value, yielded positive results. In our
Animal Health segment, we explored and began to implement initiatives to
better convert our sales execution into margin improvement. The
long-term trends in our end markets remain promising, and we are
confident that our present efforts will help us leverage the growth
opportunities ahead.”

Patterson Dental
Reported net sales in our Dental segment,
which represented approximately 45 percent of total company sales, were
$626.3 million, down 1.8 percent from the same quarter last year. Sales
declined 2.0 percent on a constant currency basis from the fiscal 2016
third quarter. On that same basis, year-over-year sales by category were
as follows:

  • Consumable dental supplies decreased 2.8 percent
  • Equipment sales declined 1.0 percent, reflecting strong performance in
    core equipment, offset by weaker performance in technology products
  • Other services and products, primarily composed of technical service,
    parts and labor, software support services and office supplies,
    decreased 1.3 percent

Anderson continued, “Consumable sales during the quarter reflected
similar market conditions experienced in the first half of our fiscal
year. However, we are encouraged by core equipment sales in the third
quarter and believe the improvement in this category validates our
experience and success with broadening our product offerings to achieve
future growth, while also increasing sales with longstanding partners.
Through expanding our product portfolio and enhancing our sales
productivity and sophistication, we are better positioning Patterson
Dental to serve a wider range of customers and clinical environments.”

As disclosed in the fiscal 2017 second quarter, during the fiscal 2017
third quarter Patterson Companies recorded a pre-tax non-cash impairment
charge of $36.3 million, or $23.0 million after taxes or $0.24 per
diluted share, related to the distribution fee associated with the CEREC
product component of our relationship with Sirona Dental Systems. While
this non-cash accounting charge will not affect Patterson’s liquidity,
cash flows or compliance with its debt covenants, the company expects
this decision to negatively affect near-term operations.

Patterson Animal Health
Reported net sales for Patterson
Animal Health, which comprised approximately 55 percent of the company’s
total sales, were $762.6 million, 1.7 percent higher than last year.
Sales increased 4.9 percent on a constant currency basis from the fiscal
2016 third quarter. On that same basis, year-over-year sales by category
were as follows:

  • Companion animal sales improved 8.5 percent
  • Production animal sales rose 1.3 percent, reflecting strong sales in
    swine, offset by lower sales in beef- and dairy-cattle categories

We continued to face margin pressure with certain pharmaceutical
products in our Animal Health segment during the third quarter, however,
we identified and began to implement approaches to adapt our sales and
marketing strategies to achieve more profitable growth,” added Anderson.
While our work on this front continues, we began to see some
improvement late in the third quarter. We believe these efforts, in
combination with our scale, commitment to sales execution, and long
history of collaboration with product manufacturers, will help pave the
way to margin improvement.”

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
Fiscal year-to-date,
Patterson repurchased approximately 2.0 million shares of its
outstanding common stock, with a value of $86.9 million, leaving
approximately 14.5 million shares for repurchase under the current
authorization, which expires in March 2018. The company also paid $23.3
million in cash dividends to shareholders in the third quarter and $70.9
million in cash dividends to shareholders in the first nine months of
fiscal 2017.

Year-to-Date Results1
Reported net sales
for the first nine months of fiscal 2017 totaled $4.1 billion, a 5.5
percent year-over-year increase. Adjusting for the effects of currency
translation, sales increased 7.3 percent. Sales improved 8.8 percent in
constant currency when accounting for the extra week in the prior
nine-month period. Reported net income from continuing operations was
$112.4 million, or $1.17 per diluted share, compared to $120.1 million,
or $1.22 per diluted share in last year’s period. Adjusted net income
from continuing operations1, which excludes certain
non-recurring and deal amortization costs and tax costs related to tax
repatriation, totaled $157.7 million, or $1.64 per diluted share,
compared to adjusted net income from continuing operations of $167.3
million, or $1.70 per diluted share, in the year-ago period. Sales in
the prior year nine-month period included an extra sales week and
approximately six fewer weeks of contribution from Animal Health
International, Inc.

Business Outlook
Anderson concluded, “Patterson Companies is
evolving its businesses on multiple fronts in response to market
dynamics for improved, long-term top- and bottom-line growth. In Dental,
we are taking the important steps necessary to further increase our
relevancy and value to all practice environments. In Animal Health, we
are approximately halfway through our three-year integration timeframe.
We are combining synergy progress with our current efforts to improve
profitability to enhance the long-term performance in this segment.
While these combined efforts will take time to fully realize their
impact, they are critical to driving the full potential of the platform
we have built.”

Fiscal 2017 Guidance
With one quarter remaining in fiscal
2017, Patterson today narrowed its fiscal 2017 earnings guidance from
continuing operations, which is provided on both a GAAP and non-GAAP
adjusted1 basis:

  • GAAP earnings are now expected to be in the range of $1.71 to $1.77
    per diluted share.
  • Non-GAAP adjusted earnings1 are now expected to be in the
    range of $2.27 to $2.33 per diluted share.
  • Our non-GAAP adjusted earnings1 guidance excludes the
    after-tax impact of:

    • Deal amortization expense of approximately $27 million ($0.28 per
      diluted share)
    • Non-cash impairment charges of approximately $23 million ($0.24
      per diluted share)
    • Integration and business restructuring expenses of approximately
      $5 million ($0.05 per diluted share)
    • Transaction-related costs of approximately $2 million ($0.02 per
      diluted share)
    • Benefit from cash repatriation tax adjustment of approximately $2
      million ($0.03 per diluted share)

Our guidance is for current continuing 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 the first nine months of
fiscal 2017, and includes the previously disclosed pre-tax $25 million
step-up in operating expense associated with the enterprise resource
planning system implementation.

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 earnings from continuing operations, net income
from continuing operations, and earnings per diluted share from
continuing operations, for the impact of transaction related costs, deal
amortization, integration and business restructuring expenses,
accelerated debt issuance costs and tax impact of cash repatriation.

Management believes that these non-GAAP measures may provide a helpful
representation of the company’s current quarter performance, 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 constant currency used in this release 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.

Third-Quarter Conference Call and Replay
Patterson’s
third-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 fiscal 2017 third quarter conference call can be heard for one week
at 888-203-1112 and by providing the Conference ID 7051341 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.

Source: Patterson Companies, Inc.

 
PATTERSON COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
               
Three Months Ended Nine Months Ended
January 28, January 30, January 28, January 30,
2017 2016 2017 2016
 
Net sales $ 1,397,418 $ 1,400,853 $ 4,148,095 $ 3,932,933
 
Gross profit 329,761 339,864 965,899 959,007
 
Operating expenses   283,207     244,135     774,126     717,638  
 
Operating income from continuing operations 46,554 95,729 191,773 241,369
 
Other income and expense:
Other income, net 994 830 4,980 2,454
Interest expense   (11,400 )   (10,634 )   (31,659 )   (39,931 )
 
Income from continuing operations before taxes 36,148 85,925 165,094 203,892
 
Income tax expense   8,379     28,735     52,663     83,828  
 
Net income from continuing operations 27,769 57,190 112,431 120,064
Net income (loss) from discontinued operations   (3,229 )   (750 )   (3,229 )   1,500  
Net income $ 24,540   $ 56,440   $ 109,202   $ 121,564  
 
Basic earnings (loss) per share:
Continuing operations $ 0.29 $ 0.60 $ 1.18 $ 1.23
Discontinued operations   (0.03 )   (0.01 )   (0.03 )   0.01  
Net basic earnings per share $ 0.26   $ 0.59   $ 1.15   $ 1.24  
 
Diluted earnings (loss) per share:
Continuing operations $ 0.29 $ 0.60 $ 1.17 $ 1.22
Discontinued operations   (0.03 )   (0.01 )   (0.03 )   0.01  
Net diluted earnings per share $ 0.26   $ 0.59   $ 1.14   $ 1.23  
 
Shares:
Basic 94,737 95,335 95,252 97,809
Diluted 95,359 95,930 95,915 98,488
 
Dividends declared per common share $ 0.24 $ 0.22 $ 0.72 $ 0.66
 
 
PATTERSON COMPANIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
       
January 28,

   April 30,   

2017 2016
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 121,739 $ 137,453
Receivables 810,155 796,693
Inventory 827,057 722,140
Prepaid expenses and other current assets   112,265   91,255
Total current assets 1,871,216 1,747,541
Property and equipment, net 300,395 293,315
Goodwill and other intangible assets 1,247,480 1,325,889
Long-term receivables, net and other   174,971   154,059
Total assets $ 3,594,062 $ 3,520,804
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 547,662 $ 566,253
Other accrued liabilities 228,037 226,582
Current maturities of long-term debt 14,754 16,500
Borrowings on revolving credit   198,000   20,000
Total current liabilities 988,453 829,335
Long-term debt 1,001,775 1,022,155
Other non-current liabilities   217,759   227,568
Total liabilities 2,207,987 2,079,058
Stockholders’ equity   1,386,075   1,441,746
Total liabilities and stockholders’ equity $ 3,594,062 $ 3,520,804
 
 
PATTERSON COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

 

       
Nine Months Ended
January 28, January 30,
2017 2016
 
Operating activities:
Net income $ 109,202 $ 121,564
Net income (loss) from discontinued operations   (3,229 )   1,500  
Net income from continuing operations 112,431 120,064
Adjustments to reconcile net income from continuing operations to
net cash used in operating activities:
Depreciation and amortization 63,056 58,817
Intangible asset impairment 36,312
Non-cash employee compensation 17,254 20,587
Change in assets and liabilities, net of acquired   (238,464 )   (247,015 )
Net cash used in operating activities- continuing operations (9,411 ) (47,547 )
Net cash used in operating activities- discontinued operations   (3,229 )   (38,985 )
Net cash used in operating activities (12,640 ) (86,532 )
Investing activities:
Additions to property and equipment (37,457 ) (56,280 )
Acquisitions and equity investments, net of cash assumed (1,106,583 )
Proceeds from sale of securities 48,744
Other investing activities   35,869      
Net cash used in investing activities- continuing operations (1,588 ) (1,114,119 )
Net cash provided by investing activities- discontinued operations       714,680  
Net cash used in investing activities (1,588 ) (399,439 )
Financing activities:
Dividends paid (70,947 ) (67,010 )
Repurchases of common stock (84,651 ) (200,000 )
Proceeds from issuance of long-term debt, net 988,400
Debt amendment costs (1,266 )
Retirement of long-term debt (22,550 ) (678,250 )
Draw on revolver 178,000 198,000
Other financing activities   5,495     5,523  
Net cash provided by financing activities 4,081 246,663
Effect of exchange rate changes on cash   (5,567 )   (10,251 )
Net change in cash and cash equivalents $ (15,714 ) $ (249,559 )
 
 
PATTERSON COMPANIES, INC.
SALES SUMMARY
(Dollars in thousands)
(Unaudited)
                       
Total Foreign Animal Health
January 28, January 30, Sales

 Exchange 

International

 Internal 

2017 2016

  Growth  

Impact Impact Growth

Three Months Ended

 
Consolidated net sales
Consumable $ 1,064,098 $ 1,059,838 0.4 % (2.1 )% % 2.5 %
Equipment and software 249,047 248,779 0.1 % 0.2 % % (0.1 )%
Other   84,273   92,236 (8.6 )% (0.7 )% % (7.9 )%
Total $ 1,397,418 $ 1,400,853 (0.2 )% (1.6 )% % 1.4 %
 
Dental
Consumable $ 325,181 $ 333,835 (2.6 )% 0.2 % % (2.8 )%
Equipment and software 230,431 232,334 (0.8 )% 0.2 % % (1.0 )%
Other   70,731   71,482 (1.1 )% 0.2 % % (1.3 )%
Total $ 626,343 $ 637,651 (1.8 )% 0.2 % % (2.0 )%
 
Animal Health
Consumable $ 738,917 $ 726,003 1.8 % (3.2 )% % 5.0 %
Equipment and software 18,616 16,445 13.2 % (0.2 )% % 13.4 %
Other   5,044   7,265 (30.6 )% (10.9 )% % (19.7 )%
Total $ 762,577 $ 749,713 1.7 % (3.2 )% % 4.9 %
 
Corporate
Other $ 8,498 $ 13,489 (37.0 )% % % (37.0 )%
Total $ 8,498 $ 13,489 (37.0 )% % % (37.0 )%
 
 

Nine Months Ended

 
Consolidated net sales
Consumable $ 3,252,551 $ 3,042,634 6.9 % (2.2 )% 6.4 % 2.7 %
Equipment and software 627,187 610,071 2.8 % % % 2.8 %
Other   268,357   280,228 (4.2 )% (0.8 )% (0.1 )% (3.3 )%
Total $ 4,148,095 $ 3,932,933 5.5 % (1.8 )% 4.9 % 2.4 %
 
Dental
Consumable $ 982,366 $ 1,024,323 (4.1 )% (0.1 )% % (4.0 )%
Equipment and software 586,375 572,771 2.4 % % % 2.4 %
Other   214,170   216,996 (1.3 )% % % (1.3 )%
Total $ 1,782,911 $ 1,814,090 (1.7 )% % % (1.7 )%
 
Animal Health
Consumable $ 2,270,185 $ 2,018,311 12.5 % (3.3 )% 9.6 % 6.2 %
Equipment and software 40,812 37,300 9.4 % (0.2 )% % 9.6 %
Other   21,357   25,852 (17.4 )% (8.1 )% (0.7 )% (8.6 )%
Total $ 2,332,354 $ 2,081,463 12.1 % (3.3 )% 9.3 % 6.1 %
 
Corporate
Other $ 32,830 $ 37,380 (12.2 )% % % (12.2 )%
Total $ 32,830 $ 37,380 (12.2 )% % % (12.2 )%
 
 
PATTERSON COMPANIES, INC.
OPERATING INCOME BY SEGMENT
(In thousands)
(Unaudited)
               
Three Months Ended Nine Months Ended
January 28, January 30, January 28, January 30,
2017 2016 2017 2016
 
Operating income (loss)
Dental $ 40,018 $ 82,108 $ 177,356 $ 223,454
Animal Health 23,777 25,959 60,460 64,108
Corporate   (17,241 )   (12,338 )   (46,043 )   (46,193 )
Total $ 46,554   $ 95,729   $ 191,773   $ 241,369  
 
 
PATTERSON COMPANIES, INC.
RECONCILIATION OF GAAP TO NON-GAAP MEASURES
(Dollars in thousands, except per share amounts)
(Unaudited)
                               
For the three months ended January 28, 2017 GAAP Transaction-related costs Deal amortization Intangible asset impairment Integration and business restructuring expenses Accelerated debt issuance costs Tax impact of cash repatriation Non-GAAP
Operating income from continuing operations $ 46,554 $ 236 $ 9,951 $ 36,312 $ 625 $ $ $ 93,678
Other expense, net   (10,406 )                 (10,406 )
Income from continuing operations before taxes 36,148 236 9,951 36,312 625 83,272
Income tax expense   8,379     89   3,480   13,263   236     2,406     27,853  
Net income from continuing operations $ 27,769   $ 147 $ 6,471 $ 23,049 $ 389 $ $ (2,406 ) $ 55,419  
               
Diluted EPS from continuing operations* $ 0.29   $ $ 0.07 $ 0.24 $ $ $ (0.03 ) $ 0.58  
 
Consolidated operating income as a % of sales 3.3 % 6.7 %
Effective tax rate 23.2 % 33.4 %
 
 
For the three months ended January 30, 2016 GAAP Transaction-related costs Deal amortization Intangible asset impairment Integration and business restructuring expenses Accelerated debt issuance costs Tax impact of cash repatriation Non-GAAP
Operating income from continuing operations $ 95,729 $ 44 $ 10,793 $ $ 1,613 $ $ $ 108,179
Other expense, net   (9,804 )                 (9,804 )
Income from continuing operations before taxes 85,925 44 10,793 1,613 98,375
Income tax expense   28,735     16   3,872     611         33,234  
Net income from continuing operations $ 57,190   $ 28 $ 6,921 $ $ 1,002 $ $   $ 65,141  
               
Diluted EPS from continuing operations* $ 0.60   $ $ 0.07 $ $ 0.01 $ $   $ 0.68  
 
Consolidated operating income as a % of sales 6.8 % 7.7 %
Effective tax rate 33.4 % 33.8 %
 
 
For the nine months ended January 28, 2017 GAAP Transaction-related costs Deal amortization Intangible asset impairment Integration and business restructuring expenses Accelerated debt issuance costs Tax impact of cash repatriation Non-GAAP
Operating income from continuing operations $ 191,773 $ 1,479 $ 30,212 $ 36,312 $ 6,304 $ $ $ 266,080
Other expense, net   (26,679 )                 (26,679 )
Income from continuing operations before taxes 165,094 1,479 30,212 36,312 6,304 239,401
Income tax expense   52,663     558   10,394   13,263   2,383     2,406     81,667  
Net income from continuing operations $ 112,431   $ 921 $ 19,818 $ 23,049 $ 3,921 $ $ (2,406 ) $ 157,734  
               
Diluted EPS from continuing operations* $ 1.17   $ 0.01 $ 0.21 $ 0.24 $ 0.04 $ $ (0.03 ) $ 1.64  
 
Consolidated operating income as a % of sales 4.6 % 6.4 %
Effective tax rate 31.9 % 34.1 %
 
 
For the nine months ended January 30, 2016 GAAP Transaction-related costs Deal amortization Intangible asset impairment Integration and business restructuring expenses Accelerated debt issuance costs Tax impact of cash repatriation Non-GAAP
Operating income from continuing operations $ 241,369 $ 13,132 $ 28,689 $ $ 5,196 $ $ $ 288,386
Other expense, net   (37,477 )           5,153       (32,324 )
Income from continuing operations before taxes 203,892 13,132 28,689 5,196 5,153 256,062
Income tax expense   83,828     3,125   10,182     1,965   1,948   (12,300 )   88,748  
Net income from continuing operations $ 120,064   $ 10,007 $ 18,507 $ $ 3,231 $ 3,205 $ 12,300   $ 167,314  
               
Diluted EPS from continuing operations* $ 1.22   $ 0.10 $ 0.19 $ $ 0.03 $ 0.03 $ 0.12   $ 1.70  
 
Consolidated operating income as a % of sales 6.1 % 7.3 %
Effective tax rate 41.1 % 34.7 %
 
* May not sum due to rounding
 

Contacts

Patterson Companies, Inc.
Ann B. Gugino, 651-686-1600
Executive
Vice President & CFO
or
John M. Wright, 651-686-1364
Vice
President, Investor Relations

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