Patterson Companies Reports Fiscal 2019 First-Quarter Results

First-quarter reported net sales totaled $1.3 billion, up 2.5 percent.

Aug. 30, 2018 11:00 UTC
  • 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 earnings1 range to $1.40 to $1.50 per diluted share.

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

 

Contacts

Patterson Companies Inc.
John M. Wright, Investor Relations, 651.686.1364
EMAIL: john.wright@pattersoncompanies.com
WEB: pattersoncompanies.com

 

 
 

Source: Patterson Companies Inc.

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