Patterson Companies Reports Fiscal 2018 Third-Quarter Results

  • Reported net sales totaled $1.38 billion.
  • GAAP earnings from continuing operations increased to $1.18 per diluted share.
  • Adjusted earnings1 from continuing operations declined to $0.43 per diluted share.
  • Company revises fiscal 2018 outlook and now expects adjusted earnings1 from continuing operations to be in the range of $1.65 to $1.70 per diluted share.
  • Announces CFO transition.

ST. PAUL, Minn.--()--Patterson Companies, Inc. (Nasdaq: PDCO) today reported consolidated net sales of approximately $1.4 billion (see attached Sales Summary for further details) in its fiscal third quarter ended January 27, 2018, a decline of 1.6 percent compared to the same period last year. Adjusting for the effects of currency translation, sales declined 2.7 percent.

Reported net income from continuing operations for the third quarter of fiscal year 2018 was $109.0 million, or $1.18 per diluted share, compared to $27.8 million, or $0.29 per diluted share, in last year’s fiscal third quarter. The current period includes the recognition of a provisional net tax benefit of $77.3 million, reflecting the revaluation of tax-deferred assets and liabilities, net of a one-time transition tax on unremitted foreign earnings as a result of the Tax Cuts and Jobs Act (“2017 Tax Act”) enacted during the third quarter.

Adjusted net income1 from continuing operations, which excludes certain non-recurring items, deal amortization costs and the provisional net tax benefit related to the 2017 Tax Act, totaled $39.6 million for the third quarter of fiscal 2018, down 28.6 percent from $55.4 million in the same quarter last year, driven by decreased sales and gross margin compression. Adjusted earnings1 per diluted share from continuing operations totaled $0.43 in the third quarter, down 25.9 percent year-over-year.

“Our third-quarter results did not meet our expectations,” said Mark Walchirk, president and CEO of Patterson Companies. “Since joining Patterson 90 days ago, I have begun a thorough review of our business and the factors impacting performance. We are moving quickly to implement an initial set of actions to improve our results, focused on enhancing the customer experience and driving better execution across the business.”

Walchirk continued, “We have much more work to do to position Patterson to reach its full potential, but I am confident in the strength of our end markets, our deep customer relationships and the broad value proposition we offer. We are committed to continuing to take clear actions to improve our execution and set the foundation to drive improved performance and long-term value.”

Patterson Dental
Reported net sales in our Dental segment for the third quarter, which represented approximately 42 percent of total company sales, were $577.9 million, down 7.7 percent from the same quarter last year. Sales declined 8.1 percent on a constant currency basis compared to the fiscal 2017 third quarter. On that same basis, year-over-year sales by category were as follows:

  • Consumable dental supplies decreased 7.4 percent.
  • Equipment sales declined 10.6 percent.
  • Other services and products, primarily composed of technical service, parts and labor, software support services and office supplies decreased 3.4 percent.

“Our Dental segment results reflect the impact of a number of transitions taking place within our business, including changes in our sales force, disruptions resulting from our enterprise resource planning implementation and the expansion of our digital equipment portfolio,” continued Walchirk. “As we work to improve execution and performance, we are making meaningful progress increasing unit placements of our new technology offerings, reinforcing this strategic decision.”

Patterson Animal Health
Reported net sales in our Animal Health segment for the third quarter of fiscal 2018, which comprised approximately 58 percent of the company’s total sales, were $794.9 million, up 4.2 percent from last year’s third quarter. After normalizing for the impact of currency and changes in product selling relationships, segment sales increased 4.6 percent from the fiscal 2017 third quarter. On that same basis, year-over-year sales by category were as follows:

  • Global companion animal sales rose 0.4 percent.
  • Production animal sales increased 8.8 percent, reflecting particularly strong performance across swine and beef cattle species.

“In our Animal Health segment, our production animal business drove solid growth across species and channels and we continue to benefit from positive end-market fundamentals,” continued Walchirk. “The lower sales growth rate in our companion animal business was primarily related to a decrease in promotional activity compared to last year.”

Share Repurchases and Dividends
In the third quarter of fiscal 2018, Patterson repurchased approximately 0.4 million shares of its outstanding common stock, with a value of $13.5 million, leaving approximately 11.5 million shares for repurchase under the current authorization, which expires in March 2018. The company also paid $24.7 million in cash dividends to shareholders in the third quarter of fiscal 2018. For the first nine months of fiscal 2018, the company has returned a total of $162 million to shareholders in the form of share repurchases and dividends.

Year-to-Date Results1
Consolidated sales for the first nine months of fiscal 2018 totaled $4.1 billion, a 2.0 percent year-over-year decrease. Reported net income from continuing operations was $180.0 million, or $1.93 per diluted share, compared to $112.4 million, or $1.17 per diluted share in last year's period. This comparison includes the recognition of a provisional net tax benefit of $77.3 million, reflecting the revaluation of tax-deferred assets and liabilities, net of a one-time transition tax on unremitted foreign earnings as a result of the 2017 Tax Act enacted during the third quarter.

Adjusted net income1 from continuing operations, which excludes certain non-recurring items, deal amortization costs and the provisional net tax benefit related to the 2017 Tax Act, totaled $128.6 million, or $1.38 per diluted share, compared to adjusted net income from continuing operations of $157.7 million, or $1.64 per diluted share, in the year-ago period.

FY2018 Guidance
Patterson today revised its fiscal 2018 earnings guidance from continuing operations, which is provided on both a GAAP and non-GAAP adjusted1 basis:

  • GAAP earnings from continuing operations are now expected to be in the range of $2.13 to $2.18 per diluted share.
  • Non-GAAP adjusted earnings1 from continuing operations for fiscal 2018 are now expected to be in the range of $1.65 to $1.70 per diluted share.
  • Our non-GAAP adjusted earnings1 guidance excludes the after-tax impact of:
    • Deal amortization expense of approximately $26.9 million ($0.29 per diluted share);
    • Integration and business restructuring expenses of approximately $5.7 million ($0.06 per diluted share);
    • Provisional net tax benefit related to the 2017 Tax Act of approximately $77.3 million ($0.83 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 2018.

Patterson Announces CFO Transition
Patterson also announced that Ann Gugino, executive vice president and chief financial officer, will transition from her role as CFO, effective March 1, 2018. Patterson has appointed Dennis Goedken, current corporate controller, to serve as interim CFO in addition to his current role, while the company conducts a search for a permanent replacement. Ms. Gugino’s departure is not related to the company’s financial condition, financial disclosure or strategic direction, and Ms. Gugino has agreed to serve as a special advisor to the company until July 31, 2018.

Said Walchirk, “We are grateful to Ann for her many contributions to Patterson over the past 18 years with the company, and I thank her for her support during my transition. On behalf of the entire Patterson team, we wish her all the best. We are also fortunate to have someone with Dennis’ experience to serve as interim CFO while we conduct a search for a finance executive to help execute our strategic priorities.”

Mr. Goedken has spent more than 12 years with Patterson having served as the corporate controller since 2012, and as Patterson’s assistant controller from 1991-1998. During his tenure, Mr. Goedken was integrally involved in internal audit, taking the company public and various divestitures and acquisitions. Mr. Goedken currently leads the accounting team and oversees preparation of all SEC filings. Previously, Mr. Goedken has held senior finance leadership positions with Ceridian HCM, Inc. and Lifetouch Inc.

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 expenses, intangible asset impairment, integration and business restructuring expenses, 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 third-quarter and full-year 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 2018 third-quarter conference call can be heard for one week at 800-585-8367 and by providing the Conference ID 6584419 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. 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 Nine Months Ended
January 27, January 28, January 27, January 28,
2018 2017 2018 2017
 
Net sales $ 1,375,222 $ 1,397,418 $ 4,065,074 $ 4,148,095
 
Gross profit 294,736 329,761 909,527 965,899
 
Operating expenses   244,690     283,207     730,889     774,126  
 
Operating income from continuing operations 50,046 46,554 178,638 191,773
 
Other income (expense):
Other income, net 2,096 994 4,768 4,980
Interest expense   (11,783 )   (11,400 )   (34,454 )   (31,659 )
 
Income from continuing operations before taxes 40,359 36,148 148,952 165,094
 
Income tax expense (benefit)   (68,596 )   8,379     (31,094 )   52,663  
 
Net income from continuing operations 108,955 27,769 180,046 112,431
Net loss from discontinued operations       (3,229 )       (3,229 )
Net income $ 108,955   $ 24,540   $ 180,046   $ 109,202  
 
Basic earnings (loss) per share:
Continuing operations $ 1.18 $ 0.29 $ 1.94 $ 1.18
Discontinued operations       (0.03 )       (0.03 )
Net basic earnings per share $ 1.18   $ 0.26   $ 1.94   $ 1.15  
 
Diluted earnings (loss) per share:
Continuing operations $ 1.18 $ 0.29 $ 1.93 $ 1.17
Discontinued operations       (0.03 )       (0.03 )
Net diluted earnings per share $ 1.18   $ 0.26   $ 1.93   $ 1.14  
 
Weighted average shares:
Basic 91,949 94,737 92,674 95,252
Diluted 92,609 95,359 93,323 95,915
 
Dividends declared per common share $ 0.26 $ 0.24 $ 0.78 $ 0.72
 
 
PATTERSON COMPANIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
       
January 27, April 29,
2018 2017
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 118,005 $ 94,959
Receivables 863,455 884,803
Inventory 882,018 711,903
Prepaid expenses and other current assets   116,310   111,928
Total current assets 1,979,788 1,803,593
Property and equipment, net 287,439 298,452
Goodwill and other intangible assets 1,216,374 1,238,983
Long-term receivables, net and other   190,757   166,885
Total assets $ 3,674,358 $ 3,507,913
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 654,792 $ 616,859
Other accrued liabilities 191,540 213,318
Current maturities of long-term debt 74,754 14,754
Borrowings on revolving credit   179,000   59,000
Total current liabilities 1,100,086 903,931
Long-term debt 931,419 998,272
Other non-current liabilities   179,863   211,277
Total liabilities 2,211,368 2,113,480
Stockholders' equity   1,462,990   1,394,433
Total liabilities and stockholders' equity $ 3,674,358 $ 3,507,913
 
 
PATTERSON COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
       
Nine Months Ended
January 27, January 28,
2018 2017
 
Operating activities:
Net income $ 180,046 $ 109,202
Net loss from discontinued operations       (3,229 )
Net income from continuing operations 180,046 112,431
Adjustments to reconcile net income from continuing operations to net cash provided by (used in) operating activities:
Depreciation and amortization 62,787 63,056
Intangible asset impairment 36,312
Non-cash employee compensation 22,999 17,254
Change in assets and liabilities, net of acquired   (225,819 )   (238,464 )
Net cash provided by (used in) operating activities- continuing operations 40,013 (9,411 )
Net cash used in operating activities- discontinued operations       (3,229 )
Net cash provided by (used in) operating activities 40,013 (12,640 )
Investing activities:
Additions to property and equipment (28,239 ) (37,457 )
Collection of deferred purchase price receivables 37,068 38,964
Other investing activities   10,600     (3,095 )
Net cash provided by (used in) investing activities- continuing operations 19,429 (1,588 )
Net cash provided by investing activities- discontinued operations        
Net cash provided by (used in) investing activities 19,429 (1,588 )
Financing activities:
Dividends paid (74,641 ) (70,947 )
Repurchases of common stock (87,500 ) (84,651 )
Debt amendment costs (1,266 )
Retirement of long-term debt (7,377 ) (22,550 )
Draw on revolver 120,000 178,000
Other financing activities   7,546     5,495  
Net cash provided by (used in) financing activities (41,972 ) 4,081
 
Effect of exchange rate changes on cash   5,576     (5,567 )
Net change in cash and cash equivalents $ 23,046   $ (15,714 )
 
 
PATTERSON COMPANIES, INC.
SALES SUMMARY
(Dollars in thousands)
(Unaudited)
                   
Total Foreign
January 27, January 28, Sales Exchange Internal
2018 2017 Growth Impact Growth

Three Months Ended

 
Consolidated net sales
Consumable $ 1,074,189 $ 1,064,098 0.9 % 1.3 % (0.4 )%
Equipment and software 222,574 249,047 (10.6 ) 0.4 (11.0 )
Other   78,459   84,273 (6.9 ) 0.6   (7.5 )
Total $ 1,375,222 $ 1,397,418 (1.6 )% 1.1 % (2.7 )%
 
Dental
Consumable $ 302,296 $ 325,181 (7.0 )% 0.4 % (7.4 )%
Equipment and software 207,000 230,431 (10.2 ) 0.4 (10.6 )
Other   68,581   70,731 (3.0 ) 0.4   (3.4 )
Total $ 577,877 $ 626,343 (7.7 )% 0.4 % (8.1 )%
 
Animal Health
Consumable $ 771,893 $ 738,917 4.5 % 1.6 % 2.9 %
Equipment and software 15,574 18,616 (16.3 ) 0.1 (16.4 )
Other   7,400   5,044 46.7   5.9   40.8  
Total $ 794,867 $ 762,577 4.2 % 1.6 % 2.6 %
 
Corporate
Other $ 2,478 $ 8,498 (70.8 )% - % (70.8 )%
Total $ 2,478 $ 8,498 (70.8 )% - % (70.8 )%
 

Nine Months Ended

 
Consolidated net sales
Consumable $ 3,270,385 $ 3,252,551 0.5 % 0.2 % 0.3 %
Equipment and software 540,860 627,187 (13.8 ) 0.2 (14.0 )
Other   253,829   268,357 (5.4 ) 0.1   (5.5 )
Total $ 4,065,074 $ 4,148,095 (2.0 )% 0.2 % (2.2 )%
 
Dental
Consumable $ 933,691 $ 982,366 (5.0 )% 0.2 % (5.2 )%
Equipment and software 504,376 586,375 (14.0 ) 0.2 (14.2 )
Other   212,247   214,170 (0.9 ) 0.2   (1.1 )
Total $ 1,650,314 $ 1,782,911 (7.4 )% 0.2 % (7.6 )%
 
Animal Health
Consumable $ 2,336,694 $ 2,270,185 2.9 % 0.2 % 2.7 %
Equipment and software 36,484 40,812 (10.6 ) - (10.6 )
Other   21,408   21,357 0.2   -   0.2  
Total $ 2,394,586 $ 2,332,354 2.7 % 0.2 % 2.5 %
 
Corporate
Other $ 20,174 $ 32,830 (38.6 )% - % (38.6 )%
Total $ 20,174 $ 32,830 (38.6 )% - % (38.6 )%
 
 
PATTERSON COMPANIES, INC.
OPERATING INCOME BY SEGMENT
(In thousands)
(Unaudited)
               
Three Months Ended Nine Months Ended
January 27, January 28, January 27, January 28,
2018 2017 2018 2017
 
Operating income (loss)
Dental $ 58,439 $ 40,018 $ 183,165 $ 177,356
Animal Health 18,037 23,777 57,930 60,460
Corporate   (26,430 )   (17,241 )   (62,457 )   (46,043 )
Total $ 50,046   $ 46,554   $ 178,638   $ 191,773  
 
 
PATTERSON COMPANIES, INC.
RECONCILIATION OF GAAP TO NON-GAAP MEASURES
(Dollars in thousands, except per share amounts)
(Unaudited)
                           

Integration

Intangible

and business

Transaction- Deal asset restructuring Discrete tax
For the three months ended January 27, 2018 GAAP related costs amortization impairment expenses matters Non-GAAP
Operating income from continuing operations $ 50,046 $ $ 9,692 $ $ $ $ 59,738
Other expense, net   (9,687 )                 (9,687 )
Income from continuing operations before taxes 40,359 9,692 50,051
Income tax expense (benefit)   (68,596 )     2,209     (370 )   77,256     10,499  
Net income from continuing operations $ 108,955   $ $ 7,483 $ $ 370   $ (77,256 ) $ 39,552  
             
Diluted earnings per share from continuing operations* $ 1.18   $ $ 0.08 $ $   $ (0.83 ) $ 0.43  
 
Operating income from continuing operations as a % of sales 3.6 % 4.3 %
Effective tax rate -170.0 % 21.0 %
 

Integration

Intangible

and business

Transaction- Deal asset restructuring Discrete tax
For the three months ended January 28, 2017 GAAP related costs amortization impairment expenses matters 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 (benefit)   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 earnings per share from continuing operations* $ 0.29   $ $ 0.07 $ 0.24 $   $ (0.03 ) $ 0.58  
 
Operating income from continuing operations as a % of sales 3.3 % 6.7 %
Effective tax rate 23.2 % 33.4 %
 

Integration

Intangible

and business

Transaction- Deal asset restructuring Discrete tax
For the nine months ended January 27, 2018 GAAP related costs amortization impairment expenses matters Non-GAAP
Operating income from continuing operations $ 178,638 $ $ 28,982 $ $ 8,594 $ $ 216,214
Other expense, net   (29,686 )                 (29,686 )
Income from continuing operations before taxes 148,952 28,982 8,594 186,528
Income tax expense (benefit)   (31,094 )     8,900     2,879     77,256     57,941  
Net income from continuing operations $ 180,046   $ $ 20,082 $ $ 5,715   $ (77,256 ) $ 128,587  
             
Diluted earnings per share from continuing operations* $ 1.93   $ $ 0.22 $ $ 0.06   $ (0.83 ) $ 1.38  
 
Operating income from continuing operations as a % of sales 4.4 % 5.3 %
Effective tax rate -20.9 % 31.1 %
 

Integration

Intangible

and business

Transaction- Deal asset restructuring Discrete tax
For the nine months ended January 28, 2017 GAAP related costs amortization impairment expenses matters 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 (benefit)   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 earnings per share from continuing operations* $ 1.17   $ 0.01 $ 0.21 $ 0.24 $ 0.04   $ (0.03 ) $ 1.64  
 
Operating income from continuing operations as a % of sales 4.6 % 6.4 %
Effective tax rate 31.9 % 34.1 %
 
* May not sum due to rounding
 

Contacts

Patterson Companies, Inc.
John M. Wright, 651-686-1364
Vice President, Investor Relations

Contacts

Patterson Companies, Inc.
John M. Wright, 651-686-1364
Vice President, Investor Relations