Patterson Companies Reports Fiscal 2017 Second-Quarter Operating Results
-
Reported net sales totaled $1.4 billion, up 2.1 percent. Sales grew
4.1 percent in constant currency. -
GAAP earnings from continuing operations increased 12 percent to
$0.48 per diluted share. -
Adjusted earnings from continuing operations1
were flat at $0.56 per diluted share. -
Company elects not to extend the exclusive portion of its Sirona
relationship after September 2017, but intends to remain a strategic
partner and continue offering the full Sirona product line thereafter. -
Company revises Fiscal 2017 outlook and expects non-GAAP earnings
to be in the range of $2.25 to $2.35 per diluted share.
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 second quarter ended October 29, 2016, up 2.1 percent over
the same period last year. Adjusting for the effects of currency
translation, sales increased 4.1 percent.
Reported net income from continuing operations was $45.8 million, or
$0.48 per diluted share, compared to $42.6 million, or $0.43 per diluted
share, in last year’s fiscal second quarter. Adjusted net income from
continuing operations1, which excludes certain non-recurring
and deal amortization costs, totaled $53.5 million for the second
quarter of fiscal 2017, down 3.2 percent from $55.3 million in the same
quarter last year. Adjusted earnings per diluted share from continuing
operations1 totaled $0.56 in the 2017 second quarter,
unchanged year-over-year.
“Patterson Companies competes in two markets with attractive long-term
fundamentals. The Dental business is positioned to benefit from
favorable demographic trends, including an aging population. In Animal
Health, the worldwide demand for protein will intensify; and consumers
are increasing both their pet ownership and the dollars they spend on
their pets. These are compelling trends. However, our markets are
evolving, and we are adapting our strategies to take full advantage of
new opportunities to deliver even greater value to our customers,” said
Scott Anderson, chairman, president and chief executive officer.
Anderson continued, “During the second quarter, we continued to move
Patterson’s growth agenda forward and, despite relatively stable yet
challenging dental and animal health environments, we continued to make
the necessary decisions to unlock growth potential for the long term. In
our Dental segment, we expanded on our strategy to broaden our approach
to the market, which resulted in a new relationship with Heartland
Dental, the largest dental support organization in the U.S. In our
Animal Health segment, our focus on sales execution is driving expansion
and market-share gains.”
Patterson Dental
Reported net sales in our Dental segment,
which represents approximately 43 percent of total company sales, were
$601.6 million, flat with prior year. Sales were unchanged on a constant
currency basis from the 2016 second fiscal quarter. On that same basis,
year-over-year sales by category were as follows:
- Consumable dental supplies decreased 2.5 percent
-
Equipment sales improved 4.2 percent, led by double-digit increases in
core equipment and digital x-ray products -
Other services and products, primarily composed of technical service,
parts and labor, software support services and office supplies, rose
0.2 percent
Anderson said, “We are pleased with our dental equipment sales during
the period, especially considering the difficult year-over-year
comparable. Dental markets, overall, remained soft but relatively stable
in the second quarter. After the end of the second quarter, Patterson
Companies elected not to extend exclusivity with Sirona for its entire
portfolio beyond September 2017. This decision is consistent with our
strategy of serving the evolving needs of all our customers and will
allow us to better serve the full range of practice models in the
future. Importantly, it will also potentially enable more product
innovation and bring more options to our customers by opening up our
superior technology support infrastructure to more manufacturers, who
view our expertise and support as a meaningful competitive advantage. We
expect this move, along with our sales realignment activities taken
earlier in fiscal 2017, to better position Patterson Dental to serve the
evolving dental market.”
Anderson continued, “In no way does this decision change our commitment
to our long-standing partnership with Sirona. Together, for the past 20
years, we have built the market for chair-side restoration technology in
North America. We are very proud of our achievements together and intend
to preserve our unwavering commitment to this important relationship. We
look forward to helping Dentsply Sirona drive further innovation in the
dental marketplace.”
Non-cash Impairment Charge
In the
first quarter of fiscal 2006, Patterson extended its exclusive North
American distribution relationship with Sirona Dental Systems for
Sirona’s CEREC 3D dental restorative system. At that time, Patterson
paid a $100 million distribution fee to extend the existing exclusive
relationship for at least a 10-year period beginning in 2007. In 2012,
the relationship was amended to include the full Sirona product
portfolio in the U.S. market and to provide for the potential for the
exclusivity relationship to extend beyond 2017. This distribution fee
has been accounted for as an intangible asset that has been amortized
since October 2007.
Based on Patterson’s decision not to extend sales exclusivity for the
full Sirona portfolio of products, Patterson Companies expects to record
a pre-tax non-cash impairment charge of approximately $36 million, or
approximately $22 million after taxes or $0.23 per diluted share in the
fiscal 2017 third quarter, related to the distribution fee associated
with the CEREC product component of this arrangement. 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. This impact is
reflected in the company’s updated fiscal 2017 earnings guidance.
Patterson Animal Health
Reported net sales for Patterson
Animal Health, which comprises approximately 57 percent of the company’s
total sales, were $807.1 million, up 4.2 percent over last year and up
7.8 percent in constant currency. Companion animal sales rose 10.8
percent in constant currency. Production animal sales increased 4.9
percent, reflecting strong sales in swine and beef species.
Anderson continued, “Revenue growth and sales execution have been key
priorities for us, and we are pleased with the significant sales
expansion and share gains in our animal health business during the
second quarter. However, we face a more challenging environment with
branded pharmaceutical manufacturers that are impacting the profit
contribution from this sales momentum, and we are implementing programs
immediately to respond to these challenges. We have a long history of
working with innovative product manufacturers and using our market
leadership and scale to create mutually beneficial relationships. We are
a partner of choice and are focusing on our strengths to create value
and drive performance.”
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 second
quarter, Patterson repurchased approximately 0.5 million shares of its
outstanding common stock, with a value of $25.0 million, leaving
approximately 15 million shares for repurchase under the current
authorization, which expires in March 2018. The company also paid $23.5
million in cash dividends to shareholders in the second quarter of
fiscal 2017.
Year-to-Date Results1
Consolidated sales
for the first six months of fiscal 2017 totaled $2.8 billion, an 8.6
percent year-over-year increase. Reported net income from continuing
operations was $84.7 million, or $0.88 per diluted share, compared to
$62.9 million, or $0.63 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 $102.3 million, or $1.06 per
diluted share, compared to adjusted net income from continuing
operations of $102.2 million, or $1.03 per diluted share, in the
year-ago period. Sales in the prior year six-month period included an
extra sales week and approximately six fewer weeks of contribution from
Animal Health International, Inc.
Business Outlook
Anderson concluded, “We believe that we are
making the right strategic moves to build sustainable growth platforms
in our two fundamentally strong and changing markets. In light of both
external market factors and our strategic decisions, we have re-examined
our financial outlook for the year. When we entered fiscal 2017, our
guidance was predicated on end markets similar to those experienced in
fiscal 2016. But we, along with others in our industry, have seen
softness in the U.S. dental market and challenges with branded
pharmaceutical companies in our animal health business. Just as
important as these external factors, we made important strategic
decisions in the first half of fiscal 2017 to realign our Dental sales
force to enhance our effectiveness and, more recently, to enable
leveraging of our sales, service and technical support infrastructure
across a wide range of products and customers in the future. While these
strategic decisions will impact our near-term performance, we believe
they are integral to evolving the customer-centric approach for which we
are known and to realize our growth ambitions.”
Fiscal 2017 Guidance
For the first time, Patterson today
introduced fiscal 2017 GAAP earnings guidance. It also revised fiscal
2017 non-GAAP adjusted earnings guidance to reflect the company’s
current business environment and strategies. For comparison purposes, it
should be noted that Patterson previously disclosed 2017 non-GAAP
adjusted earnings guidance in its prior earnings releases.
-
GAAP earnings are expected to be in the range of $1.65 to $1.75 per
diluted share for fiscal 2017. -
Non-GAAP adjusted earnings for fiscal 2017 are now expected to be in
the range of $2.25 to $2.35 per diluted share. -
Our non-GAAP adjusted earnings 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 $22 million ($0.23
per diluted share) -
Integration and business restructuring expenses of approximately
$6 million ($0.06 per diluted share) -
Transaction-related costs of approximately $3 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 half of fiscal 2017
and includes the previously disclosed pretax $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.Second-Quarter Conference Call and Replay
Patterson’s
second-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 second-quarter conference call can be heard for one week at
888-203-1112 and by providing the Conference ID 6130925 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 Six Months Ended October 29, October 31, October 29, October 31, 2016 2015 2016 2015 Net sales $ 1,418,241 $ 1,389,210 $ 2,750,677 $ 2,532,080 Gross profit 318,960 330,899 636,138 619,143 Operating expenses 239,157 247,436 490,919 473,503 Operating income from continuing operations 79,803 83,463 145,219 145,640 Other income and expense: Other income, net 1,622 954 3,986 1,624 Interest expense (10,097 ) (17,154 ) (20,259 ) (29,297 ) Income from continuing operations before taxes 71,328 67,263 128,946 117,967 Income tax expense 25,572 24,700 44,284 55,093 Net income from continuing operations 45,756 42,563 84,662 62,874 Net income (loss) from discontinued operations – (7,142 ) – 2,250 Net income $ 45,756 $ 35,421 $ 84,662 $ 65,124 Basic earnings (loss) per share: Continuing operations $ 0.48 $ 0.43 $ 0.89 $ 0.64 Discontinued operations – (0.07 ) – 0.02 Net basic earnings (loss) per share $ 0.48 $ 0.36 $ 0.89 $ 0.66 Diluted earnings (loss) per share: Continuing operations $ 0.48 $ 0.43 $ 0.88 $ 0.63 Discontinued operations – (0.07 ) – 0.02 Net diluted earnings (loss) per share $ 0.48 $ 0.36 $ 0.88 $ 0.65 Shares: Basic 95,290 98,525 95,510 98,981 Diluted 95,904 99,185 96,138 99,674 Dividends declared per common share $ 0.24 $ 0.22 $ 0.48 $ 0.44 PATTERSON COMPANIES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) October 29, April 30, 2016 2016 (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 110,387 $ 137,453 Receivables 822,734 796,693 Inventory 795,454 722,140 Prepaid expenses and other current assets 104,257 91,255 Total current assets 1,832,832 1,747,541 Property and equipment, net 303,342 293,315 Goodwill and other intangible assets 1,292,396 1,325,889 Long-term receivables, net and other 161,798 154,059 Total assets $ 3,590,368 $ 3,520,804 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 545,366 $ 566,253 Other accrued liabilities 217,678 226,582 Current maturities of long-term debt 20,625 16,500 Borrowings on revolving credit 163,000 20,000 Total current liabilities 946,669 829,335 Long-term debt 1,010,211 1,022,155 Other non-current liabilities 227,436 227,568 Total liabilities 2,184,316 2,079,058 Stockholders’ equity 1,406,052 1,441,746 Total liabilities and stockholders’ equity $ 3,590,368 $ 3,520,804 PATTERSON COMPANIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Six Months Ended October 29, October 31, 2016 2015 Operating activities: Net income $ 84,662 $ 65,124 Net income from discontinued operations – 2,250 Net income from continuing operations 84,662 62,874 Adjustments to reconcile net income from continuing operations to
net cash used in operating activities:Depreciation and amortization 42,007 38,400 Non-cash employee compensation 14,693 13,541 Change in assets and liabilities, net of acquired (196,668 ) (128,782 ) Net cash used in operating activities – continuing operations (55,306 ) (13,967 ) Net cash used in operating activities – discontinued operations – (38,985 ) Net cash used in operating activities (55,306 ) (52,952 ) Investing activities: Additions to property and equipment, net of disposals (29,377 ) (40,978 ) Acquisitions and equity investments – (1,105,229 ) Proceeds from sale of securities – 48,744 Other investing activities 23,115 – Net cash used in investing activities – continuing operations (6,262 ) (1,097,463 ) Net cash provided by investing activities – discontinued operations – 715,430 Net cash used in investing activities (6,262 ) (382,033 ) Financing activities: Dividends paid (47,655 ) (45,356 ) Repurchases of common stock (50,000 ) (160,579 ) Proceeds from issuance of long-term debt, net – 988,400 Retirement of long-term debt (8,250 ) (674,125 ) Draw on revolver 143,000 80,000 Other financing activities 974 2,894 Net cash provided by financing activities 38,069 191,234 Effect of exchange rate changes on cash (3,567 ) (8,058 ) Net change in cash and cash equivalents $ (27,066 ) $ (251,809 ) PATTERSON COMPANIES, INC. SALES SUMMARY (Dollars in thousands) (Unaudited) Total Foreign Animal Health October 29, October 31, Sales Exchange International Internal 2016 2015 Growth
Impact Impact Growth
Three Months Ended
Consolidated net sales Consumable $ 1,112,232 $ 1,087,489 2.3 % (2.5 ) % – % 4.8 % Equipment and software 217,194 207,809 4.5 – – 4.5 Other 88,815 93,912 (5.4 ) (0.9 ) – (4.5 ) Total $ 1,418,241 $ 1,389,210 2.1 % (2.0 ) % – % 4.1 % Dental Consumable $ 324,237 $ 332,436 (2.5 ) % – % – % (2.5 ) % Equipment and software 205,062 196,767 4.2 – – 4.2 Other 72,254 72,119 0.2 – – 0.2 Total $ 601,553 $ 601,322 – % – % – % – % Animal Health Consumable $ 787,995 $ 755,053 4.4 % (3.6 ) % – % 8.0 % Equipment and software 12,132 11,042 9.9 (0.3 ) – 10.2 Other 7,019 8,358 (16.0 ) (9.9 ) – (6.1 ) Total $ 807,146 $ 774,453 4.2 % (3.6 ) % – % 7.8 % Corporate Other $ 9,542 $ 13,435 (29.0 ) % – % – % (29.0 ) % Total $ 9,542 $ 13,435 (29.0 ) % – % – % (29.0 ) % Six Months Ended
Consolidated net sales Consumable $ 2,188,453 $ 1,982,796 10.4 % (2.3 ) % 9.8 % 2.9 % Equipment and software 378,140 361,292 4.7 (0.2 ) – 4.9 Other 184,084 187,992 (2.1 ) (0.8 ) (0.1 ) (1.2 ) Total $ 2,750,677 $ 2,532,080 8.6 % (1.9 ) % 7.7 % 2.8 % Dental Consumable $ 657,185 $ 690,488 (4.8 ) % (0.2 ) % – % (4.6 ) % Equipment and software 355,944 340,437 4.6 (0.2 ) – 4.8 Other 143,439 145,514 (1.4 ) (0.1 ) – (1.3 ) Total $ 1,156,568 $ 1,176,439 (1.7 ) % (0.2 ) % – % (1.5 ) % Animal Health Consumable $ 1,531,268 $ 1,292,308 18.5 % (3.4 ) % 15.0 % 6.9 % Equipment and software 22,196 20,855 6.4 (0.2 ) – 6.6 Other 16,313 18,587 (12.2 ) (7.0 ) (0.9 ) (4.3 ) Total $ 1,569,777 $ 1,331,750 17.9 % (3.4 ) % 14.6 % 6.7 % Corporate Other $ 24,332 $ 23,891 1.8 % – % – % 1.8 % Total $ 24,332 $ 23,891 1.8 % – % – % 1.8 % PATTERSON COMPANIES, INC. OPERATING INCOME BY SEGMENT (In thousands) (Unaudited) Three Months Ended Six Months Ended October 29, October 31, October 29, October 31, 2016 2015 2016 2015 Operating income (loss) Dental $ 77,043 $ 74,094 $ 137,338 $ 141,346 Animal Health 21,854 25,177 36,683 38,149 Corporate (19,094 ) (15,808 ) (28,802 ) (33,855 ) Total $ 79,803 $ 83,463 $ 145,219 $ 145,640 PATTERSON COMPANIES, INC. RECONCILIATION OF GAAP TO NON-GAAP MEASURES (Dollars in thousands, except per share amounts) (Unaudited) For the three months ended October 29, 2016 GAAP Transaction-
related costsDeal
amortizationIntegration
and business
restructuring
expensesAccelerated
debt issuance
costsTax impact of
cash
repatriationNon-GAAP Operating income from continuing operations $ 79,803 $ 896 $ 10,247 $ 804 $ – $ – $ 91,750 Other expense, net (8,475 ) – – – – – (8,475 ) Income from continuing operations before taxes 71,328 896 10,247 804 – – 83,275 Income tax expense 25,572 338 3,537 304 – – 29,751 Net income from continuing operations $ 45,756 $ 558 $ 6,710 $ 500 $ – $ – $ 53,524 Diluted EPS from continuing operations* $ 0.48 $ 0.01 $ 0.07 $ 0.01 $ – $ – $ 0.56 Consolidated operating income as a % of sales 5.6 % 6.5 % Effective tax rate 35.9 % 35.7 % For the three months ended October 31, 2015 GAAP Transaction-
related costsDeal
amortizationIntegration
and business
restructuring
expensesAccelerated
debt issuance
costsTax impact of
cash
repatriationNon-GAAP Operating income from continuing operations $ 83,463 $ 723 $ 10,862 $ 2,183 $ – $ – $ 97,231 Other expense, net (16,200 ) – – – 5,153 – (11,047 ) Income from continuing operations before taxes 67,263 723 10,862 2,183 5,153 – 86,184 Income tax expense 24,700 46 3,888 825 1,948 (500 ) 30,907 Net income from continuing operations $ 42,563 $ 677 $ 6,974 $ 1,358 $ 3,205 $ 500 $ 55,277 Diluted EPS from continuing operations* $ 0.43 $ 0.01 $ 0.07 $ 0.01 $ 0.03 $ 0.01 $ 0.56 Consolidated operating income as a % of sales 6.0 % 7.0 % Effective tax rate 36.7 % 35.9 % For the six months ended October 29, 2016 GAAP Transaction-
related costsDeal
amortizationIntegration
and business
restructuring
expensesAccelerated
debt issuance
costsTax impact of
cash
repatriationNon-GAAP Operating income from continuing operations $ 145,219 $ 1,243 $ 20,261 $ 5,679 $ – $ – $ 172,402 Other expense, net (16,273 ) – – – – – (16,273 ) Income from continuing operations before taxes 128,946 1,243 20,261 5,679 – – 156,129 Income tax expense 44,284 469 6,914 2,147 – – 53,814 Net income from continuing operations $ 84,662 $ 774 $ 13,347 $ 3,532 $ – $ – $ 102,315 Diluted EPS from continuing operations* $ 0.88 $ 0.01 $ 0.14 $ 0.04 $ – $ – $ 1.06 Consolidated operating income as a % of sales 5.3 % 6.3 % Effective tax rate 34.3 % 34.5 % For the six months ended October 31, 2015 GAAP Transaction-
elated costsDeal
amortizationIntegration
and business
restructuring
expensesAccelerated
debt issuance
costsTax impact of
cash
repatriationNon-GAAP Operating income from continuing operations $ 145,640 $ 13,088 $ 17,896 $ 3,583 $ – $ – $ 180,207 Other expense, net (27,673 ) – – – 5,153 – (22,520 ) Income from continuing operations before taxes 117,967 13,088 17,896 3,583 5,153 – 157,687 Income tax expense 55,093 3,109 6,310 1,354 1,948 (12,300 ) 55,514 Net income from continuing operations $ 62,874 $ 9,979 $ 11,586 $ 2,229 $ 3,205 $ 12,300 $ 102,173 Diluted EPS from continuing operations* $ 0.63 $ 0.10 $ 0.12 $ 0.02 $ 0.03 $ 0.12 $ 1.03 Consolidated operating income as a % of sales 5.8 % 7.1 % Effective tax rate 46.7 % 35.2 % * 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 -
Deal amortization expense of approximately $27 million ($0.28 per