PDCO Patterson Companies Inc

• 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.

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 DentalReported 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 HealthReported 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 OperationsOn 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 DividendsFiscal 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 Results1Reported 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 OutlookAnderson 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 GuidanceWith 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 ReplayPatterson’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 MarketPatterson'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 MarketPatterson'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  

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