PDCO Patterson Companies Inc

• Second-quarter reported net sales totaled $1.4 billion, up 1.4 percent.
• Second-quarter GAAP earnings of $0.31 per diluted share.
• Second-quarter adjusted earnings1 of $0.39 per diluted share.
• Company generates $200.2 million of cash flow from operating activities in first six months of fiscal 2019.
• Company reaffirms fiscal 2019 GAAP earnings range of $0.84 to $0.94 per diluted share and adjusted earnings1 range of $1.40 to $1.50 per diluted share.

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 second quarter ended October 27, 2018, an increase of 1.4 percent compared to the same period last year. Internal sales, which are adjusted for the effects of currency translation and changes in product selling relationships, increased 1.8 percent.

Reported net income attributable to Patterson Companies, Inc. for the second quarter of fiscal year 2019 was $28.9 million, or $0.31 per diluted share, compared to net income attributable to Patterson Companies, Inc. of $40.2 million, or $0.43 per diluted share, in last year’s fiscal second quarter. Adjusted net income1 attributable to Patterson Companies, Inc., which excludes deal amortization costs and integration and business restructuring costs, totaled $36.3 million for the second quarter of fiscal 2019, or $0.39 per diluted share, compared to $47.6 million in the same quarter last year, or $0.51 per diluted share. The reported net income and the adjusted net income attributable to Patterson Companies, Inc. were both impacted by the decrease in operating margins within the Dental segment.

“Our second quarter results met our expectations and we continue to make progress on our focused initiatives to improve performance and build a stronger Patterson,” said Mark Walchirk, president and CEO of Patterson Companies. “While we still have much work ahead, our team has delivered two consecutive quarters of year-over-year revenue growth, operating margin improvement from the fiscal first quarter and continued strong cash flow generation. As a result, we are reaffirming our fiscal 2019 guidance.”

Patterson Animal Health

Reported net sales in our Animal Health segment for the second quarter of fiscal 2019, which comprised approximately 61 percent of the company’s total sales, were $855.4 million compared to $823.6 million in the same quarter last year. Internal sales for the segment increased 4.5 percent from the fiscal 2018 second quarter.

Patterson Dental

Reported net sales in our Dental segment for the second quarter of fiscal 2019, which represented approximately 39 percent of total company sales, were $542.5 million compared to $553.6 million in the same quarter last year. Internal sales declined 1.8 percent compared to the fiscal 2018 second quarter.

Balance Sheet and Capital Allocation

For the first six months of fiscal 2019, Patterson Companies generated $200.2 million of cash from operating activities and collected deferred purchase price receivables of $165.6 million for a total of $365.8 million, compared to a total of $101.7 million in the same period last year. During the first six months of fiscal 2019, debt has been reduced by $196.3 million and cash has grown by $102.5 million.

In the second quarter of fiscal 2019, Patterson Companies paid $24.7 million in cash dividends to shareholders. On a year-to-date basis, Patterson has returned $50.0 million in cash dividends to shareholders.

Year-to-Date Results

Consolidated net sales for the first six months of fiscal 2019 totaled $2.7 billion, a 1.9 percent year-over-year increase. Reported net income attributable to Patterson Companies, Inc. was $24.4 million, or $0.26 per diluted share, compared to $71.1 million, or $0.76 per diluted share in last year's period. In July 2018, Patterson Companies 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, integration and business restructuring costs and legal reserve costs, totaled $60.3 million, or $0.65 per diluted share, compared to adjusted net income of $89.0 million, or $0.95 per diluted share, in the year-ago period.

FY2019 Guidance

Patterson Companies today reaffirmed 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 approximately $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 before taxes, income tax expense, net income, net income attributable to Patterson Companies, Inc. and diluted earnings 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.

Management believes that these non-GAAP measures may provide a helpful representation of the company's second-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.

Second-Quarter Conference Call and Replay

Patterson Companies’ fiscal 2019 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 the Patterson Companies website. A replay of the fiscal 2019 second-quarter conference call can be heard for one week at 800-585-8367 and by providing the Conference ID 5359197 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 Six Months Ended October 27, 2018     October 28, 2017 October 27, 2018     October 28, 2017   Net sales $ 1,404,752 $ 1,385,737 $ 2,741,072 $ 2,689,852   Gross profit 295,076 315,743 578,739 614,791   Operating expenses 253,860   243,984   533,009   486,199     Operating income 41,216 71,759 45,730 128,592   Other income (expense): Other income, net 5,941 1,160 7,194 2,672 Interest expense (9,456 ) (11,468 ) (20,677 ) (22,671 )   Income before taxes 37,701 61,451 32,247 108,593   Income tax expense 9,055   21,207   8,110   37,502     Net income 28,646 40,244 24,137 71,091 Net loss attributable to noncontrolling interests (223 ) —   (276 ) —   Net income attributable to Patterson Companies, Inc. $ 28,869   $ 40,244   $ 24,413   $ 71,091     Earnings per share attributable to Patterson Companies, Inc.: Basic $ 0.31   $ 0.43   $ 0.26   $ 0.76     Diluted $ 0.31   $ 0.43   $ 0.26   $ 0.76     Weighted average shares: Basic 92,683 92,722 92,606 93,037 Diluted 93,289 93,351 93,144 93,683   Dividends declared per common share $ 0.26 $ 0.26 $ 0.52 $ 0.52            

PATTERSON COMPANIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

  October 27, 2018 April 28, 2018   ASSETS Current assets: Cash and cash equivalents $ 165,515 $ 62,984 Receivables 571,232 826,877 Inventory 792,533 779,834 Prepaid expenses and other current assets 176,019   103,029 Total current assets 1,705,299 1,772,724 Property and equipment, net 289,602 290,590 Goodwill and other intangible assets 1,182,533 1,205,401 Long-term receivables, net and other 166,820   202,949 Total assets $ 3,344,254   $ 3,471,664   LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 662,731 $ 610,368 Other accrued liabilities 225,903 205,415 Current maturities of long-term debt 80,286 76,598 Borrowings on revolving credit —   16,000 Total current liabilities 968,920 908,381 Long-term debt 738,341 922,030 Other non-current liabilities 181,305   179,463 Total liabilities 1,888,566 2,009,874 Stockholders' equity 1,455,688   1,461,790 Total liabilities and stockholders' equity $ 3,344,254   $ 3,471,664        

PATTERSON COMPANIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

  Six Months Ended October 27, 2018     October 28, 2017   Operating activities: Net income $ 24,137 $ 71,091 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 41,926 41,833 Non-cash employee compensation 13,926 16,635 Deferred consideration in securitized receivables (165,567 ) (24,581 )

Change in assets and liabilities, net of acquired

285,792   (27,870 ) Net cash provided by operating activities 200,214 77,108 Investing activities: Additions to property and equipment (22,094 ) (16,431 ) Collection of deferred purchase price receivables 165,567 24,581 Other investing activities 2,875   11,626   Net cash provided by investing activities 146,348 19,776 Financing activities: Dividends paid (49,980 ) (49,969 ) Repurchases of common stock — (71,254 ) Retirement of long-term debt (180,321 ) (7,377 ) Draw on (payment on) revolving credit (16,000 ) 33,000 Other financing activities 3,592   3,561   Net cash used in financing activities (242,709 ) (92,039 ) Effect of exchange rate changes on cash (1,322 ) 1,652   Net change in cash and cash equivalents $ 102,531   $ 6,497                              

PATTERSON COMPANIES, INC.

SALES SUMMARY

(Dollars in thousands)

(Unaudited)

  October 27, 2018 October 28, 2017 TotalSales Growth ForeignExchange Impact Other (a) Internal SalesGrowth

Three Months Ended

  Consolidated net sales Consumable $ 1,138,251 $ 1,116,091 2.0 % (0.4 )% (0.1 )% 2.5 % Equipment and software 182,120 181,337 0.4 (0.2 ) — 0.6 Other 84,381   88,309   (4.4 ) (0.2 ) —   (4.2 ) Total $ 1,404,752   $ 1,385,737   1.4 % (0.3 )% (0.1 )% 1.8 %   Dental Consumable $ 303,806 $ 311,217 (2.4 )% (0.2 )% — % (2.2 )% Equipment and software 167,686 169,513 (1.1 ) (0.2 ) — (0.9 ) Other 71,024   72,900   (2.6 ) (0.2 ) —   (2.4 ) Total $ 542,516   $ 553,630   (2.0 )% (0.2 )% — % (1.8 )%   Animal Health Consumable $ 834,445 $ 804,874 3.7 % (0.4 )% (0.2 )% 4.3 % Equipment and software 14,434 11,824 22.1 — — 22.1 Other 6,529   6,885   (5.2 ) (0.3 ) —   (4.9 ) Total $ 855,408   $ 823,583   3.9 % (0.4 )% (0.2 )% 4.5 %   Corporate Other $ 6,828   $ 8,524   (19.9 )% — % — % (19.9 )% Total $ 6,828   $ 8,524   (19.9 )% — % — % (19.9 )%  

(a) Sales of certain products previously recognized on a gross basis were recognized on a net basis during the three and six months ended October 27, 2018.

                         

PATTERSON COMPANIES, INC.

SALES SUMMARY

(Dollars in thousands)

(Unaudited)

  October 27, 2018 October 28, 2017 TotalSales Growth ForeignExchange Impact Other (a) Internal SalesGrowth

Six Months Ended

  Consolidated net sales Consumable $ 2,247,648 $ 2,196,196 2.3 % 0.1 % (0.2 )% 2.4 % Equipment and software 329,018 318,286 3.4 (0.1 ) — 3.5 Other 164,406   175,370   (6.3 ) —   —   (6.3 ) Total $ 2,741,072   $ 2,689,852   1.9 % 0.1 % (0.2 )% 2.0 %   Dental Consumable $ 608,045 $ 631,395 (3.7 )% — % — % (3.7 )% Equipment and software 302,643 297,376 1.8 (0.1 ) — 1.9 Other 137,892   143,666   (4.0 ) —   —   (4.0 ) Total $ 1,048,580   $ 1,072,437   (2.2 )% — % — % (2.2 )%   Animal Health Consumable $ 1,639,603 $ 1,564,801 4.8 % 0.1 % (0.3 )% 5.0 % Equipment and software 26,375 20,910 26.1 — — 26.1 Other 14,644   14,008   4.5   0.7   —   3.8   Total $ 1,680,622   $ 1,599,719   5.1 % 0.1 % (0.3 )% 5.3 %   Corporate Other $ 11,870   $ 17,696   (32.9 )% — % — % (32.9 )% Total $ 11,870   $ 17,696   (32.9 )% — % — % (32.9 )%  

(a) Sales of certain products previously recognized on a gross basis were recognized on a net basis during the three and six months ended October 27, 2018.

         

PATTERSON COMPANIES, INC.

OPERATING INCOME BY SEGMENT

(In thousands)

(Unaudited)

  Three Months Ended Six Months Ended October 27, 2018     October 28, 2017 October 27, 2018     October 28, 2017   Operating income (loss) Dental $ 41,594 $ 65,207 $ 77,467 $ 124,726 Animal Health 22,031 23,217 41,063 39,893 Corporate (22,409 ) (16,665 ) (72,800 ) (36,027 ) Total $ 41,216   $ 71,759   $ 45,730   $ 128,592                        

PATTERSON COMPANIES, INC.

RECONCILIATION OF GAAP TO NON-GAAP MEASURES

(Dollars in thousands, except per share amounts)

(Unaudited)

  For the three months ended October 27, 2018 GAAP

Dealamortization

Integration andbusinessrestructuringexpenses

Legal reserve Non-GAAP Operating income $ 41,216 $ 9,715 $ — $ — $ 50,931 Other expense, net (3,515 ) —   —   —   (3,515 ) Income before taxes 37,701 9,715 — — 47,416 Income tax expense 9,055   2,289   —   —   11,344   Net income 28,646 7,426 — — 36,072 Net loss attributable to noncontrolling interests (223 ) —   —   —   (223 ) Net income attributable to Patterson Companies, Inc. $ 28,869   $ 7,426   $ —   $ —   $ 36,295     Diluted earnings per share attributable to Patterson Companies, Inc.* $ 0.31   $ 0.08   $ —   $ —   $ 0.39     Operating income as a % of sales 2.9 % 3.6 % Effective tax rate 24.0 % 23.9 %   For the three months ended October 28, 2017 GAAP

Dealamortization

Integration andbusinessrestructuringexpenses

Legal reserve Non-GAAP Operating income $ 71,759 $ 9,660 $ 1,688 $ — $ 83,107 Other expense, net (10,308 ) —   —   —   (10,308 ) Income before taxes 61,451 9,660 1,688 — 72,799 Income tax expense 21,207   3,346   638   —   25,191   Net income 40,244 6,314 1,050 — 47,608 Net loss attributable to noncontrolling interests —   —   —   —   —   Net income attributable to Patterson Companies, Inc. $ 40,244   $ 6,314   $ 1,050   $ —   $ 47,608     Diluted earnings per share attributable to Patterson Companies, Inc.* $ 0.43   $ 0.07   $ 0.01   $ —   $ 0.51     Operating income as a % of sales 5.2 % 6.0 % Effective tax rate 34.5 % 34.6 %  

* May not sum due to rounding

                   

PATTERSON COMPANIES, INC.

RECONCILIATION OF GAAP TO NON-GAAP MEASURES

(Dollars in thousands, except per share amounts)

(Unaudited)

  For the six months ended October 27, 2018 GAAP

Dealamortization

Integration andbusinessrestructuringexpenses

Legal reserve Non-GAAP Operating income $ 45,730 $ 19,681 $ — $ 28,263 $ 93,674 Other expense, net (13,483 ) —   —   —   (13,483 ) Income before taxes 32,247 19,681 — 28,263 80,191 Income tax expense 8,110   4,575   —   7,523   20,208   Net income 24,137 15,106 — 20,740 59,983 Net loss attributable to noncontrolling interests (276 ) —   —   —   (276 ) Net income attributable to Patterson Companies, Inc. $ 24,413   $ 15,106   $ —   $ 20,740   $ 60,259     Diluted earnings per share attributable to Patterson Companies, Inc.* $ 0.26   $ 0.16   $ —   $ 0.22   $ 0.65     Operating income as a % of sales 1.7 % 3.4 % Effective tax rate 25.1 % 25.2 %   For the six months ended October 28, 2017 GAAP

Dealamortization

Integration andbusinessrestructuringexpenses

Legal reserve Non-GAAP Operating income $ 128,592 $ 19,290 $ 8,594 $ — $ 156,476 Other expense, net (19,999 ) —   —   —   (19,999 ) Income before taxes 108,593 19,290 8,594 — 136,477 Income tax expense 37,502   6,691   3,249   —   47,442   Net income 71,091 12,599 5,345 — 89,035 Net loss attributable to noncontrolling interests —   —   —   —   —   Net income attributable to Patterson Companies, Inc. $ 71,091   $ 12,599   $ 5,345   $ —   $ 89,035     Diluted earnings per share attributable to Patterson Companies, Inc.* $ 0.76   $ 0.13   $ 0.06   $ —   $ 0.95     Operating income as a % of sales 4.8 % 5.8 % Effective tax rate 34.5 % 34.8 %  

* May not sum due to rounding

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John M. Wright, Investor RelationsPatterson Companies Inc.john.wright@pattersoncompanies.compattersoncompanies.com