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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_X_ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JANUARY 25, 2003.
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
Commission File No. 0-20572
PATTERSON DENTAL COMPANY
------------------------
(Exact Name of Registrant as Specified in its Charter)
Minnesota 41-0886515
--------- ----------
(State of Incorporation) (IRS Employer Identification No.)
1031 Mendota Heights Road, St. Paul, Minnesota 55120
----------------------------------------------------
(Address of Principal Executive Offices)
(Zip Code)
(651) 686-1600
--------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for at least the past 90 days.
X Yes No
----- -----
Patterson Dental Company has outstanding 68,010,967 shares of common stock as of
March 4, 2003.
Page 1 of 17
PATTERSON DENTAL COMPANY
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements 3-8
Consolidated Balance Sheets as of January 25, 2003 and April 27, 2002 3
Consolidated Statements of Income for the Three Months
and Nine Months Ended January 25, 2003 and January 26, 2002 4
Consolidated Statements of Cash Flows for the Nine
Months Ended January 25, 2003 and January 26, 2002 5
Notes to Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations. 9-13
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 14
Item 4 - Controls and Procedures 14
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 14
Signatures 15
Certifications 16-17
Safe Harbor Statement Under The Private Securities Litigation Reform Act Of
- ---------------------------------------------------------------------------
1995:
- -----
This Form 10-Q for the period ended January 25, 2003, contains certain
forward-looking statements as defined in the Private Securities Litigation
Reform Act of 1995, which may be identified by the use of forward-looking
terminology such as "may", "will", "expect", "anticipate", "estimate",
"believe", "goal", or "continue", or comparable terminology that involves risks
and uncertainties and that are qualified in their entirety by cautionary
language set forth in the Company's Form 10-K report filed July 25, 2002, and
other documents filed with the Securities and Exchange Commission. See also page
13 of this Form 10-Q.
2
PART I FINANCIAL INFORMATION
PATTERSON DENTAL COMPANY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
January 25, 2003 April 27, 2002
---------------- --------------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 135,365 $ 125,986
Short-term investments 28,292 25,251
Receivables, net 223,269 222,435
Inventory 150,631 142,457
Prepaid expenses and other current assets 12,730 13,291
--------- ---------
Total current assets 550,287 529,420
Property and equipment, net 56,636 57,140
Goodwill 125,395 115,079
Identifiable intangibles, net 9,290 11,149
Other 22,482 5,588
--------- ---------
Total assets $ 764,090 $ 718,376
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 102,577 $ 133,637
Accrued payroll expense 26,408 28,311
Income taxes payable 5,137 7,815
Other accrued expenses 34,312 28,244
--------- ---------
Total current liabilities 168,434 198,007
Non-current liabilities 2,393 2,637
--------- ---------
Total liabilities 170,827 200,644
Deferred credits -- 3,372
STOCKHOLDERS' EQUITY
Common stock 680 681
Additional paid-in capital 82,661 90,777
Accumulated other comprehensive loss (2,159) (3,084)
Retained earnings 535,756 449,661
Notes receivable from ESOP (23,675) (23,675)
--------- ---------
Total stockholders' equity 593,263 514,360
--------- ---------
Total liabilities and stockholders' equity $ 764,090 $ 718,376
========= =========
See accompanying notes.
3
PATTERSON DENTAL COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
January 25, January 26, January 25, January 26,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net sales $ 421,070 $ 357,394 $ 1,209,630 $ 1,015,666
Cost of sales 273,305 231,786 790,916 661,788
----------- ----------- ----------- -----------
Gross margin 147,765 125,608 418,714 353,878
Operating expenses 101,288 87,027 290,916 249,902
----------- ----------- ----------- -----------
Operating income 46,477 38,581 127,798 103,976
Other income and expense:
Amortization of deferred credits -- 221 -- 663
Finance income, net 1,681 949 4,772 3,755
Interest expense (34) (12) (45) (83)
Profit (loss) on currency exchange 108 (70) 38 (119)
----------- ----------- ----------- -----------
Income before income taxes and
cumulative effect of accounting change 48,232 39,669 132,563 108,192
Income taxes 18,130 14,837 49,840 40,465
----------- ----------- ----------- -----------
Income before cumulative effect of
accounting change 30,102 24,832 82,723 67,727
Cumulative effect of accounting change-
See Note 7 -- -- 3,372 --
=========== =========== =========== ===========
Net income $ 30,102 $ 24,832 $ 86,095 $ 67,727
=========== =========== =========== ===========
Before cumulative effect of accounting change:
Earnings per share - basic $ 0.44 $ 0.37 $ 1.22 $ 1.00
=========== =========== =========== ===========
Earnings per share - diluted $ 0.44 $ 0.36 $ 1.21 $ 0.99
=========== =========== =========== ===========
After cumulative effect of accounting change:
Earnings per share - basic $ 0.44 $ 0.37 $ 1.27 $ 1.00
=========== =========== =========== ===========
Earnings per share - diluted $ 0.44 $ 0.36 $ 1.26 $ 0.99
=========== =========== =========== ===========
Weighted average common shares:
Basic 67,797 67,687 67,855 67,675
Dilutive potential 68,406 68,225 68,505 68,163
See accompanying notes.
4
PATTERSON DENTAL COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Nine Months Ended
January 25, 2003 January 26, 2002
---------------- ----------------
Operating activities:
Income before cumulative effect of
accounting change $ 82,723 $ 67,727
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Depreciation 8,011 6,684
Amortization of deferred credits -- (664)
Amortization of intangibles 1,858 3,909
Bad debt expense 697 1,326
Change in assets and liabilities, net of acquired (59,074) (32,742)
--------- ---------
Net cash provided by operating activities 34,215 46,240
Investing activities:
Additions to property and equipment, net (8,658) (8,356)
Acquisitions, net (4,956) (86,123)
(Purchase) sale of short-term investments (3,041) 1,736
--------- ---------
Net cash used in investing activities (16,655) (92,743)
Financing activities:
Payments and retirement of long-term debt and
obligations under capital leases (275) (300)
Common stock repurchased, net
(8,117) (4,826)
--------- ---------
Net cash used in financing activities (8,392) (5,126)
Effect of exchange rate changes on cash 211 (784)
--------- ---------
Net increase (decrease) in cash and cash equivalents 9,379 (52,413)
Cash and cash equivalents at beginning of period 125,986 160,024
--------- ---------
Cash and cash equivalents at end of period $ 135,365 $ 107,611
========= =========
See accompanying notes.
5
PATTERSON DENTAL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)
January 25, 2003
1. In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly
the financial position of the Company as of January 25, 2003, and the
results of operations and the cash flows for the periods ended January 25,
2003 and January 26, 2002. Such adjustments are of a normal recurring
nature. The results of operations for the quarter ended January 25, 2003
and January 26, 2002, are not necessarily indicative of the results to be
expected for the full year. The balance sheet at April 27, 2002, is derived
from the audited balance sheet as of that date. These financial statements
should be read in conjunction with the financial statements included in the
2002 Annual Report on Form 10-K filed on July 25, 2002.
The consolidated financial statements of Patterson Dental Company include
the assets and liabilities of PDC Funding Company, LLC, a wholly owned
subsidiary and a separate legal entity under Minnesota law. The assets of
PDC Funding Company, LLC, would be available first and foremost to satisfy
the claims of its creditors. There are no known creditors of PDC Funding
Company, LLC.
2. The fiscal year end of the Company is the last Saturday in April. The third
quarter of fiscal 2003 and 2002 represent the 13 weeks ended January 25,
2003 and January 26, 2002, respectively.
3. Total comprehensive income was $31,182 and $87,020 for the three and nine
months ended January 25, 2003, respectively, and $23,582 and $66,081 for
the three and nine months ended January 26, 2002 respectively.
4. On April 2, 2002 and July 9, 2002, respectively, the Company purchased
Thompson Dental Company ("Thompson"), an eastern regional dental supplier
in the U.S., and Distribution Quebec Dentaire, Inc. ("DQD"), a full-service
distributor of dental supplies and equipment serving the province of
Quebec, Canada. The operating results of Thompson and DQD are included in
the consolidated statements of income since the dates of acquisition. Pro
forma results of operations have not been presented since the effect of the
acquisitions was not material to the Company.
The Company also acquired the assets of J. A. Webster, Inc. in July 2001.
The following pro forma summary presents the results of operations, as if
the acquisition had occurred at the beginning of the prior fiscal year. The
pro forma results of operations are not necessarily indicative of the
results that would have been achieved had the two companies been combined:
Nine Months Ended
January 26, 2002
----------------
Net sales $1,049,294
Net income 68,118 (1)
Earnings per share - basic $1.00 (1)
Earnings per share - diluted $0.99 (1)
(1) Reflects the amortization of certain identifiable intangible assets.
Because the transaction was consummated following the effective date
specified in the recently issued Statement of the Financial Accounting
Standards Board No. 142 "Goodwill and Other Intangible Assets," the
6
Company is not amortizing goodwill for this transaction, but the goodwill
becomes subject to periodic evaluations of possible impairment in its
value.
5. The following table sets forth the denominator for the computation of basic
and diluted earnings per share:
Three Months Ended Nine Months Ended
------------------ -----------------
Jan. 25, Jan. 26, Jan. 25, Jan. 26,
2003 2002 2003 2002
------ ------ ------ ------
Denominator:
Denominator for basic earnings per
share - weighted-average shares 67,797 67,687 67,855 67,675
Effect of dilutive securities:
Stock Option Plans 520 449 567 401
Employee Stock Purchase Plan 9 9 9 8
Capital Accumulation Plan 80 80 74 79
------ ------ ------ ------
Dilutive potential common shares 609 538 650 488
------ ------ ------ ------
Denominator for diluted earnings per
share - adjusted weighted-average
shares and assumed conversions 68,406 68,225 68,505 68,163
====== ====== ====== ======
6. Certain financial information regarding the Company's reportable segments
is as follows:
Three Months Ended Nine Months Ended
----------------------- -----------------------
Jan. 25, Jan. 26, Jan. 25, Jan. 26,
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net sales:
Dental supply:
Consumable dental and
printed office products $ 210,178 $ 189,807 $ 641,561 $ 572,455
Equipment and software 141,396 103,059 342,089 272,016
Other 29,248 27,126 93,493 80,881
---------- ---------- ---------- ----------
380,822 319,992 1,077,143 925,352
Veterinary supply 40,248 37,402 132,487 90,314
---------- ---------- ---------- ----------
Consolidated net sales $ 421,070 $ 357,394 $1,209,630 $1,015,666
========== ========== ========== ==========
Operating income:
Dental supply $ 44,119 $ 36,781 $ 117,930 $ 98,971
Veterinary supply 2,358 1,800 9,868 5,005
---------- ---------- ---------- ----------
Consolidated operating income $ 46,477 $ 38,581 $ 127,798 $ 103,976
========== ========== ========== ==========
7. In July 2001, the Financial Accounting Standards Board issued Statement No.
142, "Goodwill and Other Intangible Assets", which eliminated the
systematic amortization of goodwill. The Statement also required that
goodwill be reviewed for impairment at adoption and at least annually
thereafter.
7
The Company adopted Statement No. 142 in the first quarter of fiscal 2003
and as such discontinued amortization of goodwill effective April 28, 2002.
With the adoption of the statement, the Company recognized as the
cumulative effect of a change in accounting principle the remaining balance
of its unamortized deferred credits. The deferred credits were negative
goodwill that arose from acquisitions in the 1980's and amounted to
approximately $3.4 million at the time of the adoption. The Company
completed the required transitional impairment tests of goodwill and
determined the fair value to be in excess of the carrying value of these
assets.
The following table reconciles reported fiscal 2002 net earnings and basic
and diluted net earnings per share before the cumulative effect of an
accounting change had this statement been effective April 29, 2001:
Three Months Ended Nine Months Ended
January 26, 2002 January 26, 2002
------------------ -----------------
Net Earnings:
Reported net income $ 24,832 $ 67,727
Deferred credit amortization (221) (663)
Goodwill amortization, net of tax 614 1,829
---------- ----------
Adjusted net earnings $ 25,225 $ 68,893
========== ==========
Earnings per share:
Reported basic $ 0.37 $ 1.00
Deferred credit amortization -- (0.01)
Goodwill amortization, net of tax -- 0.03
---------- ----------
Adjusted basic earnings per share $ 0.37 $ 1.02
========== ==========
Reported diluted $ 0.36 $ 0.99
Deferred credit amortization -- (0.01)
Goodwill amortization, net of tax 0.01 0.03
---------- ----------
Adjusted diluted earnings per share $ 0.37 $ 1.01
========== ==========
Goodwill by operating segment is as follows:
January 25, 2003 April 27, 2002
---------------- --------------
Dental Supply $ 66,759 $ 57,017
Veterinary Supply 58,636 58,062
-------- --------
Total $125,395 $115,079
======== ========
The change in the dental supply segment goodwill is predominantly the
result of the preliminary purchase price allocation for the acquisition of
Distribution Quebec Dentaire in July 2002 and adjustment of the preliminary
purchase price allocation associated with the purchase of Thompson Dental
Company in April 2002.
The Company continues to amortize intangibles with finite lives.
Identifiable intangible assets are primarily comprised of non-compete
agreements arising from previous acquisitions made by the Company.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentage of net sales represented by certain operational data.
Three Months Ended Nine Months Ended
--------------------------- ---------------------------
Jan. 25, 2003 Jan. 26, 2002 Jan. 25, 2003 Jan. 26, 2002
------------- ------------- ------------- -------------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 64.9% 64.9% 65.4% 65.2%
----- ----- ----- -----
Gross profit 35.1% 35.1% 34.6% 34.8%
Operating expenses 24.1% 24.3% 24.0% 24.6%
----- ----- ----- -----
Operating income 11.0% 10.8% 10.6% 10.2%
Other income and expense, net 0.4% 0.3% 0.6% 0.4%
Income before income tax 11.4% 11.1% 11.2% 10.6%
Net Income 7.1% 6.9% 7.1% 6.6%
===== ===== ===== =====
QUARTER ENDED JANUARY 25, 2003 COMPARED TO QUARTER ENDED JANUARY 26, 2002.
Net Sales. Net sales for the three months ended January 25, 2003
("Current Quarter") totaled $421.1 million, a 17.8% increase from $357.4
million reported for the three months ended January 26, 2002 ("Prior
Quarter").
Dental supply sales rose 19.0% to $380.8 million, paced by sales of
equipment, which grew 37.2% reflecting strong demand for core dental
equipment, the CEREC(R)3 dental restorative system and digital radiography
systems. While software unit sales were down quarter-over-quarter, a gain
in momentum nearly doubled the second quarter sales. Consumable and printed
office products increased 10.7% in the Current Quarter. Sale of other
services and products, consisting primarily of parts, technical service
labor, software support and insurance e-claims, increased 7.8%. The
estimated internal growth of the dental segment was approximately 14%-15%.
The acquisitions of Thompson Dental Company ("Thompson") and Distribution
Quebec Dentaire ("DQD") also contributed to the total sales improvement.
See Note 4 to the Consolidated Financial Statements.
Canadian dental sales rebounded after a slower second quarter,
increasing to $28.7 million, or 25.5% over the Prior Quarter. The impact of
DQD, acquired in July 2002, contributed approximately 16 percentage points
of this growth. Equipment sales led the increase, growing 50.5%, primarily
due to robust CEREC and digital radiography sales.
9
Veterinary sales increased 7.6% to $40.2 million compared to $37.4
million in the Prior Quarter. The promotional sales of a major heart worm
medication in the Prior Quarter negatively impacted sales growth by 2.7% in
the Current Quarter.
Gross Margins. Gross profit increased 17.6% over the Prior Quarter
solely as a result of higher sales volumes while the margin remained flat
at 35.1%. Dental supply posted a slight decline of 10 basis points in
margin primarily due to the change in the overall mix of sales between
consumables and equipment. Consumable sales generally carry a higher gross
margin overall than equipment.
Operating Expenses. Results for the Current Quarter include the impact
of the adoption of SFAS No. 142, "Goodwill and Other Intangible Assets"
resulting in the cessation of goodwill amortization. Additional information
regarding the adoption of SFAS No. 142 is included in the Notes to the
Consolidated Financial Statements on pages 7 and 8 of this document. That
information is incorporated by reference into this section of this report.
After adjusting the Prior Quarter to exclude goodwill amortization, Current
Quarter operating expenses increased 17.6% and were flat as a ratio to
sales.
The Company continued to invest in new marketing programs and our
technical service initiatives in the third quarter. Over the past few
quarters, the Company has made substantial investments in people and
training to support its office networking and digital radiography
single-source technology solution, which was fully rolled out in the
Current Quarter. While the Company is encouraged with the sales related to
the hardware component of this program, the investment that we are making
had a dampening effect on the operating expense rate. The implementation of
new systems for managing and strengthening the technical service operation
affected the expense rate as well. The Company expects these new systems to
improve operating efficiencies and contribute to sales growth over time.
For the short-term, however, this initiative will continue to add
incremental expense for the Company consisting primarily of additional
training, software licensing fee and communication costs. In addition, the
Current Quarter expense rate reflects the impact of the Thompson
acquisition, which was contributory to operating earnings but to a lesser
degree than the Company's historical dental business. The operating income
contribution from this incremental business is expected to continue to
improve as we go forward.
Operating Income. Operating income increased 20.5% and improved 20
basis points as a percent of sales. Higher sales volumes accounted for most
of the increase in operating income while the improvement in operating
margin was primarily the result of the discontinuance of goodwill
amortization in the Current Quarter due to the adoption of SFAS No. 142.
Other Income. Other income, net of expenses, was $1.8 million for the
Current Quarter compared to $1.1 million for the Prior Quarter. The benefit
of higher financing income from equipment contracts was mitigated by the
elimination of the amortization of deferred credits associated with the
adoption of SFAS No. 142.
Income Taxes. The effective income tax rate in the Current Quarter was
37.6%, which was adjusted up from the 37.4% rate used in Prior Quarter to
reflect the impact of the elimination of the amortization of the
non-taxable deferred credits discussed above.
10
Earnings Per Share, Before Cumulative Effect of Accounting Change.
Diluted earnings per share increased to $0.44 versus $0.36 a year ago. Had
amortization of goodwill and the deferred credits ceased in the Prior
Quarter, Prior Quarter earnings would have increased by $0.4 million or
less than $0.01 per diluted share.
NINE-MONTHS ENDED JANUARY 25, 2003 COMPARED TO NINE-MONTHS ENDED JANUARY 26,
2002.
Net Sales. Net sales for the nine months ended January 25, 2003
("Current Period") increased 19.1% to $1,209.6 million from $1,015.7
million in the nine months ended January 26, 2002 ("Prior Period").
Nine-month results include two months of incremental sales from the
acquisition of the assets of J. A. Webster, Inc. which annualized into the
Company's results in July 2002, and the Thompson and DQD acquisitions as
discussed above.
Sales for the Dental segment increased 16.4% to $1,077.1 million, led
by strong equipment sales, including increasing sales of CEREC and digital
radiography in both the U.S. and Canada in the third quarter. Practice
management software sales, while down from Prior Period, improved in the
third quarter from soft first and second quarter levels. Consumables
continue to grow in the double digits but growth has slowed slightly over
the nine months. Other products and services sales improved 15.6%, driven
by software and equipment related services.
Canadian dental sales increased 17.3% over last year led by strong
sales of equipment. The acquisition of DQD in July 2002 contributed between
9% and 10% to the overall sales increase in Canada. Currency exchange rates
had a nominal impact on results in the Current Period.
Veterinary supply sales improved 6.9% on a pro forma basis (as if this
acquisition had occurred at the beginning of fiscal 2002) to $132.5 million
in the Current Period. After giving affect to product introduction volume
and follow-on fall promotional sales of a new heart worm medication during
the Prior Period, the veterinary segment's comparable sales increase was
approximately 15% for the first nine months of the fiscal year.
Gross Margins. Gross margins represented 34.6% of sales, down 20 basis
points from the Prior Period reflecting the impact of the acquisition of
the assets of J. A. Webster, Inc. which did not annualize into the
Company's results until July 2002. Gross margins in the veterinary business
are typically in the lower to mid 20's compared to the mid 30's for the
dental business. There was no change in gross margin compared to last year
in the dental segment.
Operating Expenses. Operating expenses increased $41.0 million, or
16.4%. As a percentage of sales, operating expenses declined 60 basis
points from the Prior Period. Current Period operating expenses as a
percent of sales reflects nine months of operating results for Webster
Veterinary Supply compared to seven months in the Prior Period. Since the
operating expense rate in the veterinary business is lower than in the
dental business, this disparity provides a favorable year-over-year impact
of approximately 30 basis points after the amortization of certain
identifiable intangible assets. Discontinuance of goodwill amortization
resulting from the adoption of SFAS No. 142 also positively impacted the
year-over-year expense rate by approximately 30 basis points. Excluding the
impact of the adoption of SFAS No. 142, the Current Period operating
expense rate for the historical dental business was unchanged from the
Prior Period. Nine month performance in the dental business operating
expense rate is similar to third quarter results reflecting the strategic
investments the Company is undertaking to capitalize
11
on market opportunities, as well as in infrastructure and systems to
strengthen efficiencies and reduce costs. Also similar to the third quarter
the nine-month expense rate reflects the integration and leveraging of the
Thompson acquisition.
Operating Income. Operating income grew by 22.9% and improved 40 basis
points as a percent of sales. The elimination of goodwill amortization
benefited operating income by $2.6 million or 30 basis points compared to
Prior Period.
Other Income. Other income increased $0.5 million in the Current
Period. The cessation of the amortization of deferred credits associated
with the adoption of SFAS No. 142 net of increased interest income resulted
in the increase.
Income Taxes. The effective tax rate increased to 37.6% up from 37.4%
in the Prior Period reflecting the impact of the elimination of the
amortization of the non-taxable deferred credits discussed above.
Earnings Per Share, Before Cumulative Effect of Accounting Change.
Diluted earnings per share increased to $1.21 versus $0.99 a year ago. Had
amortization of goodwill and the deferred credits ceased in the Prior
Period, Prior Period earnings would have increased by $1.2 million or $0.02
per diluted share.
LIQUIDITY AND CAPITAL RESOURCES
Over the past nine months, Patterson generated $34.2 million of cash from
operations, compared to $46.2 million in the Prior Period. The $12.0
million decline in operating cash flows, despite a 22.1% increase in
earnings, primarily stemmed from significant financing activities in the
third quarter. Contractual stipulations of the new commercial paper conduit
agreement combined with the Company's contract terms and the timing of
selling the contracts created a temporary increase in the receivable
balance. Days sales outstanding were 48 days at the end of the third
quarter. Inventory turns were 6.9, an improvement of .3 turns over the
Prior Period.
We invested $5.0 million to acquire Distribution Quebec Dentaire Inc., and
to settle certain contingent consideration obligations related to previous
acquisitions. In comparison, we used $86.1 million of cash in the Prior
Period primarily to purchase the assets of J. A. Webster, Inc. The Company
also repurchased $13.1 million of common stock versus $8.3 million in the
Prior Period.
The Company expects funds generated by operations and existing cash and
cash equivalents to continue to be its most significant sources of
liquidity. The Company currently believes funds generated from the expected
results of operations and available cash and cash equivalents of $163.7
million will be sufficient to meet the Company's working capital needs and
finance anticipated expansion plans and strategic initiatives for the next
fiscal year. Also, in November 2002, the Company entered into a new credit
facility, which provides for an unsecured line of credit of up to $50
million. Should additional investment opportunities arise, management
believes that the strength of the Company's earnings, cash flows and
balance sheet will permit the Company to obtain additional debt or equity
capital, if necessary, at a reasonable cost.
12
CRITICAL ACCOUNTING POLICIES
There has been no material change in the Company's Critical Accounting
Policies, as disclosed in its 2002 Annual Report on Form 10-K filed July
25, 2002.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
Certain information of a non-historical nature contains forward-looking
statements. Words such as "believes," "expects," "plans," "estimates,"
"intends" and variations of such words are intended to identify such
forward-looking statements. The statements are not guaranties of future
performance and are subject to certain risks, uncertainties or assumptions
that are difficult to predict; therefore, the Company cautions shareholders
and prospective investors that the following important factors, among
others, could cause the Company's actual operating results to differ
materially from those expressed in any forward-looking statements. The
statements under this caption are intended to serve as cautionary
statements within the meaning of the Private Securities Litigation Reform
Act of 1995. The following information is not intended to limit in any way
the characterization of other statements or information under other
captions as cautionary statements for such purpose. The order in which such
factors appear below should not be construed to indicate their relative
importance or priority.
o The Company's ability to meet increased competition from national,
regional and local full-service distributors and mail-order
distributors of dental and veterinary products, while maintaining
current or improved profit margins.
o The ability of the Company to retain its base of customers and to
increase its market share.
o The ability of the Company to maintain satisfactory relationships with
qualified and motivated sales personnel.
o The continued ability of the Company to maintain satisfactory
relationships with key vendors and the ability of the Company to
create relationships with additional manufacturers of quality,
innovative products.
o Changes in the economics of dentistry affecting dental practice growth
and the demand for dental products, including the ability and
willingness of dentists to invest in high-technology diagnostic and
therapeutic products.
o Reduced growth in expenditures for dental services by private dental
insurance plans.
o The accuracy of the Company's assumptions concerning future per capita
expenditures for dental services, including assumptions as to
population growth and the demand for preventive dental services such
as periodontic, endodontic and orthodontic procedures.
o The rate of growth in demand for infection control products currently
used for prevention of the spread of communicable diseases such as
AIDS, hepatitis and herpes.
o Changes in the economics of the veterinary supply market, including
reduced growth in per capita expenditures for veterinary services and
reduced growth in the number of households owning pets.
13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in market risk during the three months
ended January 25, 2003. For additional information refer to Item 7A of the
Company's 2002 Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Within the 90 days prior to the date of this report, the Company
carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's
Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure
controls and procedures as defined in Exchange Act Rules 13a-14(c) and
15d-14(c). Based on that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective in alerting them timely to
material information relating to the Company (including its
consolidated subsidiaries) required to be included in the Company's
periodic SEC filings.
(b) Changes in Internal Controls
There were no significant changes in the Company's internal controls
or in other factors that could significantly affect these controls
subsequent to the date of their evaluation.
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.20 Patterson Dental Company Stock Option Plan For Canadian
Employees
10.21 Credit Agreement dated as of November 22, 2002 among
Patterson Dental Company, The Lenders, and Bank One.
99.2 Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C.ss.1350, as Adopted, pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
(b) No reports on Form 8-K were filed during the quarter for which this
report is filed.
All other items under Part II have been omitted because they are inapplicable or
the answers are negative, or, in the case of legal proceedings, were previously
reported in the Annual Report on Form 10-K filed July 25, 2002.
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PATTERSON DENTAL COMPANY
(Registrant)
Dated: March 10, 2003
By: /s/ R. Stephen Armstrong
--------------------------------------
R. Stephen Armstrong
Executive Vice President, Treasurer
and Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
15
CERTIFICATIONS PURSUANT TO
SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Peter L. Frechette, the Chief Executive Officer of Patterson Dental Company,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Patterson Dental
Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation , to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 10, 2003 /s/ Peter L. Frechette
------------------------
Peter L. Frechette
Chief Executive Officer
16
CERTIFICATIONS PURSUANT TO
SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, R. Stephen Armstrong, the Chief Financial Officer of Patterson Dental
Company, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Patterson Dental
Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation , to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 10, 2003 /s/ R. Stephen Armstrong
------------------------
R. Stephen Armstrong
Chief Financial Officer
17