UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED OCTOBER 30, 2004.
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
Commission File No. 0-20572
PATTERSON COMPANIES, INC.
(Exact name of registrant as specified in its charter)
Minnesota | 41-0886515 | |
(State of incorporation) | (I.R.S. Employer Identification No.) |
1031 Mendota Heights Road, St. Paul, Minnesota 55120
(Address of principal executive offices, including zip code)
(651) 686-1600
(Registrants 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
Indicate by check mark whether the registrant is an accelerated filer (as defined in rule 12b-2 of the Exchange Act.) x Yes ¨ No
Patterson Companies, Inc. has outstanding 137,398,268 shares of common stock as of December 3, 2004.
INDEX
Page | ||||
PART I - FINANCIAL INFORMATION |
||||
Item 1 - |
Financial Statements (Unaudited) |
3-10 | ||
Condensed Consolidated Balance Sheets as of October 30, 2004 and April 24, 2004 |
3 | |||
4 | ||||
5 | ||||
6-10 | ||||
Item 2 - |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
10-15 | ||
Item 3 - |
16 | |||
Item 4 - |
16 | |||
PART II - OTHER INFORMATION |
||||
Item 2 - |
18 | |||
Item 4 - |
18 | |||
Item 6 - |
18 | |||
19 | ||||
20 |
Safe Harbor Statement Under The Private Securities Litigation Reform Act Of 1995:
This Form 10-Q for the period ended October 30, 2004, 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 that are qualified in their entirety by cautionary language set forth in the Companys Form 10-K report filed July 8, 2004 and other documents previously filed with the Securities and Exchange Commission. See also pages 15 and 16 of this Form 10-Q, Factors That May Affect Future Operating Results.
2
PART I - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
October 30, 2004 |
April 24, 2004 |
|||||||
(Unaudited) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 265,806 | $ | 287,160 | ||||
Short-term investments |
20,391 | 8,018 | ||||||
Receivables, net |
279,530 | 285,249 | ||||||
Inventory |
188,630 | 173,022 | ||||||
Prepaid expenses and other current assets |
29,019 | 24,694 | ||||||
Total current assets |
783,376 | 778,143 | ||||||
Property and equipment, net |
86,417 | 77,233 | ||||||
Long-term receivables, net |
26,238 | 25,840 | ||||||
Goodwill |
632,306 | 601,194 | ||||||
Identifiable intangibles, net |
119,531 | 97,023 | ||||||
Other |
9,220 | 9,524 | ||||||
Total assets |
$ | 1,657,088 | $ | 1,588,957 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 176,632 | $ | 149,528 | ||||
Accrued payroll expense |
23,736 | 30,796 | ||||||
Other accrued expenses |
67,391 | 61,409 | ||||||
Income taxes payable |
2,656 | 1,924 | ||||||
Current maturities of long-term debt |
20,031 | 20,031 | ||||||
Total current liabilities |
290,446 | 263,688 | ||||||
Long-term debt |
416,542 | 479,556 | ||||||
Deferred taxes |
46,946 | 43,955 | ||||||
Total liabilities |
753,934 | 787,199 | ||||||
STOCKHOLDERS EQUITY |
||||||||
Common stock |
1,374 | 685 | ||||||
Additional paid-in capital |
113,029 | 100,995 | ||||||
Accumulated other comprehensive income |
9,167 | 2,901 | ||||||
Retained earnings |
801,450 | 718,818 | ||||||
Notes receivable from ESOP |
(21,866 | ) | (21,641 | ) | ||||
Total stockholders equity |
903,154 | 801,758 | ||||||
Total liabilities and stockholders equity |
$ | 1,657,088 | $ | 1,588,957 | ||||
See accompanying notes.
3
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended |
Six Months Ended |
|||||||||||||||
October 30, 2004 |
October 25, 2003 |
October 30, 2004 |
October 25, 2003 |
|||||||||||||
Net sales |
$ | 578,237 | $ | 477,510 | $ | 1,156,180 | $ | 910,772 | ||||||||
Cost of sales |
373,610 | 311,189 | 747,584 | 599,869 | ||||||||||||
Gross margin |
204,627 | 166,321 | 408,596 | 310,903 | ||||||||||||
Operating expenses |
134,568 | 110,043 | 270,935 | 209,616 | ||||||||||||
Operating income |
70,059 | 56,278 | 137,661 | 101,287 | ||||||||||||
Other income and (expense): |
||||||||||||||||
Finance income, net |
1,180 | 1,365 | 2,501 | 3,263 | ||||||||||||
Interest expense |
(3,791 | ) | (1,889 | ) | (7,549 | ) | (1,921 | ) | ||||||||
Gain on currency exchange |
447 | 151 | 488 | 378 | ||||||||||||
Income before taxes |
67,895 | 55,905 | 133,101 | 103,007 | ||||||||||||
Income taxes |
25,391 | 21,019 | 49,782 | 38,728 | ||||||||||||
Net income |
$ | 42,504 | $ | 34,886 | $ | 83,319 | $ | 64,279 | ||||||||
Earnings per share: |
||||||||||||||||
Basic |
$ | 0.31 | $ | 0.26 | $ | 0.61 | $ | 0.47 | ||||||||
Diluted |
$ | 0.31 | $ | 0.25 | $ | 0.60 | $ | 0.47 | ||||||||
Weighted average common shares: |
||||||||||||||||
Basic |
136,737 | 135,812 | 136,630 | 135,744 | ||||||||||||
Diluted |
138,795 | 137,698 | 138,702 | 137,280 | ||||||||||||
See accompanying notes.
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Six Months Ended |
||||||||
October 30, 2004 |
October 25, 2003 |
|||||||
Operating activities: |
||||||||
Net income |
$ | 83,319 | $ | 64,279 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation |
7,418 | 5,857 | ||||||
Amortization of intangibles |
5,816 | 1,459 | ||||||
Bad debt expense |
773 | 1,303 | ||||||
Change in assets and liabilities, net of acquired |
28,085 | (1,812 | ) | |||||
Net cash provided by operating activities |
125,411 | 71,086 | ||||||
Investing activities: |
||||||||
Additions to property and equipment, net |
(13,386 | ) | (6,861 | ) | ||||
Acquisitions, net |
(72,762 | ) | (581,323 | ) | ||||
(Purchase) sale of short-term investments |
(12,373 | ) | 11,269 | |||||
Net cash used in investing activities |
(98,521 | ) | (576,915 | ) | ||||
Financing activities: |
||||||||
Payments and retirement of long-term debt and obligations under capital leases |
(60,420 | ) | (276 | ) | ||||
Proceeds from debt |
| 498,750 | ||||||
Common stock issued, net |
9,036 | 3,878 | ||||||
Net cash (used in) provided by financing activities |
(51,384 | ) | 502,352 | |||||
Effect of exchange rate changes on cash |
3,140 | 1,050 | ||||||
Net decrease in cash and cash equivalents |
(21,354 | ) | (2,427 | ) | ||||
Cash and cash equivalents at beginning of period |
287,160 | 195,182 | ||||||
Cash and cash equivalents at end of period |
$ | 265,806 | $ | 192,755 | ||||
See accompanying notes.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)
October 30, 2004
NOTE 1 GENERAL
Basis of Presentation
In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly the financial position of the Company as of October 30, 2004 and the results of operations and the cash flows for the periods ended October 30, 2004 and October 25, 2003. Such adjustments are of a normal recurring nature. The results of operations for the periods ended October 30, 2004 and October 25, 2003, are not necessarily indicative of the results to be expected for the full year. These financial statements should be read in conjunction with the financial statements included in the 2004 Annual Report on Form 10-K filed on July 8, 2004.
The consolidated financial statements of Patterson Companies, Inc. 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.
Fiscal Year End
The fiscal year end of the Company is the last Saturday in April. The second quarter of fiscal 2005 and 2004 represent the 13 weeks ended October 30, 2004 and October 25, 2003, respectively. Because of the Companys long established practice of using a 52/53-week fiscal year convention, the first six months of fiscal 2005 include 27 weeks while the first six months of fiscal 2004 include 26 weeks.
Stock Split
In October 2004, the Companys stock was split two-for-one in the form of a 100% stock dividend. All prior share and per share amounts have been restated to reflect the stock split.
Reclassifications
Certain amounts previously reported have been reclassified to conform to the current presentation.
Comprehensive Income
Total comprehensive income was $46,805 and $89,585 for the three and six months ended October 30, 2004, respectively, and $37,529 and $68,419 for the three and six months ended October 25, 2003, respectively. Other than net income, comprehensive income includes foreign currency translation effects and unrealized gains and losses on cash flow hedging instruments.
6
Stock-Based Compensation
The Company has adopted the disclosure requirements of SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of FASB Statement 123. The Company has chosen to continue with its current practice of applying the recognition and measurement principles of APB No. 25 Accounting for Stock Issued to Employees. This method defines the Companys cost as the excess of the stocks market value at the time of the grant over the amount that the employee is required to pay. In accordance with APB Opinion No. 25, no compensation expense was recognized for the stock based plans for the quarters ended October 30, 2004 and October 25, 2003, as the price paid was not less than 100 percent of fair market value.
The following table illustrates the effect on net earnings and net earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock Based Compensation to stock-based employee compensation:
Three Months Ended |
Six Months Ended | |||||||||||
October 30, 2004 |
October 25, 2003 |
October 30, 2004 |
October 25, 2003 | |||||||||
Net income, as reported |
$ | 42,504 | $ | 34,886 | $ | 83,319 | $ | 64,279 | ||||
Deduct: total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effect |
534 | 509 | 1,080 | 1,002 | ||||||||
Pro forma net earnings |
$ | 41,970 | $ | 34,377 | $ | 82,239 | $ | 63,277 | ||||
Earnings per sharebasic: |
||||||||||||
As reported |
$ | 0.31 | $ | 0.26 | $ | 0.61 | $ | 0.47 | ||||
Pro forma |
$ | 0.31 | $ | 0.25 | $ | 0.61 | $ | 0.46 | ||||
Earnings per sharediluted: |
||||||||||||
As reported |
$ | 0.31 | $ | 0.25 | $ | 0.60 | $ | 0.47 | ||||
Pro forma |
$ | 0.30 | $ | 0.25 | $ | 0.60 | $ | 0.46 |
Earnings Per Share
The following table sets forth the denominator for the computation of basic and diluted earnings per share:
Three Months Ended |
Six Months Ended | |||||||
October 30, 2004 |
October 25, 2003 |
October 30, 2004 |
October 25, 2003 | |||||
Denominator: |
||||||||
Denominator for basic earnings per share - weighted-average shares |
136,737 | 135,812 | 136,630 | 137,744 | ||||
Effect of dilutive securities: |
||||||||
Stock option plans |
1,723 | 1,408 | 1,776 | 1,194 | ||||
Employee Stock Purchase Plan |
44 | 24 | 44 | 24 | ||||
Capital Accumulation Plan |
232 | 278 | 193 | 230 | ||||
Convertible debentures |
59 | 176 | 59 | 88 | ||||
Dilutive potential common shares |
2,058 | 1,886 | 2,072 | 1,536 | ||||
Denominator for diluted earnings per |
||||||||
share - adjusted weighted-average shares and assumed conversions |
138,795 | 137,698 | 138,702 | 137,280 | ||||
7
NOTE 2 GOODWILL AND OTHER INTANGIBLE ASSETS
The goodwill balance by business segment as of April 24, 2004 and October 30, 2004 is as follows:
Balance at April 24, 2004 |
Acquisition Activity |
Translation And Other Activity |
Balance at October 30, 2004 | ||||||||||
Dental Supply |
$ | 68,885 | $ | 5,542 | $ | 3,004 | $ | 77,431 | |||||
Rehabilitative Supply |
469,344 | 12,979 | 83 | 482,406 | |||||||||
Veterinary Supply |
62,965 | 11,015 | (1,511 | ) | 72,469 | ||||||||
Total |
$ | 601,194 | $ | 29,536 | $ | 1,576 | $ | 632,306 | |||||
The increase in the goodwill balance during the six-month period ended October 30, 2004 reflects the purchase price allocation of acquisitions, contingent earn-out payments from acquisitions made in prior years and changes in currency exchange rates.
Balances of acquired intangible assets excluding goodwill are as follows:
October 30, 2004 |
April 24, 2004 |
|||||||
Copyrights, trade names and trademarks |
$ | 78,335 | $ | 56,275 | ||||
Customer lists and other amortizable intangible assets |
58,602 | 52,338 | ||||||
Total |
136,937 | 108,613 | ||||||
Less: Accumulated amortization |
(17,406 | ) | (11,590 | ) | ||||
Total identifiable intangible assets, net |
$ | 119,531 | $ | 97,023 | ||||
The increase in acquired intangible assets excluding goodwill during the six-month period ended October 30, 2004 reflects the purchase price allocation of acquisitions and changes in currency exchange rates.
NOTE 3 ACQUISITIONS
On September 12, 2003, the Company acquired the stock of AbilityOne Products Corp. (AbilityOne). AbilityOne is the worlds leading distributor of rehabilitative supplies and non-wheelchair assistive patient products to the global physical and occupational therapy markets. The purchase price of $585.8 million consisted of a base price of $576.0 million and an additional $9.8 for an idle facility and transaction expenses. In conjunction with the transaction, the Company also issued $4.5 million of convertible debentures maturing in 2006. The debentures are convertible into the Common Stock of Patterson Companies, Inc. at a price of $25.49 per share. Interest on the debentures is accrued at the rate of 0.5% per annum. In May 2004, $3 million of the convertible debentures were converted into 117,692 shares of common stock.
8
The results of AbilityOnes operations are included in the accompanying financial statements since the date of acquisition. When acquired, AbilityOne became a reportable business segment (rehabilitative supply) of the Company. The purchase price plus direct acquisition costs were allocated on the basis of estimated fair values at the date of acquisition. The final purchase price allocation is as follows:
Purchase price |
$ | 585,828 | ||
Less: |
||||
Accounts receivable |
27,930 | |||
Income tax receivable |
8,069 | |||
Inventory |
24,394 | |||
Fixed assets |
12,740 | |||
Other assets |
10,280 | |||
Accounts payable |
(14,810 | ) | ||
Deferred taxes |
(35,187 | ) | ||
Accrued expenses |
(8,897 | ) | ||
Hedge liability |
(2,355 | ) | ||
Identifiable intangible assets |
94,320 | |||
Goodwill |
$ | 469,344 | ||
The following pro forma summary presents the results of operations, as if the acquisition had occurred at the beginning of fiscal 2004. The pro forma results of operations are not necessarily indicative of the results that would have been achieved had the two companies been combined:
Three Months Ended October 25, 2003 |
Six Months Ended October 25, 2003 | |||||
Net sales |
$ | 501,631 | $ | 991,245 | ||
Net income |
$ | 37,593 | $ | 71,122 | ||
Earnings per share: |
||||||
Basic |
$ | 0.28 | $ | 0.52 | ||
Diluted |
$ | 0.27 | $ | 0.52 |
Also, during the quarter ended October 30, 2004, the Company completed two all-cash acquisitions. In September 2004, the Company acquired a small dental equipment dealer. In October 2004, the Company acquired Milburn Distributions, Inc. (Milburn), the largest distributor specializing in the U.S. equine veterinary supply market. Additionally, the Company completed the acquisitions of Medco Supply Company, Inc. and CAESY Education Systems, Inc. in May 2004. The operating results of these acquisitions are included in the Companys condensed consolidated statements of income from the date of acquisition. Pro forma results of operations have not been presented for these acquisitions since the effects of the acquisitions were not material to the Company either individually or in the aggregate.
NOTE 4 SEGMENT REPORTING
Patterson Companies, Inc. is comprised of three reportable segments: dental, veterinary, and rehabilitative supply. The Companys reportable business segments are strategic business units that offer similar products and services to different customer bases. The dental supply segment provides a virtually complete range of consumable dental products, clinical and laboratory equipment and value-added services to dentists, dental laboratories, institutions and other dental healthcare providers
9
throughout North America. The veterinary supply segment provides consumable supplies, equipment, diagnostic products, biologicals (vaccines) and pharmaceuticals to companion-pet veterinary clinics primarily in the Eastern, Mid-Atlantic, Southeastern, Midwest and Northwest regions of the United States. The rehabilitative supply segment provides a comprehensive range of distributed and self-manufactured rehabilitative medical supplies and non-wheelchair assistive products to acute care hospitals, long-term care facilities, rehabilitation clinics, dealers and schools.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates segment performance based on operating income.
The following table presents information about the Companys reportable segments:
Three Month Ended |
Six Months Ended | |||||||||||
October 30, 2004 |
October 25, 2003 |
October 30, 2004 |
October 25, 2003 | |||||||||
Net sales |
||||||||||||
Dental supply |
$ | 438,918 | $ | 392,657 | $ | 864,535 | $ | 764,469 | ||||
Rehabilitative supply |
75,205 | 31,842 | 152,450 | 31,842 | ||||||||
Veterinary supply |
64,114 | 53,011 | 139,195 | 114,461 | ||||||||
Consolidated net sales |
$ | 578,237 | $ | 477,510 | $ | 1,156,180 | $ | 910,772 | ||||
Operating income |
||||||||||||
Dental supply |
$ | 54,229 | $ | 44,629 | $ | 103,939 | $ | 84,819 | ||||
Rehabilitative supply |
12,897 | 7,543 | 27,313 | 7,543 | ||||||||
Veterinary supply |
2,933 | 4,106 | 6,409 | 8,925 | ||||||||
Consolidated operating income |
$ | 70,059 | $ | 56,278 | $ | 137,661 | $ | 101,287 | ||||
The following table presents sales information by product for the Company:
Three Months Ended |
Six Months Ended | |||||||||||
October 30, 2004 |
October 25, 2003 |
October 30, 2004 |
October 25, 2003 | |||||||||
Net sales |
||||||||||||
Consumable and printed products |
$ | 367,140 | $ | 304,762 | $ | 757,003 | $ | 588,792 | ||||
Equipment and software |
167,675 | 136,055 | 312,659 | 252,793 | ||||||||
Other |
43,422 | 36,693 | 86,518 | 69,187 | ||||||||
Total |
$ | 578,237 | $ | 477,510 | $ | 1,156,180 | $ | 910,772 | ||||
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
This Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A) should be read in conjunction with the MD&A included in our Form 10-K report filed July 8, 2004, for important background information regarding, among other things, an overview to the markets in which we operate and our business strategies. Notes 3 and 4 to the accompanying condensed consolidated financial statements are incorporated by reference into this discussion.
10
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 |
Six Months Ended |
|||||||||||
October 30, 2004 |
October 25, 2003 |
October 30, 2004 |
October 25, 2003 |
|||||||||
Net sales |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||
Cost of sales |
64.6 | % | 65.2 | % | 64.7 | % | 65.9 | % | ||||
Gross margin |
35.4 | % | 34.8 | % | 35.3 | % | 34.1 | % | ||||
Operating expenses |
23.3 | % | 23.0 | % | 23.4 | % | 23.0 | % | ||||
Operating income |
12.1 | % | 11.8 | % | 11.9 | % | 11.1 | % | ||||
Other (expense) income, net |
(0.4 | )% | (0.1 | )% | (0.4 | )% | 0.2 | % | ||||
Income before income taxes |
11.7 | % | 11.7 | % | 11.5 | % | 11.3 | % | ||||
Net income |
7.4 | % | 7.3 | % | 7.2 | % | 7.1 | % |
QUARTER ENDED OCTOBER 30, 2004 COMPARED TO QUARTER ENDED OCTOBER 25, 2003.
Net Sales. Net sales for the three months ended October 30, 2004 (Current Quarter) totaled $578.2 million, a 21.1% increase from $477.5 million reported for the three months ended October 25, 2003 (Prior Quarter). Sales for the Current Quarter include the incremental contributions from five acquisitions earlier this calendar year, in addition to the September 12, 2003 acquisition of AbilityOne. The impact of foreign exchange rate changes on net sales for the Current Quarter was approximately 0.6% of total net sales.
The five most recent acquisitions include the ProVet division of Lextron, Inc. (ProVet) in April 2004, Medco Supply Company, Inc. (Medco) and CAESY Education Systems, Inc. (CAESY) in May 2004, the nominal acquisition of a small dental equipment dealer in September 2004, and the October 2004 acquisition of Milburn Distributions, Inc (Milburn). The operations of AbilityOne, combined with the more recent Medco transaction, now form the rehabilitation segment of the business.
Dental segment sales rose 11.8% to $438.9 million. Substantially all of this growth was internally generated. Sales growth in the dental supply segment was led by sales of equipment, which grew 20.8%, reflecting the continuation of robust demand for both basic and new-generation equipment, including the CEREC®3 dental restorative system and digital radiography systems. Consumable and printed office products increased 6.3% in the Current Quarter led by U.S. consumable growth of nearly 7%. This improvement reflects the positive impact of continued strengthened market focus, new sales training, tools and programs, and the addition of
11
territory sales representatives to the sales force. Sales of other services and products, consisting primarily of parts, technical service labor, software support and insurance e-claims, grew 13.9% compared to the Prior Quarter.
Veterinary sales increased 20.9% to $64.1 million compared to $53.0 million in the Prior Quarter. The positive impact of the ProVet and Milburn acquisitions was partly offset by $5 million of reduced sales related to the unexpected voluntary recall from the U.S. market in September of ProHeart 6, an injectable heartworm medication and the conversion of a temporary pharmaceutical distribution agreement into an agency agreement late in the Prior Quarter. The ProHeart 6 recall included the impact of product returns. After adjusting for the acquisitions, the recall and the conversion of the temporary pharmaceutical distribution agreement, internally generated veterinary sales rose 8% in the Current Quarter. All product returns of ProHeart 6 have been accounted for and, accordingly, the further impact from the recall will be limited only to the lost revenue opportunity, partly offset by sales of alternative heartworm medications on an agency commission basis. As a result, the revenue impact is expected to decline to approximately $2.5 million in the third quarter, a seasonally low period for Webster.
AbilityOne, acquired in September 2003, serves the rehabilitation supply markets. Sales for the rehabilitative supply segment, which include the May 2004 acquisition of Medco, were $75.2 million. Excluding the acquisition, Current Quarter sales increased 9% on a pro forma basis.
Gross Margins. Gross margin percentage increased from 34.8% to 35.4% in the Current Quarter. The improvement was driven by dental operations, whose gross margin benefited from strong sales of new-generation equipment and software, including CEREC and the new CAESY product line. Further benefiting margins, the Current Quarter included a full quarter of AbilityOnes operations, which have higher margins than our other businesses, whereas the Prior Quarter included only seven weeks of AbilityOne operations.
Operating Expenses. Operating expenses as a percent of sales increased from 23.0% in the Prior Quarter to 23.3% in the Current Quarter. The increase was due almost entirely to recent acquisitions. The Company is assimilating businesses with cost structures higher than the Companys historic norm, absorbing integration expenses associated with the acquisitions, and absorbing the impact of identifiable intangible asset amortization resulting from the accounting for these transactions. The operating expenses as a percent of sales for the veterinary supply business were 17.3% in the Current Quarter, an increase from 15.1% in the Prior Quarter. Driving the increase were the costs associated with the acquisitions of ProVet and Milburn, and the loss of leverage stemming from the conversion of the distribution agreement discussed above, as well as the recall of ProHeart 6.
Operating Income. Operating income increased 30 basis points to 12.1% of net sales, which reflects a solid improvement in our dental business margin that was partially offset by reduced operating margins in the veterinary and rehabilitative supply businesses when compared to the Prior Quarter.
Other (Expense)-Income. Net other expense was $2.2 million for the Current Quarter compared to $0.4 million in the Prior Quarter due to a full quarter of interest expense incurred on the debt financing used to purchase AbilityOne. The debt was not incurred until midway through the Prior Quarter. The weighted average effective interest rate on all debt was approximately 3.3% in the Current Quarter. A similar rate in the third quarter of fiscal 2005 is expected.
12
Income Taxes. The effective income tax rate for the Current Quarter was 37.4%, which is consistent with the first quarter of the current fiscal year. In the Prior Quarter, the rate was 37.6%. The decrease in the rate reflects the addition of the foreign operations of AbilityOne, particularly in the United Kingdom, that caused the estimated annual effective tax rate to decline since the rates in the United Kingdom are less than in the United States at this current time.
Earnings Per Share. Diluted earnings per share increased to $0.31 versus $0.25 the same quarter a year ago, an increase of 24%.
SIX-MONTHS ENDED OCTOBER 30, 2004 COMPARED TO SIX-MONTHS ENDED OCTOBER 25, 2003.
Net Sales. Net sales for the six months ended October 30, 2004 (Current Period) totaled $1,156.2 million, a 27.0% increase from $910.7 million reported for the six months ended October 25, 2003 (Prior Period). Sales for the Current Period include the incremental contributions from five acquisitions earlier this calendar year, in addition to the September 12, 2003 acquisition of AbilityOne. Additionally, the Current Period includes the impact of an extra or twenty-seventh week in the Current Period resulting from the Companys long-standing convention of using a fifty-two, fifty-three week fiscal year ending on the final Saturday of April. Fiscal year 2005 will be a fifty-three week year.
It is difficult to precisely quantify the impact of an extra week on six-month operating results since certain aspects of the Companys business, such as equipment sales and contract services, are not as directly affected by the additional billing days.
Dental segment sales rose 13.1% to $864.5 million. Substantially all of this growth was internally generated and included a contribution from the estimated impact of the extra week of 3.7%. Sales growth in the dental supply segment was led by sales of equipment, which grew 18.8%, reflecting the continuation of robust demand for both basic and new-generation equipment, including the CEREC®3 dental restorative system and digital radiography systems. Consumable and printed office products increased 10.0% in the Current Period led by U.S. consumable growth of 10.7%. This improvement reflects the positive impact of continued strengthened market focus, new sales training, tools and programs, and the addition of territory sales representatives to the sales force. Sales of other services and products, consisting primarily of parts, technical service labor, software support and insurance e-claims, grew 15.0% compared to the Prior Period.
Veterinary sales increased 21.6% to $139.2 million compared to $114.5 million in the Prior Period. As noted above, the positive impact of the ProVet and Milburn acquisitions was partly offset by $5 million of reduced sales related to the recall of ProHeart 6 and the conversion of a temporary pharmaceutical distribution agreement into an agency agreement late in the latter half of the Prior Period. After adjusting for the acquisitions, the recall and the conversion of the temporary pharmaceutical distribution agreement, internally generated veterinary sales rose 6.5% in the Current Period. The estimated impact of the extra week contributed 3.4% to the Current Period sales increase.
AbilityOne, acquired in September 2003, serves the rehabilitation supply markets. Sales for the rehabilitative supply segment, which include the May 2004 acquisition of Medco, were $152.5 million. Excluding the acquisition, Current Period sales increased 12.3% on a pro forma basis. This increase includes the estimated impact of the extra week, which contributed 4.5% to the Current Period sales increase.
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Gross Margins. Gross margin percentage increased from 34.1% to 35.3% in the Current Period. As discussed above, dental operations partially drove the improvement, with additional positive impact in the Current Period resulting from a full six months of AbilityOnes operations being included in the consolidated operations. As discussed, the Prior Period included approximately seven weeks of AbilityOnes operations.
Operating Expenses. Operating expenses as a percent of sales increased from 23.0% in the Prior Period to 23.4% in the Current Period. The increase was due almost entirely to recent acquisitions. The Company is assimilating businesses with cost structures higher than the Companys historic norm, absorbing integration expenses associated with the acquisitions, and absorbing the impact of identifiable intangible asset amortization resulting from the accounting for these transactions. Total amortization expense for the Current Period was $5,816, an increase from $1,459 in the Prior Period. The operating expenses as a percent of sales for the veterinary supply business were 16.4% in the Current Period, an increase from 13.8% in the Prior Period. Driving the increase were the costs associated with the acquisitions of ProVet and Milburn, and the loss of leverage stemming from both the conversion of the distribution agreement discussed above, as well as the recall of ProHeart 6.
Operating Income. Operating income increased 80 basis points to 11.9% of net sales, which reflects an increase in our dental business margin that was partially offset by reduced operating margins in the veterinary and rehabilitative supply businesses when compared to the Prior Period.
Other (Expense)Income. Net other expense was $4.6 million for the Current Period compared to $1.7 million of net other income in the Prior Period. The increase in net expense of $6.3 is due primarily to six months of interest expense incurred on debt financing used to purchase AbilityOne. Interest expense in the Current Period totaled $7.5 million which is an increase from the $1.9 million included in the operations of the Prior Period. The related debt was not incurred until midway through the second quarter of fiscal 2004.
Income Taxes. The effective income tax rate was for the Current Period was 37.4%, a decrease from 37.6% in the Prior Period. The decrease in the rate reflects the addition of the foreign operations of AbilityOne, particularly in the United Kingdom, that caused the estimated annual effective tax rate to decline since the rates in the United Kingdom are less than in the United States of America at this current time.
Earnings Per Share. Diluted earnings per share increased to $0.60 versus $0.47 for the same quarter a year ago, an increase of 28%.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended October 30, 2004, the Company generated $125.4 million of cash from operations on earnings of $83.3 million, compared to $71.1 million on earnings of $64.3 million in the six moths ended October 25, 2003. Included in operating cash flow is approximately $20 million of additional accounts payable outstanding at Current Period end that resulted from a
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difference in the sequencing of our routine cash disbursement cycle and our fiscal year calendar. This difference has caused about one additional week of trade payables to be outstanding at Current Period end.
Also included in operating cash flow is an incremental $20 million of proceeds from the sale of finance contracts which had been generated during the fourth quarter of the prior year, but which could not be sold until this years first quarter. Historically, the Company experiences lower equipment sales volumes, and lower financing, in the first quarter of each fiscal year as compared to the fourth quarter of the preceding fiscal year.
Cash flows used in investing activities were due primarily to $72.8 million used for acquisitions, including Medco, CAESY, and Milburn, and $13.4 million in capital expenditures.
Payments on debt totaled $60.4 million. In August 2004, the Company paid $50 million of bank debt over and above normal amortization. Normal debt payments were approximately $10 million. In May 2004, $3.0 million of convertible debentures were converted into 117,692 shares of common stock.
The Company expects funds generated by operations, existing cash balances and availability under existing bank debt facilities will be sufficient to meet the Companys working capital needs and finance anticipated expansion plans and strategic initiatives over the next fiscal year.
CRITICAL ACCOUNTING POLICIES
There has been no material change in the Companys Critical Accounting Policies, as disclosed in its 2004 Annual Report on Form 10-K filed July 8, 2004.
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 Companys 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. The Company assumes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.
| The Companys ability to meet increased competition from national, regional and local full-service distributors and mail-order distributors of dental, veterinary and rehabilitative and assistive living products, while maintaining current or improved profit margins. |
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| The ability of the Company to retain its base of customers and to increase its market share. |
| The ability of the Company to maintain satisfactory relationships with qualified and motivated sales personnel. |
| 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. |
| 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. |
| Reduced growth in expenditures for dental services by private dental insurance plans. |
| The accuracy of the Companys 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. |
| 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. |
| 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. |
| The effects of healthcare related legislation and regulation, which may affect expenditures or reimbursements for rehabilitative and assistive products. |
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As discussed above, in August 2004 the Company paid $50 million of debt over and above normal amortization. The weighted-average interest rate for the Current Quarter was approximately 3.3% and is not expected to differ significantly in the third quarter of fiscal 2005. There have been no other material changes from April 24, 2004 in the Companys market risk. For further information on market risk, refer to Item 7A in the Companys Annual Report on Form 10-K for the fiscal year ended April 24, 2004.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures.
In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the Exchange Act), the Companys management evaluated, with the participation of the Companys management, including the Companys Chairman and Chief Executive Officer (CEO) and Executive Vice President, Chief
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Financial Officer and Treasurer (CFO), of the effectiveness of the design and operation of the Companys disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of October 30, 2004. Based upon their evaluation of these disclosure controls and procedures, the CEO and CFO concluded that the disclosure controls and procedures were effective as of October 30, 2004 to ensure that material information relating to the Company, including its consolidated subsidiaries, was made known to them by others within those entities, particularly during the period in which this quarterly report on Form 10-Q was being prepared.
Changes in internal controls over financial reporting.
There was no change in the Companys internal control over financial reporting that occurred during the quarter ended October 30, 2004 that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In September 2004, the Companys Board of Directors approved a stock repurchase program under which the Company may repurchase up to six million shares of common stock in open market transactions. The Company did not repurchase any shares during the quarter ended October 30, 2004. As of October 30, 2004, the Company had authority to repurchase six million shares under that program. The repurchase authorization expires on September 30, 2009.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Companys Annual Meeting of Shareholders held on September 13, 2004, the Companys shareholders approved the following matters:
1. ELECTION OF DIRECTORS: | Voted for |
Withheld | ||
To serve for a two-year term expiring in 2006: |
||||
Ellen A. Rudnick |
62,810,524 | 450,015 | ||
To serve for a three-year term expiring in 2007: |
||||
Peter L. Frechette |
62,271,871 | 988,668 | ||
David K. Beecken |
60,424,825 | 2,835,714 |
There were no abstentions or broker non-votes. The other directors of the Company whose terms in office continued after the 2004 Annual Meeting of Shareholders are as follows: terms expiring at the 2005 Annual MeetingRonald E. Ezerski and Andre B. Lacy; and terms expiring at the 2006 Annual MeetingHarold C. Slavkin and James W. Wiltz.
2. | THE ADOPTION OF THE COMPANYS 2002 STOCK OPTION PLAN, AS AMENDED AND RESTATED. The vote was 53,888,412 for, 1,862,800 against, 166,880 abstentions and 7,342,447 broker non-votes. |
3. | RATIFY THE SELECTION OF ERNST & YOUNG LLP AS INDEPENDENT AUDITORS OF THE COMPANY FOR 2005. The vote was 61,479,622 for, 1,716,935 against, and 63,982 abstentions. There were no broker non-votes. |
Votes for matters approved at the Companys Annual Meeting of Shareholders on September 13, 2004 took place prior to the two-for-one stock split in the form of a 100% stock dividend in October 2004 and, accordingly, reflect voting shares prior to the stock split.
The exhibits listed in the accompanying exhibit index are filed as part of this Quarterly Report on Form 10-Q.
All other items under Part II have been omitted because they are inapplicable or the answers are negative, or, as in the case of legal proceedings, were previously reported in the Annual Report on Form 10-K filed July 8, 2004.
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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 COMPANIES, INC. | ||||
(Registrant) | ||||
Dated: December 9, 2004 | ||||
By: | /s/ R. Stephen Armstrong | |||
R. Stephen Armstrong | ||||
Executive Vice President, Treasurer and Chief | ||||
Financial Officer | ||||
(Principal Financial Officer and Principal Accounting Officer) |
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Exhibit Number |
Exhibit Description | |
31.1 | Certifications of the Chief Executive Officer, dated December 9, 2004 | |
31.2 | Certifications of the Chief Financial Officer, dated December 9, 2004 | |
32.1 | Written Statement of the Chief Executive Officer, dated December 9, 2004 | |
32.2 | Written Statement of the Chief Financial Officer, dated December 9, 2004 |
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