Patterson Companies (PDCO) 8-K Patterson Companies Reports Fiscal 2016 Third Quarter Operating Results

Patterson Companies Reports Fiscal 2016 Third Quarter Operating Results

• Sales increased to $1.4 billion, up 47.8 percent on a constant currency basis, including the impact of sales from recently acquired Animal Health International, Inc.

• Adjusted EPS from continuing operations¹ totaled $0.68, a 38.7 percent increase over prior year.

• Dental segment sales rose 5.9 percent on a constant currency basis.

• Animal Health segment sales increased 123.9 percent on a constant currency basis, with $406.6 million in sales attributed to the acquisition of Animal Health International, Inc.

• Company narrows adjusted earnings guidance for fiscal 2016 to $2.42 to $2.48 per diluted share.

St. Paul, Minn. — February 25, 2016 — Patterson Companies, Inc. (Nasdaq: PDCO) today reported consolidated sales of $1.4 billion (see attached Sales Summary for further details) in its fiscal third quarter ended January 30, 2016, up 46 percent over the same period last year. Sales in this fiscal 2016 period include results from the recent Animal Health International, Inc. acquisition.

Adjusted net income from continuing operations¹, which reflects adjustments to exclude certain non-recurring and deal amortization costs, was $65.1 million for the third quarter of fiscal 2016, a 35 percent gain over $48.4 million in the same quarter last year. Adjusted earnings per diluted share from continuing operations¹ was $0.68 in the 2016 third quarter, a 39 percent year-over-year increase. Reported net income from continuing operations was $57.2 million, or $0.60 per diluted share, compared to $46.4 million, or $0.47 per diluted share, in last year’s fiscal third quarter.

“We are pleased with our execution in the third quarter from both a sales and operations perspective. Patterson Companies generated solid organic revenue growth and expanded operating margins in both our Dental and Animal Health businesses. We also made significant additional integration progress in our Animal Health segment,” said Scott Anderson, chairman, president and chief executive officer. “Our sales and support teams are focusing diligently on serving our customers and taking full advantage of our leadership in technology, value-added services and broadened product offerings.”

Patterson Dental

Sales for Patterson Dental, which represent approximately 46 percent of total sales, improved to $637.7 million, up 5.9 percent on a constant currency basis from the same quarter last year. On that same basis, year-over-year sales by category were as follows:

• Consumable dental supplies improved 5.1 percent

• Equipment sales rose 6.8 percent, reflecting strength in both technology and core equipment

• Other services and products, primarily composed of technical service, parts and labor, software support services and office supplies, climbed 7.7 percent

Anderson said, “A highlight for us was the solid growth in the consumables category this quarter, which stemmed from increased patient utilization. We continue to see stable to steadily improving dynamics in the

North American dental market and believe we are increasingly well-positioned to capitalize on this trend – given our technology leadership and support infrastructure – across the full spectrum of dental customers.”

Patterson Animal Health

Sales for Patterson Animal Health, which comprise approximately 54 percent of the company’s total sales, more than doubled to $749.7 million. Sales from Animal Health International, Inc. added $406.6 million to the Animal Health segment during the quarter. Excluding the contribution from Animal Health International, Inc. and accounting for normalized changes in veterinary diagnostic manufacturer relationships, segment sales improved 6.2 percent on a constant currency basis, led by an 11.3 percent increase in the U.S.

Anderson continued, “Overall, our Animal Health business posted solid results for the quarter, driven by a particularly strong performance in the U.S. companion animal business. We remain confident in the pace of our integration progress with Animal Health International, Inc., the synergies we are gaining and the competitive position of our market-leading platform.”

Discontinued Operations

On August 28, 2015, Patterson Companies completed the sale of Patterson Medical to Madison Dearborn Partners for approximately $715 million. As a result of the sale, results of Patterson Medical are classified and reported as discontinued operations in all periods beginning with the fiscal 2016 first quarter.

Share Repurchases and Dividends

Fiscal year-to-date, Patterson repurchased approximately 4.4 million shares of its outstanding common stock, with a value of $200.0 million, leaving approximately 16 million shares for repurchase under the current authorization. The company also paid $21.6 million in cash dividends to shareholders in the third quarter and $67.0 million in the first nine months of fiscal 2016.

Year-to-Date Results¹ 

Consolidated sales for the first nine months of fiscal 2016 totaled $3.9 billion, a 37 percent year-over-year increase. Adjusted net income from continuing operations was $167.3 million, or $1.70 per diluted share, compared to adjusted net income from continuing operations of $132.4 million, or $1.33 per diluted share, in the year-ago period, as outlined in the Third Quarter and Nine-Month Reconciliation table¹. Fiscal 2016 also includes the impact of an extra week.

Business Outlook

Anderson concluded, “With three quarters of the fiscal year completed, we are narrowing our 2016 adjusted earnings guidance range on a continuing operations basis to $2.42 to $2.48 per diluted share. We expect to achieve this growth by concentrating on the strong fundamentals in both of our businesses. In Dental, we intend to capitalize on the favorable North American market conditions. In Animal Health, as we generate synergies from the acquisition, we are focused on driving growth across both the companion and production animal platforms. We continue to create value for shareholders as we balance investing in our business, paying dividends and repurchasing shares.”

The fiscal 2016 annual financial outlook and adjusted earnings guidance:

• Assumes stable North American and international markets

• Includes the impact of an extra week in fiscal 2016 compared to the previous year

• Excludes the impact of additional share repurchases for the remainder of the fiscal year

• Excludes transaction-related costs, integration expense, deal amortization, accelerated debt issuance costs, non-recurring IT initiative training costs and tax costs related to cash repatriation (See Third Quarter and Nine-Month Reconciliation table below)

• Excludes the discontinued operations for Medical

¹Third Quarter and Nine-Month Reconciliation

The following non-GAAP table is provided to adjust reported net income and earnings per share for the impact of tax affected one-time costs, current and prior deal-amortization costs and tax costs related to cash repatriation. Management believes that the adjusted net income and EPS amounts may provide a helpful representation of the company’s current quarter performance.

(Dollars in thousands, except EPS)
	Three Months Ended				Nine Months Ended
	January 30, 2016		January 24, 2015		January 30, 2016		January 24, 2015
Net Income from Continuing Operations - Reported	$	57,190	$	46,434	$	120,064	$	126,624
Transaction-Related Costs	28		—		10,007		—
Deal Amortization	6,921		1,930		18,507		5,767
Integration Expense	925		—		2,979		—
Accelerated Debt Issuance Costs	—		—		3,205		—
Non-Recurring IT Training Costs	77		—		252		—
Tax Impact of Repatriation of Cash	—		—		12,300		—
Net Income from Continuing Operations - Adjusted	$	65,141	$	48,364	$	167,314	$	132,391
Diluted Earnings Per Share from Continuing Operations - Reported	$	0.60	$	0.47	$	1.22	$	1.27
Transaction-Related Costs	—		—		0.10		—
Deal Amortization	0.07		0.02		0.19		0.06
Integration Expense	0.01		—		0.03		—
Accelerated Debt Issuance Costs	—		—		0.03		—
Non-Recurring IT Training Costs	—		—		—		—
Tax Impact of Repatriation of Cash	—		—		0.12		—
Diluted Earnings Per Share from Continuing Operations - Adjusted*	$	0.68	$	0.49	$	1.70	$	1.33

*May not foot due to rounding

Third Quarter Conference Call and Replay

Patterson’s third quarter earnings conference call will start at 10 a.m. Eastern today. Investors can listen to a live webcast of the conference call at www.pattersoncompanies.com. The conference call will be archived on Patterson’s website. A replay of the third quarter conference call can be heard for one week at 888-203-1112 and by providing the Conference ID 6564113, when prompted.

About Patterson Companies, Inc.Patterson Companies, Inc. is a value-added distributor serving the dental and animal health markets.

Dental Market
Patterson's Dental segment provides a virtually complete range of consumable dental products, equipment and

software, turnkey digital solutions and value-added services to dentists and dental laboratories throughout North America.

Animal Health Market
Patterson's Animal Health segment is a leading distributor of products, services and technologies to both the production and companion animal health markets in North America and the U.K.

This press release contains certain forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are information of a non-historical nature and are subject to risks and uncertainties that are beyond Patterson's ability to control. Forward-looking statements generally can be identified by words such as "believes," "expects," "anticipates," "foresees," "forecasts," "estimates" or other words or phrases of similar import. It is uncertain whether any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do, what impact they will have on the results of operations and financial condition of Patterson or the price of Patterson stock. These forward-looking statements involve certain risks and uncertainties that could cause actual results to differ materially from those indicated in such forward-looking statements, including but not limited to the other risks and important factors contained and identified in Patterson's filings with the Securities and Exchange Commission, such as its Quarterly Reports on Form 10-Q and Annual Reports on Form 10-K, any of which could cause actual results to differ materially from the forward-looking statements. Any forward-looking statement in this press release speaks only as of the date on which it is made. Except to the extent required under the federal securities laws, Patterson does not intend to update or revise the forward-looking statements.

For additional information contact:

Ann B. Gugino            Executive Vice President & CFO            
651-686-1600                        

John M. Wright            
Vice President, Investor Relations            
651-686-1364    

Source: Patterson Companies, Inc.

PATTERSON COMPANIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

(Unaudited)

	Three Months Ended						Nine Months Ended
	January 30, 2016			January 24, 2015			January 30, 2016			January 24, 2015
Net sales	$	1,400,853		$	958,628		$	3,932,933		$	2,875,804
Gross profit	339,864			262,442			959,007			772,346
Operating expenses	244,135			185,065			717,638			556,833
Operating income from continuing operations	95,729			77,377			241,369			215,513
Other expense, net	(9,804		)	(7,971		)	(37,477		)	(23,136		)
Income from continuing operations before taxes	85,925			69,406			203,892			192,377
Income taxes	28,735			22,972			83,828			65,753
Net income from continuing operations	57,190			46,434			120,064			126,624
Net income (loss) from discontinued operations	(750		)	8,242			1,500			32,119
Net income	$	56,440		$	54,676		$	121,564		$	158,743
Basic earnings (loss) per share:
Continuing operations	$	0.60		$	0.47		$	1.23		$	1.28
Discontinued operations	(0.01		)	0.08			0.01			0.32
Net basic earnings per share	$	0.59		$	0.55		$	1.24		$	1.60
Diluted earnings (loss) per share:
Continuing operations	$	0.60		$	0.47		$	1.22		$	1.27
Discontinued operations	(0.01		)	0.08			0.01			0.32
Net diluted earnings per share	$	0.59		$	0.55		$	1.23		$	1.59
Shares:
Basic	95,335			98,842			97,809			98,991
Diluted	95,930			99,540			98,488			99,699
Dividends declared per common share	$	0.22		$	0.20		$	0.66		$	0.60
Gross margin - reported	24.3		%	27.4		%	24.4		%	26.9		%
Operating expenses as a % of net sales - adjusted	16.6		%	19.0		%	17.1		%	19.1		%
Adjustments1	0.9			0.3			1.2			0.3
Operating expenses as a % of net sales - reported	17.5		%	19.3		%	18.3		%	19.4		%
Operating income as a % of net sales - adjusted	7.7		%	8.4		%	7.3		%	7.8		%
Adjustments1	(0.9		)	(0.3		)	(1.2		)	(0.3		)
Operating income as a % of net sales - reported	6.8		%	8.1		%	6.1		%	7.5		%
Effective tax rate - adjusted	33.8		%	33.0		%	34.7		%	34.0		%
Adjustments1	(0.4		)	0.1			6.4			0.2
Effective tax rate - reported	33.4		%	33.1		%	41.1		%	34.2		%
1 Refer to the press release for the definition of adjustments to reported results

PATTERSON COMPANIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

	January 30, 2016		January 24, 2015
	(Unaudited)
ASSETS
Current assets:
Cash and short-term investments	$	97,701	$	400,632
Receivables	698,911		586,263
Inventory	814,413		408,422
Prepaid expenses and other current assets	99,831		59,561
Current assets held for sale	—		118,347
Total current assets	1,710,856		1,573,225
Property and equipment, net	278,288		204,133
Goodwill and other intangible assets	1,337,531		424,949
Long-term receivables, net and other	228,995		109,605
Long-term assets held for sale	—		635,794
Total assets	$	3,555,670	$	2,947,706
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	503,523	$	323,294
Other accrued liabilities	197,575		215,075
Current maturities of long-term debt	16,500		—
Borrowings on revolving credit	198,000		—
Current liabilities held for sale	—		39,316
Total current liabilities	915,598		577,685
Long-term debt	1,030,250		725,000
Other non-current liabilities	247,275		81,484
Long-term liabilities held for sale	—		49,414
Total liabilities	2,193,123		1,433,583
Stockholders' equity	1,362,547		1,514,123
Total liabilities and stockholders' equity	$	3,555,670	$	2,947,706

PATTERSON COMPANIES, INC.

SALES SUMMARY

(Dollars in thousands)

(Unaudited)

	January 30, 2016		January 24, 2015		Total Sales Growth		Foreign Exchange Impact		Animal Health International Impact		Internal Growth
Three Months Ended
Consolidated net sales
Consumable1	$	1,059,838	$	638,541	66.0	%	(1.8	)%	63.8	%	4.0	%
Equipment and software	248,779		235,847		5.5		(1.4	)	—		6.9
Other1	92,236		84,240		9.5		(1.4	)	(0.9	)	11.8
Total	$	1,400,853	$	958,628	46.1	%	(1.7	)%	42.4	%	5.4	%
Dental
Consumable1	$	333,835	$	322,682	3.5	%	(1.6	)%	—	%	5.1	%
Equipment and software	232,334		220,738		5.3		(1.5	)	—		6.8
Other1	71,482		67,235		6.3		(1.4	)	—		7.7
Total	$	637,651	$	610,655	4.4	%	(1.5	)%	—	%	5.9	%
Animal Health
Consumable1	$	726,003	$	315,859	129.9	%	(2.0	)%	129.9	%	2.9	%
Equipment and software	16,445		15,109		8.8		(0.1	)	—		8.9
Other1	7,265		6,847		6.1		(3.0	)	(10.8	)	19.9
Total	$	749,713	$	337,815	121.9	%	(2.0	)%	120.4	%	3.5	%
Corporate
Other1	$	13,489	$	10,158	32.8	%	—	%	—	%	32.8	%
Total	$	13,489	$	10,158	32.8	%	—	%	—	%	32.8	%
Nine Months Ended
Consolidated net sales
Consumable1	$	3,042,634	$	2,020,345	50.6	%	(2.2	)%	49.2	%	3.6	%
Equipment and software	610,071		596,650		2.2		(1.5	)	—		3.7
Other1	280,228		258,809		8.3		(1.4	)	(0.5	)	10.2
Total	$	3,932,933	$	2,875,804	36.8	%	(2.0	)%	34.5	%	4.3	%
Dental
Consumable1	$	1,024,323	$	974,534	5.1	%	(1.5	)%	—	%	6.6	%
Equipment and software	572,771		565,483		1.3		(1.6	)	—		2.9
Other1	216,996		206,148		5.3		(1.3	)	—		6.6
Total	$	1,814,090	$	1,746,165	3.9	%	(1.5	)%	—	%	5.4	%
Animal Health
Consumable1	$	2,018,311	$	1,045,811	93.0	%	(2.9	)%	95.0	%	0.9	%
Equipment and software	37,300		31,167		19.7		(0.1	)	—		19.8
Other1	25,852		23,611		9.5		(4.0	)	(5.3	)	18.8
Total	$	2,081,463	$	1,100,589	89.1	%	(2.8	)%	90.2	%	1.7	%
Corporate
Other1	$	37,380	$	29,050	28.7	%	—	%	—	%	28.7	%
Total	$	37,380	$	29,050	28.7	%	—	%	—	%	28.7	%
1 Certain sales were reclassified from consumable to other in current and prior periods.

PATTERSON COMPANIES, INC.

SUPPLEMENTARY FINANCIAL DATA

(In thousands, except per share amounts)

(Unaudited)

	Three Months Ended						Nine Months Ended
	January 30, 2016			January 24, 2015			January 30, 2016			January 24, 2015
Operating income (loss)
Dental	$	82,108		$	78,048		$	223,454		$	214,024
Animal Health	25,959			11,864			64,108			40,187
Corporate	(12,338		)	(12,535		)	(46,193		)	(38,698		)
	$	95,729		$	77,377		$	241,369		$	215,513
Other (expense) income, net
Interest income	$	496		$	1,057		$	1,914		$	3,056
Interest expense	(10,634		)	(8,512		)	(39,931		)	(25,824		)
Other	334			(516		)	540			(368		)
	$	(9,804	)	$	(7,971	)	$	(37,477	)	$	(23,136	)

PATTERSON COMPANIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Nine Months Ended
	January 30, 2016			January 24, 2015
Operating activities:
Net income	$	121,564		$	158,743
Net income from discontinued operations	1,500			32,119
Net income from continuing operations	120,064			126,624
Adjustments to reconcile net income from continuing operations         to net cash (used in) provided by operating activities:
Depreciation & amortization	58,817			31,489
Non-cash employee compensation	20,587			17,940
Change in assets and liabilities, net of acquired	(247,015		)	(56,636		)
Net cash (used in) provided by operating activities- continuing operations	(47,547		)	119,417
Net cash (used in) provided by operating activities- discontinued operations	(38,985		)	38,668
Net cash (used in) provided by operating activities	(86,532		)	158,085
Investing activities:
Additions to property and equipment, net of disposals	(56,280		)	(43,182		)
Acquisitions and equity investments	(1,106,583		)	(8,730		)
Proceeds from sale of securities	48,744			40,775
Other investing activities	—			(543		)
Net cash used in investing activities- continuing operations	(1,114,119		)	(11,680		)
Net cash provided by investing activities- discontinued operations	714,680			4,256
Net cash used in investing activities	(399,439		)	(7,424		)
Financing activities:
Dividends paid	(67,010		)	(60,340		)
Share repurchases	(200,000		)	(47,539		)
Proceeds from issuance of long-term debt, net	988,400			—
Retirement of long-term debt	(678,250		)	—
Draw on revolver	198,000			—
Other financing activities	5,523			6,484
Net cash provided by (used in) financing activities	246,663			(101,395		)
Effect of exchange rate changes on cash	(10,251		)	(24,452		)
Net change in cash and cash equivalents	$	(249,559	)	$	24,814