FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
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EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JANUARY 27, 2001.
______ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
Commission File No. 0-20572
PATTERSON DENTAL COMPANY
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(Exact Name of Registrant as Specified in its Charter)
Minnesota 41-0886515
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(State of Incorporation) (IRS Employer Identification No.)
1031 Mendota Heights Road, St. Paul, Minnesota 55120
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(Address of Principal Executive Offices)
(Zip Code)
(651) 686-1600
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(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
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Patterson Dental Company has outstanding 67,516,945 shares of common stock as of
March 8, 2001.
Page 1 of 14
PATTERSON DENTAL COMPANY
INDEX
Page
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements 3-7
Consolidated Balance Sheets as of January 27, 2001 and April 29, 2000 3
Condensed Consolidated Statements of Income for the Three and Nine
Months Ended January 27, 2001 and January 29, 2000 4
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended January 27, 2001 and January 29, 2000 5
Notes to Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations. 8-11
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 12
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 13
Signatures 14
Safe Harbor Statement Under The Private Securities Litigation Reform Act Of
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1995:
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This Form 10-Q for the period ended January 27, 2001, 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, 2000, and
other documents filed with the Securities and Exchange Commission. See also
pages 11-12 of this Form 10-Q.
2
PART I FINANCIAL INFORMATION
PATTERSON DENTAL COMPANY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
Jan. 27, 2001 Apr. 29, 2000
------------------ ---------------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 141,379 $ 113,453
Short-term investments 16,266 4,720
Receivables, net 134,708 132,419
Inventory 110,887 92,838
Prepaid expenses and other current assets 8,851 7,978
---------------- ---------------
Total current assets 412,091 351,408
Property and equipment, net 47,953 46,022
Intangibles, net 50,786 50,730
Other 5,054 3,816
---------------- ---------------
Total assets $ 515,884 $ 451,976
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 80,399 $ 80,097
Accrued payroll expense 17,561 15,194
Income taxes payable 3,388 1,110
Other accrued expenses 20,376 16,505
---------------- ---------------
Total current liabilities 121,724 112,906
Non-current liabilities 3,166 3,458
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Total liabilities 124,890 116,364
Deferred credits 4,478 5,142
STOCKHOLDERS' EQUITY
Preferred stock --- ---
Common stock 675 674
Additional paid-in capital 68,039 67,022
Accumulated other comprehensive loss (2,478) (2,060)
Retained earnings 333,342 277,896
Note receivable from ESOP (13,062) (13,062)
---------------- ---------------
Total stockholders' equity 386,516 330,470
---------------- ---------------
Total liabilities and stockholders' equity $ 515,884 $ 451,976
================ ===============
See accompanying notes.
3
PATTERSON DENTAL COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
Jan. 27, 2001 Jan. 29, 2000 Jan. 27, 2001 Jan. 29, 2000
(39 weeks) (40 weeks)
------------- ------------- ------------- -------------
Net sales $ 288,890 $ 260,172 $ 846,056 $ 763,206
Cost of sales 180,374 163,756 534,632 482,470
---------- ---------- ---------- ----------
Margin 108,516 96,416 311,424 280,736
Operating expenses 77,913 70,445 227,841 210,313
---------- ---------- ---------- ----------
Operating income 30,603 25,971 83,583 70,423
Other income and expense:
Amortization of deferred credits 217 222 664 664
Finance income, net 1,796 1,285 4,541 3,325
Interest expense (41) (37) (98) (139)
Profit (loss) on currency exchange 7 31 (109) (5)
---------- ---------- ---------- ----------
Income before income taxes 32,582 27,472 88,581 74,268
Income taxes 12,196 10,280 33,132 27,776
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Net income $ 20,386 $ 17,192 $ 55,449 $ 46,492
========== ========== ========== ==========
Earnings per share - basic and diluted $ 0.30 $ 0.25 $ 0.82 $ 0.69
========== ========== ========== ==========
Weighted average common and dilutive
potential common shares 67,863 67,593 67,728 67,567
========== ========== ========== ==========
See accompanying notes.
4
PATTERSON DENTAL COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Nine Months Ended
Jan. 27, 2001 Jan. 29, 2000
(39 weeks) (40 weeks)
-------------- --------------
Operating activities:
Net income $ 55,449 $ 46,492
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 5,757 5,030
Amortization of deferrals (664) (664)
Amortization of goodwill 2,467 2,236
Bad debt expense 627 890
Change in assets and liabilities, net of acquired (14,673) (12,372)
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Net cash provided by operating activities 48,963 41,612
Investing activities:
Additions to property and equipment, net (7,276) (12,700)
Acquisitions, net (2,627) (2,842)
Purchase of short-term investments (11,546) (6,662)
Investment in equipment contracts ---- (14,940)
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Net cash used in investing activities (21,449) (37,144)
Financing activities:
Payments and retirement of long-term debt and obligations under
capital leases (546) (457)
Common stock issued, net 1,013 (1,016)
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Net cash provided by (used in) financing activities 467 (1,473)
Effect of exchange rate changes on cash (55) 130
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Net increase in cash and cash equivalents 27,926 3,125
Cash and cash equivalents at beginning of period 113,453 78,746
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Cash and cash equivalents at end of period $ 141,379 $ 81,871
========== ==========
See accompanying notes.
5
PATTERSON DENTAL COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
(Unaudited)
January 27, 2001
1. 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 January 27,
2001, and the results of operations and the cash flows for the periods
ended January 27, 2001 and January 29, 2000. Such adjustments are of a
normal recurring nature. The results of operations for the quarter ended
January 27, 2001 and January 29, 2000, are not necessarily indicative of
the results to be expected for the full year. The balance sheet at April
29, 2000, 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 2000 Annual Report on Form 10-K filed on July
25, 2000.
2. The fiscal year end of the Company is the last Saturday in April. The third
quarter of fiscal year 2001 and 2000 represent the 13 weeks ended January
27, 2001 and January 29, 2000, respectively. The first nine months of
fiscal year 2001 include 39 weeks while the first nine months of fiscal
year 2000 include 40 weeks.
3. Total comprehensive income was $20,771 and $55,031 for the three and nine
months ended January 27, 2001, respectively, and $17,625 and $47,275 for
the three and nine months ended January 29, 2000, respectively.
4. On June 13, 2000 the Company declared a two-for-one stock split in the form
of a 100% stock dividend payable July 21, 2000, to shareholders of record
on June 30, 2000. All references in the financial statements and related
notes to weighted average shares outstanding, share issuances, related
prices and per share amounts have been restated to reflect the split.
6
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. 27, Jan. 29, Jan. 27, Jan. 29,
2001 2000 2001 2000
--------- -------- -------- --------
Denominator:
Denominator for basic earnings per
share - weighted-average shares 67,454 67,373 67,410 67,344
Effect of dilutive securities:
Stock Option Plans 310 123 219 122
Employee Stock Purchase Plan 10 9 11 10
Capital Accumulation Plan 89 88 88 91
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Dilutive potential common shares 409 220 318 223
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Denominator for diluted earnings per
share - adjusted weighted-average
shares and assumed conversions 67,863 67,593 67,728 67,567
======== ========= ========= =========
6. In September 2000, the Emerging Issues Task Force reached a consensus on
Issue No. 00-10, "Accounting for Shipping and Handling Fees and Costs"
(Issue 00-10), which is required to be applied no later than the Company's
fiscal fourth quarter. The Issue requires companies to classify as revenue
all amounts related to shipping and handling that are billed to a customer
in a sale transaction. If shipping or handling costs are significant and are
not included in cost of sales, companies must disclose both the amount of
such costs and the line item on the income statement where such costs are
reported. Historically the Company has reported the net cost of its shipping
and handling activities as an operating expense. The consensus of this Issue
will probably result in some reclassifications within the structure of the
Company's operating statement thus revising certain operating ratios. These
potential reclassifications will have no impact on reported earnings.
Management is continuing to review the impact of Issue 00-10 on the
Company's financial statements and the options available, but has formed no
definitive opinion as to how it will implement the standard.
7
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
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Jan. 27, Jan. 29, Jan. 27, Jan. 29,
2001 2000 2001 2000
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Net sales.......................... 100.0% 100.0% 100.0% 100.0%
Cost of sales...................... 62.4% 62.9% 63.2% 63.2%
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Gross profit....................... 37.6% 37.1% 36.8% 36.8%
Operating expenses................. 27.0% 27.1% 26.9% 27.6%
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Operating income................... 10.6% 10.0% 9.9% 9.2%
Other income and expense, net...... 0.7% 0.6% 0.6% 0.5%
------ ------ ------ -----
Income before income taxes......... 11.3% 10.6% 10.5% 9.7%
Income taxes....................... 4.2% 4.0% 3.9% 3.6%
------ ------ ------ -----
Net income......................... 7.1% 6.6% 6.6% 6.1%
====== ====== ====== =====
QUARTER ENDED JANUARY 27, 2001 COMPARED TO QUARTER ENDED JANUARY 29, 2000.
Net Sales. Net sales for the three months ended January 27, 2001
("Current Quarter") totaled $288.9 million up 11% from $260.2 million for
the three months ended January 29, 2000 ("Prior Quarter"). Sales of
consumable dental supplies, including printed office products, increased
9.1% to $175.8 million led by an 11.5% increase in the U.S. dental market.
A 2.5% decline in printed office product sales and a nominal increase in
the Canadian market tempered consumable dental supply sales in the current
quarter. Dental equipment and software sales totaled $90.6 million in the
Current Quarter versus $80.1 million in the Prior Quarter. Double-digit
increases in most equipment product offerings drove the 13.1% increase in
dental equipment and software sales. Equipment sales growth in the Current
Quarter slowed in comparison to the first half of the year primarily in
new-generation dental equipment lines. In addition, equipment sales in
Canada were down 10.3% quarter over quarter. Sales of clinical software
grew with digital equipment, but total software unit sales were flat in the
Current Quarter due to reduced sales of front-office practice management
software. Sales of other products and services, consisting of parts,
technical service, software support and insurance e-claims, grew 18.9% to
$22.5 million.
8
Gross Margin. Gross margins increased $12.1 million or 12.5% over the
Prior Quarter due to increased sales volumes and an improvement in the
gross margin rate to 37.6% in the Current Quarter from 37.1% in the Prior
Quarter. The 50 basis point increase in the gross margin rate reflects
better margins at the point-of-sale, changes in product mix and an increase
in vendor incentives.
Operating Expenses. Operating expenses were $77.9 million in the
Current Quarter, 10.6% higher than the Prior Quarter, but relatively
unchanged as a percent of sales at 27.0% in the Current Quarter versus
27.1% for the Prior Quarter. The flat expense rate reflects the benefit of
improved operating leverage and cost containment efforts offset by the
negative impact of higher commission expense resulting from the Company's
margin based commission programs.
Operating Income. Operating income increased 17.8% to $30.6 million
for the Current Quarter from $26.0 million for the Prior Quarter. Operating
income increased as a percent of net sales from 10.0% to 10.6% due
principally to an improved gross margin rate.
Other Income. Other income, net of expenses, was $2.0 million for the
Current Quarter compared to $1.5 million for the Prior Quarter. Other
income increased due to higher average short-term investments of cash.
Income Taxes. The effective income tax rate at 37.4% remained the same
as last year.
Net Income. Net income increased to $20.4 million, or 18.6% due to
the factors discussed above.
Earnings Per Share. Diluted earnings per share increased to $0.30
versus $0.25 reported a year ago, a 5 cent or 20.0% increase over the same
quarter a year ago.
NINE MONTHS ENDED JANUARY 27, 2001 COMPARED TO NINE MONTHS ENDED JANUARY 29,
2000.
Net Sales. Net sales increased 10.9% to $846.1 million for the nine
months ended January 27, 2001 ("Current Period") from $763.2 million for
the nine months ended January 29, 2000 ("Prior Period"). The Current Period
includes 39 weeks versus 40 weeks in the Prior Period. Excluding the impact
of the additional week, sales increased approximately 14%. Sales references
in parentheses exclude the additional week. Acquisitions contributed 3
percentage points, or approximately $20 million, to the overall sales
growth. Sales of consumable dental supplies, including printed office
products, increased 7.9%(11%) due primarily to contributions from an
expanded sales force. The printed office products business closed several
sales locations and experienced turnover in its direct sales force in this
year's first quarter resulting in a year-to-date decline in sales of
4.4%(2%). Dental equipment and software sales increased 17.1%(20%) due to
strong demand across the equipment product lines. Equipment and software
sales were negatively impacted by the Company's software business, which
faced a difficult sales comparison with the year-earlier period. Sales of
other services and products increased 13.2%(16%) in the current period due
mostly to increases in technical services and parts.
9
Gross Margin. Gross margins increased $30.7 million to $311.4 million
for the Current Period due solely to the increase in sales volumes.
Year-to-date gross margins amounted to 36.8% of sales, the same as last
year. Although margins improved in the second and third quarters, the
increase was not sufficient to offset the mix related margin decline
experienced in the first quarter due to lower software and software related
service sales as a percent of total sales.
Operating Expenses. Operating expenses increased 8.3% to $227.8
million for the Current Period from $210.3 million for the Prior Period.
The increase in operating expenses was related to greater sales volume. The
Company gained efficiencies from its infrastructure and controlled costs
resulting in a 70 basis point reduction in the operating expense rate which
declined from 27.6% in the Prior Period to 26.9% in the Current Period.
Operating Income. Operating income increased 18.7% to $83.6 million
for the Current Period from $70.4 million for the Prior Period. Operating
income, which increased as a percent of net sales from 9.2% to 9.9%,
benefited from a reduction in operating costs and improved operating
leverage.
Other Income. Other income, net of expenses, was $5.0 million for the
Current Period compared to $3.8 million for the Prior Period. Increased
average short-term investments of cash and higher finance income from long-
term contracts resulted in the $1.2 million increase in other income.
Income Taxes. The effective income tax rate at 37.4% remained the same
as last year.
Net Income. Net income was $55.4 million, up $8.9 million or 19.3%
from $46.5 million reported in the first nine-months of last year due to
the factors discussed above.
Earnings Per Share. Earnings per share were $0.82 which represents a
13 cent or 18.8% increase over the same period a year ago.
LIQUIDITY AND CAPITAL RESOURCES
Our financial condition remains strong. Cash generated from operating
activities was our principal source of funds during the nine months ended
January 27, 2001 and was used primarily to invest in working capital, fund
capital expenditures and make acquisitions.
Operating activities generated cash of $49.0 million in the first nine
months of 2001, compared to the same period in 2000 where operating
activities provided cash of $41.6 million. The increase of $7.4 million was
due primarily to a 19.3% increase in net income.
Capital expenditures for the first nine months of 2001 declined $5.4
million from the prior year period when the Company was funding the
construction of a new distribution center.
For the nine months ended January 27, 2001 the Company invested $2.6
million to acquire one dental distribution business and eCheck-Up.com, a
newly developed Internet service that will provide on-line payroll, human
resources and payables processing through its web site. In comparison, the
Company spent $2.8 million in the prior year period to acquire two dental
distribution businesses.
10
In September 1999, the Board of Directors authorized the repurchase of up
to two million shares of our common stock. For the nine months ended
January 27, 2001, the Company repurchased 75,000 shares for $2.1 million.
The investment in equipment contracts resulted from the decision to hold,
as opposed to sell, $20.1 million of equipment contracts receivable in the
third quarter of 2000, $14.9 million of which was classified as a long-term
asset on the balance sheet.
Available liquid resources at January 27, 2001 consisted of $157.6 million
of cash and short-term investments and $28.3 million available under
existing bank lines. The Company believes that cash and short-term
investments and the remainder of its credit lines are sufficient to meet
any existing and presently anticipated cash needs. In addition, because of
its low debt to equity ratio, the Company believes it has sufficient debt
capacity to replace its existing revolver and provide the necessary funds
to achieve its corporate objectives.
Factors That May Affect Future Operating Results
Certain information of a non-historical nature contain forward-looking
statements. Words such as "believes," "expects," "plans," "estimates" 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 in the
future affect the Company's actual operating results which could 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.
. Reduced growth in expenditures for dental services by private dental
insurance plans.
. 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.
. 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.
. The effects of, and changes in, U.S. and world social and economic
conditions, monetary and fiscal conditions, laws and regulations,
other activities of governments, agencies and similar organizations,
trade policies and taxes, import and other charges, inflation and
monetary fluctuations; the ability or inability of the Company to
obtain or hedge against foreign currencies, foreign exchange rates and
fluctuations in those rates.
. Ability of the Company to retain its base of customers and to increase
its market share.
11
. The ability of the Company to maintain satisfactory relationships with
qualified and motivated sales personnel.
. Changes in 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.
. The Company's ability to meet increased competition from national,
regional and local full-service distributors and mail-order
distributors of dental products, while maintaining current or improved
profit margins.
. 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.
. Because the cost of paper stock represents over half the cost of the
Company's paper and printed products, future operating results may be
subject to fluctuations in paper prices.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in market risk during the three months
ended January 27, 2001. For additional information refer to item 7A of the
Company's 2000 Form 10K.
12
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Item 27 Financial Data Schedule.
(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, 2000.
13
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 13, 2001
By: /s/ R. Stephen Armstrong
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R. Stephen Armstrong
Executive Vice President, Treasurer and
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
14