Patterson Companies Reports Fiscal 2021 Third-Quarter Operating Results

Patterson Companies, Inc. (Nasdaq: PDCO) today reported consolidated net sales of $1.55 billion (see attached Sales Summary for further details) in its fiscal third quarter ended January 23, 2021, an increase of 6.5 percent compared to the same period last year. Internal sales, which are adjusted for the effects of currency translation and changes in product selling relationships, increased 6.9 percent.

Reported net income attributable to Patterson Companies, Inc. for the third quarter of fiscal 2021 was $48.8 million, or $0.50 per diluted share, compared to $23.2 million, or $0.24 per diluted share, in the third quarter of fiscal 2020. Adjusted net income¹ attributable to Patterson Companies, Inc., which excludes deal amortization, integration and business restructuring expenses, legal reserve costs and accelerated debt-related costs totaled $55.8 million for the third quarter of fiscal 2021, or $0.58 per diluted share, compared to $44.5 million in the same quarter of fiscal 2020, or $0.47 per diluted share. The 25.3 percent year-over-year increase in adjusted net income for the period is primarily attributed to strong sales execution, improved operating margins across both business segments, and the benefit of continued expense discipline during the fiscal 2021 third quarter.

“Patterson’s third quarter results demonstrate the continued focus and dedication of our team to help drive the success of our customers as we navigate the ongoing disruption of the pandemic,” said Mark Walchirk, President and CEO of Patterson Companies. “Our commitment to strong execution and operational excellence, combined with our ongoing investments to broaden and enhance our value proposition, has enabled us to build additional momentum across our entire business – including increased sales and margin expansion in both our Dental and Animal Health segments during the third quarter.

“We grew adjusted EPS by 23 percent through the continued focus on improving our performance and creating value for our shareholders. Looking ahead, we remain confident about our strengthened position in each of our end markets and in Patterson's long-term value creation potential.”

Patterson Dental

Reported net sales in our Dental segment for the third quarter of fiscal 2021, which represented approximately 42 percent of total company sales, were $648.9 million compared to $626.6 million in the third quarter of last year. Internal sales increased 3.6 percent compared to the fiscal 2020 third quarter, including 13.6 percent growth in consumables.

Patterson Animal Health

Reported net sales in our Animal Health segment for the third quarter of fiscal 2021, which comprised approximately 58 percent of the company’s total sales, were $894.3 million compared to $817.3 million in the third quarter of last year. Internal sales for the segment increased 10.0 percent from the fiscal 2020 third quarter with companion animal posting internal sales growth of 20.7 percent compared to the same period one year ago.

Balance Sheet and Capital Allocation

During the first nine months of fiscal 2021, Patterson Companies used $604.9 million of cash from operating activities and collected deferred purchase price receivables of $634.5 million, generating cash of $29.6 million, compared to generating $190.3 million in the first nine months of fiscal 2020. Free cash flow¹ (see definition below and attached free cash flow table) generated during the first nine months of fiscal 2021 is down $120.0 million compared to the first nine months of fiscal 2020, primarily due to an increased level of working capital in the current period.

During the third quarter of fiscal 2021, Patterson Companies declared a quarterly cash dividend of $0.26 per share. On a year-to-date basis, Patterson has returned $50.1 million in cash dividends to shareholders.

Year-to-Date Results

Consolidated reported net sales for the first nine months of fiscal 2021 totaled $4.35 billion, a 3.5 percent year-over-year increase. Internal sales also increased 3.5 percent compared to the first nine months of fiscal 2020. Reported net income attributable to Patterson Companies, Inc. was $127.2 million, or $1.32 per diluted share, compared to a $20.1 million, or $0.21 per diluted share, in last year's period. Adjusted net income¹ attributable to Patterson Companies, Inc., which excludes deal amortization, integration and business restructuring expenses, legal reserve costs, accelerated debt-related costs and an investment gain, totaled $148.4 million, or $1.54 per diluted share. This compares to $106.5 million, or $1.12 per diluted share in the year-ago period, representing a 38 percent increase year-over-year.

Fiscal 2021 Guidance

Due to the continued uncertainty surrounding the COVID-19 pandemic and its impact on business operations, Patterson is not providing fourth-quarter fiscal 2021 financial guidance at this time.

¹Non-GAAP Financial Measures

The Reconciliation of GAAP to non-GAAP Measures table appearing behind the accompanying financial information is provided to adjust reported GAAP measures, namely operating income, income before taxes, income tax expense, net income, net income attributable to Patterson Companies, Inc. and diluted earnings per share attributable to Patterson Companies, Inc., for the impact of deal amortization, integration and business restructuring expenses, legal reserve costs, accelerated debt-related costs and an investment gain, along with the related tax effects of these items.

The term “free cash flow” used in this release is defined as net cash used in operating activities less capital expenditures less the one-time benefit from the initiation of our trade accounts receivables facilities plus the collection of deferred purchase price receivables.

In addition, the term “internal sales” used in this release represents net sales adjusted to exclude the impact of foreign currency and changes in product selling relationships. Foreign currency impact represents the difference in results that is attributable to fluctuations in currency exchange rates the company uses to convert results for all foreign entities where the functional currency is not the U.S. dollar. The company calculates the impact as the difference between the current period results translated using the current period currency exchange rates and using the comparable prior period's currency exchange rates. The company believes the disclosure of net sales changes in constant currency provides useful supplementary information to investors in light of significant fluctuations in currency rates.

Management believes that these non-GAAP measures may provide a helpful representation of the company's third-quarter performance and enable comparison of financial results between periods where certain items may vary independent of business performance. These non-GAAP financial measures are presented solely for informational and comparative purposes and should not be regarded as a replacement for corresponding, similarly captioned, GAAP measures.

Third-Quarter Conference Call and Replay

Patterson Companies’ fiscal 2021 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 the Patterson Companies website. A replay of the fiscal 2021 third-quarter conference call can be heard for one week at 800-585-8367 and by providing the Conference ID 1612628 when prompted.

About Patterson Companies Inc.

Patterson Companies Inc. (Nasdaq: PDCO) connects dental and animal health customers in North America and the U.K. to the latest products, technologies, services and innovative business solutions that enable operational and professional success. Our comprehensive portfolio, distribution network and supply chain is equaled only by our dedicated, knowledgeable people who deliver unrivalled expertise and unmatched customer service and support.

Learn more: pattersoncompanies.com

This press release contains, and our officers and representatives may from time to time make, certain “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995, including statements regarding future financial performance, and the objectives and expectations of management. Forward-looking statements often include words such as “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “seeks” or words of similar meaning, or future or conditional verbs, such as “will,” “should,” “could” or “may.” Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not place undue reliance on any of these forward-looking statements.

Any number of factors could affect our actual results and cause such results to differ materially from those contemplated by any forward-looking statements, including, but not limited to, the following: the effects of the highly competitive dental and animal health supply markets in which we compete; the COVID-19 pandemic and measures taken in response thereto; general economic conditions, including political and economic uncertainty; risks from disruption to our information systems; our ability to comply with restrictive covenants in our amended credit agreement; our dependence on relationships with sales representatives, service technicians and customers; our ability to realize the long-term strategic benefits of our acquisition of Animal Health International; potential disruption of distribution capabilities, including service issues with third-party shippers; our ability to provide our sales force and customers with the latest technology; our dependence on suppliers for the manufacture and supply of the products we sell; material changes in our purchasing relationship with suppliers; the risk that private label sales could adversely affect our relationships with suppliers; our dependence on positive perceptions of Patterson’s reputation; risks inherent in acquiring other businesses; the risk that our acquired technology or developed technology might not be successful in maintaining or gaining customers; litigation risks, including new or unanticipated litigation developments and new or unanticipated regulatory investigations; changes in consumer preferences; regulatory restrictions; the cyclicality of the livestock market; the outbreak of an infectious disease within the production animal or companion animal population; pressure from animal rights groups; adverse changes in supplier rebates; fluctuations in quarterly financial results; volatility in the price of our stock; risks from the expansion of customer purchasing power; increases in over-the-counter sales of companion animal products; the risks inherent in international operations, including currency fluctuations; the effects of health care reform; failure to comply with regulatory requirements and data privacy laws; cyberattacks or other privacy or data security breaches; the risk of the products we sell becoming obsolete or containing undetected errors; volatility in the financial markets; our dependence on our senior management; our dependence on leadership development and succession planning; disruptions from our enterprise resource planning system; risks associated with shareholder activism; the risk of being required to record impairment charges; the risk of audit by tax authorities; risks associated with interest rate fluctuations; and the risk that our governing documents and Minnesota law may discourage takeovers and business combinations. The order in which these factors appear should not be construed to indicate their relative importance or priority. We caution that these factors may not be exhaustive, accordingly, any forward-looking statements contained herein should not be relied upon as a prediction of actual results.

You should carefully consider these and other relevant factors, including those risk factors in Part I, Item 1A, (“Risk Factors”) in our most recent Form 10-K, as amended and supplemented by our Quarterly Report on Form 10-Q for the quarterly period ended October 24, 2020, and information which may be contained in our other filings with the U.S. Securities and Exchange Commission, or SEC, when reviewing any forward-looking statement. Investors should understand it is impossible to predict or identify all such factors or risks. As such, you should not consider the foregoing list, or the risks identified in our SEC filings, to be a complete discussion of all potential risks or uncertainties.

Any forward-looking statement made by us in this press release is based only on information currently available to us and speaks only as of the date on which it is made. We do not undertake any obligation to release publicly any revisions to any forward-looking statements whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise.

PATTERSON COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
		Three Months Ended								Nine Months Ended
		January 23, 2021				January 25, 2020				January 23, 2021				January 25, 2020
Net sales		$	1,551,268			$	1,456,155			$	4,350,273			$	4,203,550
Gross profit		324,541				311,830				898,725				903,378
Operating expenses		262,860				268,014				725,466				861,034
Operating income		61,681				43,816				173,259				42,344
Other income (expense):
Other income, net		4,323				2,307				9,580				34,493
Interest expense		(5,532		)		(16,584		)		(18,604		)		(34,320		)
Income before taxes		60,472				29,539				164,235				42,517
Income tax expense		11,905				6,567				37,640				23,087
Net income		48,567				22,972				126,595				19,430
Net loss attributable to noncontrolling interests		(192		)		(255		)		(631		)		(710		)
Net income attributable to Patterson Companies, Inc.		$	48,759			$	23,227			$	127,226			$	20,140
Earnings per share attributable to Patterson Companies, Inc.:
Basic		$	0.51			$	0.25			$	1.33			$	0.21
Diluted		$	0.50			$	0.24			$	1.32			$	0.21
Weighted average shares:
Basic		95,734				94,267				95,472				94,052
Diluted		96,953				95,021				96,379				94,828
Dividends declared per common share		$	0.26			$	0.26			$	0.78			$	0.78

PATTERSON COMPANIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
		January 23, 2021				April 25, 2020
ASSETS
Current assets:
Cash and cash equivalents		$	155,961			$	77,944
Receivables, net		456,138				416,523
Inventory		838,012				812,194
Prepaid expenses and other current assets		273,119				236,104
Total current assets		1,723,230				1,542,765
Property and equipment, net		224,310				303,725
Operating lease right-of-use assets, net		80,157				79,021
Goodwill and identifiable intangibles, net		428,156				452,229
Long-term receivables, net and other		395,112				337,610
Total assets		$	2,850,965			$	2,715,350
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable		$	677,054			$	862,093
Other accrued liabilities		282,638				182,099
Operating lease liabilities		32,452				30,706
Current maturities of long-term debt		100,750				—
Borrowings on revolving credit		108,000				—
Total current liabilities		1,200,894				1,074,898
Long-term debt		487,850				587,766
Non-current operating lease liabilities		51,648				49,854
Other non-current liabilities		175,968				166,388
Total liabilities		1,916,360				1,878,906
Stockholders' equity		934,605				836,444
Total liabilities and stockholders' equity		$	2,850,965			$	2,715,350

PATTERSON COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
		Nine Months Ended
		January 23, 2021				January 25, 2020
Operating activities:
Net income		$	126,595			$	19,430
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		58,355				61,892
Investment gain		—				(34,334		)
Non-cash employee compensation		25,161				28,661
Accelerated amortization of costs on early repayment of debt		—				8,984
Non-cash losses (gains) and other, net		6,791				—
Change in assets and liabilities:
Receivables		(685,345		)		(380,340		)
Inventory		(12,506		)		(104,494		)
Accounts payable		(199,558		)		151,464
Accrued liabilities		67,503				108,107
Long term receivables		(3,103		)		(6,169		)
Other changes from operating activities, net		11,223				(22,157		)
Net cash used in operating activities		(604,884		)		(168,956		)
Investing activities:
Additions to property and equipment		(21,101		)		(32,872		)
Collection of deferred purchase price receivables		634,499				359,329
Other investing activities		2,493				—
Net cash provided by investing activities		615,891				326,457
Financing activities:
Dividends paid		(50,077		)		(75,522		)
Proceeds from issuance of long-term debt, net		—				296,700
Payments on long-term debt		—				(460,840		)
Draw on revolving credit		108,000				95,000
Other financing activities		2,139				(3,319		)
Net cash provided by (used in) financing activities		60,062				(147,981		)
Effect of exchange rate changes on cash		6,948				1,003
Net change in cash and cash equivalents		78,017				10,523
Cash and cash equivalents at beginning of period		77,944				95,646
Cash and cash equivalents at end of period		$	155,961			$	106,169

PATTERSON COMPANIES, INC.
SALES SUMMARY
(Dollars in thousands)
(Unaudited)
		January 23, 2021				January 25, 20201				Total Sales Growth			Foreign Exchange Impact			Other 2			Internal Sales Growth
Three Months Ended
Consolidated net sales
Consumable		$	1,199,102			$	1,090,891			9.9	%		0.4	%		(0.9	)%		10.4	%
Equipment and software		266,519				273,329				(2.5	)		0.1			—			(2.6	)
Value-added services and other		85,647				91,935				(6.8	)		0.1			—			(6.9	)
Total		$	1,551,268			$	1,456,155			6.5	%		0.3	%		(0.7	)%		6.9	%
Dental
Consumable		$	342,561			$	301,599			13.6	%		—	%		—	%		13.6	%
Equipment and software		237,096				252,874				(6.2	)		0.1			—			(6.3	)
Value-added services and other		69,289				72,116				(3.9	)		—			—			(3.9	)
Total		$	648,946			$	626,589			3.6	%		—	%		—	%		3.6	%
Animal Health
Consumable		$	856,541			$	789,292			8.5	%		0.6	%		(1.3	)%		9.2	%
Equipment and software		29,423				20,455				43.8			—			—			43.8
Value-added services and other		8,383				7,538				11.2			1.5			—			9.7
Total		$	894,347			$	817,285			9.4	%		0.6	%		(1.2	)%		10.0	%
Corporate
Value-added services and other		$	7,975			$	12,281			(35.1	)%		—	%		—	%		(35.1	)%
Total		$	7,975			$	12,281			(35.1	)%		—	%		—	%		(35.1	)%

1 Certain sales were reclassified between categories to conform to the current period presentation.

2 Sales of certain products previously recognized on a gross basis were recognized on a net basis during the three and nine months ended January 23, 2021.

PATTERSON COMPANIES, INC.
SALES SUMMARY
(Dollars in thousands)
(Unaudited)
		January 23, 2021				January 25, 20201				Total Sales Growth			Foreign Exchange Impact			Other 2			Internal Sales Growth
Nine Months Ended
Consolidated net sales
Consumable		$	3,485,669			$	3,313,556			5.2	%		0.3	%		(0.3	)%		5.2	%
Equipment and software		616,077				621,652				(0.9	)		—			—			(0.9	)
Value-added services and other		248,527				268,342				(7.4	)		0.1			—			(7.5	)
Total		$	4,350,273			$	4,203,550			3.5	%		0.2	%		(0.2	)%		3.5	%
Dental
Consumable		$	957,013			$	909,638			5.2	%		—	%		—	%		5.2	%
Equipment and software		548,194				566,750				(3.3	)		—			—			(3.3	)
Value-added services and other		205,782				215,940				(4.7	)		—			—			(4.7	)
Total		$	1,710,989			$	1,692,328			1.1	%		—	%		—	%		1.1	%
Animal Health
Consumable		$	2,528,656			$	2,403,918			5.2	%		0.4	%		(0.4	)%		5.2	%
Equipment and software		67,883				54,902				23.6			—			—			23.6
Value-added services and other		24,138				24,192				(0.2	)		1.0			—			(1.2	)
Total		$	2,620,677			$	2,483,012			5.5	%		0.4	%		(0.4	)%		5.5	%
Corporate
Value-added services and other		$	18,607			$	28,210			(34.0	)%		—	%		—	%		(34.0	)%
Total		$	18,607			$	28,210			(34.0	)%		—	%		—	%		(34.0	)%

1 Certain sales were reclassified between categories to conform to the current period presentation.

2 Sales of certain products previously recognized on a gross basis were recognized on a net basis during the three and nine months ended January 23, 2021.

PATTERSON COMPANIES, INC.
OPERATING INCOME BY SEGMENT
(In thousands)
(Unaudited)
		Three Months Ended								Nine Months Ended
		January 23, 2021				January 25, 2020				January 23, 2021				January 25, 2020
Operating income (loss)
Dental		$	61,291			$	48,822			$	172,017			$	135,458
Animal Health		20,615				13,438				55,605				51,236
Corporate		(20,225		)		(18,444		)		(54,363		)		(144,350		)
Total		$	61,681			$	43,816			$	173,259			$	42,344

PATTERSON COMPANIES, INC.
RECONCILIATION OF GAAP TO NON-GAAP MEASURES
(Dollars in thousands, except per share amounts)
(Unaudited)
For the three months ended January 23, 2021		GAAP				Deal amortization			Integration and business restructuring expenses				Legal reserve costs				Accelerated debt-related costs				Investment gain				Non-GAAP
Operating income		$	61,681			$	9,238		$	—			$	—			$	—			$	—			$	70,919
Other income (expense), net		(1,209		)		—			—				—				—				—				(1,209		)
Income before taxes		60,472				9,238			—				—				—				—				69,710
Income tax expense		11,905				2,196			—				—				—				—				14,101
Net income		48,567				7,042			—				—				—				—				55,609
Net loss attributable to noncontrolling interests		(192		)		—			—				—				—				—				(192		)
Net income attributable to Patterson Companies, Inc.		$	48,759			$	7,042		$	—			$	—			$	—			$	—			$	55,801
Diluted earnings per share attributable to Patterson Companies, Inc.*		$	0.50			$	0.07		$	—			$	—			$	—			$	—			$	0.58
Operating income as a % of sales		4.0		%																					4.6		%
Effective tax rate		19.7		%																					20.2		%
For the three months ended January 25, 2020		GAAP				Deal amortization			Integration and business restructuring expenses				Legal reserve costs				Accelerated debt-related costs				Investment gain				Non-GAAP
Operating income		$	43,816			$	9,267		$	7,714			$	2,288			$	—			$	—			$	63,085
Other income (expense), net		(14,277		)		—			—				—				8,984				—				(5,293		)
Income before taxes		29,539				9,267			7,714				2,288				8,984				—				57,792
Income tax expense		6,567				2,200			1,928				572				2,246				—				13,513
Net income		22,972				7,067			5,786				1,716				6,738				—				44,279
Net loss attributable to noncontrolling interests		(255		)		—			—				—				—				—				(255		)
Net income attributable to Patterson Companies, Inc.		$	23,227			$	7,067		$	5,786			$	1,716			$	6,738			$	—			$	44,534
Diluted earnings per share attributable to Patterson Companies, Inc.*		$	0.24			$	0.07		$	0.06			$	0.02			$	0.07			$	—			$	0.47
Operating income as a % of sales		3.0		%																					4.3		%
Effective tax rate		22.2		%																					23.4		%
* May not sum due to rounding

PATTERSON COMPANIES, INC.
RECONCILIATION OF GAAP TO NON-GAAP MEASURES
(Dollars in thousands, except per share amounts)
(Unaudited)
For the nine months ended January 23, 2021		GAAP					Deal amortization				Integration and business restructuring expenses				Legal reserve costs				Accelerated debt-related costs				Investment gain				Non-GAAP
Operating income		$	173,259				$	27,741			$	—			$	—			$	—			$	—			$	201,000
Other income (expense), net		(9,024			)		—				—				—				—				—				(9,024		)
Income before taxes		164,235					27,741				—				—				—				—				191,976
Income tax expense		37,640					6,596				—				—				—				—				44,236
Net income		126,595					21,145				—				—				—				—				147,740
Net loss attributable to noncontrolling interests		(631			)		—				—				—				—				—				(631		)
Net income attributable to Patterson Companies, Inc.		$	127,226				$	21,145			$	—			$	—			$	—			$	—			$	148,371
Diluted earnings per share attributable to Patterson Companies, Inc.*		$	1.32				$	0.22			$	—			$	—			$	—			$	—			$	1.54
Operating income as a % of sales		4.0			%																						4.6		%
Effective tax rate		22.9			%																						23.0		%
For the nine months ended January 25, 2020		GAAP					Deal amortization				Integration and business restructuring expenses				Legal reserve costs‡				Accelerated debt-related costs				Investment gain				Non-GAAP
Operating income		$	42,344				$	27,758			$	13,461			$	81,254			$	—			$	—			$	164,817
Other income (expense), net		173					—				—				—				9,943				(34,334		)		(24,218		)
Income before taxes		42,517					27,758				13,461				81,254				9,943				(34,334		)		140,599
Income tax expense		23,087					6,601				3,370				7,113				2,486				(7,884		)		34,773
Net income		19,430					21,157				10,091				74,141				7,457				(26,450		)		105,826
Net loss attributable to noncontrolling interests		(710			)		—				—				—				—				—				(710		)
Net income attributable to Patterson Companies, Inc.		$	20,140				$	21,157			$	10,091			$	74,141			$	7,457			$	(26,450	)		$	106,536
Diluted earnings per share attributable to Patterson Companies, Inc.*		$	0.21				$	0.22			$	0.11			$	0.78			$	0.08			$	(0.28	)		$	1.12
Operating income as a % of sales		1.0			%																						3.9		%
Effective tax rate		54.3			%																						24.7		%
‡ Includes costs and expenses incurred in the first quarter of fiscal 2020 of $17,666 related to the settlement of litigation with SourceOne Dental, Inc., costs and expenses incurred in the second quarter of fiscal 2020 of $58,300 related to the then-probable settlement of litigation with the U.S. Attorney's Office for the Western District of Virginia and $5,288 related to other legal proceedings.
* May not sum due to rounding

PATTERSON COMPANIES, INC.
FREE CASH FLOW
(In thousands)
(Unaudited)
		Nine Months Ended
		January 23, 2021				January 25, 2020
Net cash used in operating activities		$	(604,884	)		$	(168,956	)
Additions to property and equipment		(21,101		)		(32,872		)
Collection of deferred purchase price receivables		634,499				359,329
Impact of trade account receivables facility		—				(29,000		)
Free cash flow		$	8,514			$	128,501

 

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