XNAS:PDCO Patterson Companies Inc Quarterly Report 10-Q Filing - 1/28/2012

Effective Date 1/28/2012

XNAS:PDCO Fair Value Estimate
Premium
XNAS:PDCO Consider Buying
Premium
XNAS:PDCO Consider Selling
Premium
XNAS:PDCO Fair Value Uncertainty
Premium
XNAS:PDCO Economic Moat
Premium
XNAS:PDCO Stewardship
Premium
 
Table of Contents

 

 

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 JANUARY 28, 2012.

 

¨ 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 Number)
1031 Mendota Heights Road  
St. Paul, Minnesota   55120
(Address of principal executive offices)   (Zip Code)

(651) 686-1600

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer   x    Accelerated Filer   ¨
Non-Accelerated Filer   ¨    Smaller Reporting Company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Patterson Companies, Inc. had outstanding 110,973,887 shares of common stock as of March 2, 2012.

 

 

 


Table of Contents

PATTERSON COMPANIES, INC.

INDEX

 

         Page  

PART I—FINANCIAL INFORMATION

  

  Item 1—Financial Statements (Unaudited)      1-11   
 

Condensed Consolidated Balance Sheets as of January 28, 2012 and April 30, 2011

     1   
 

Condensed Consolidated Statements of Income and Other Comprehensive Income for the Three and Nine Months Ended January 28, 2012 and January 29, 2011

     2   
 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended January 28, 2012 and January 29, 2011

     3   
 

Notes to Condensed Consolidated Financial Statements

     4-11   
  Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations      12-17   
  Item 3—Quantitative and Qualitative Disclosures About Market Risk      18   
  Item 4—Controls and Procedures      18   

PART II—OTHER INFORMATION

  

  Item 2—Unregistered Sales of Equity Securities and Use of Proceeds      19   
  Item 6—Exhibits      19   
  Signatures      20   
  Exhibit Index      21   

Safe Harbor Statement Under The Private Securities Litigation Reform Act Of 1995:

This Form 10-Q for the period ended January 28, 2012, 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 herein under the caption “Factors That May Affect Future Operating Results,” in the Company’s 2011 Annual Report on Form 10-K filed June 29, 2011 and other documents previously filed with the Securities and Exchange Commission.

 


Table of Contents

PART I—FINANCIAL INFORMATION

PATTERSON COMPANIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

 

     January 28,     April 30,  
     2012     2011  
     (Unaudited)        

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 538,092      $ 388,665   

Receivables, net

     428,587        465,170   

Inventory

     334,775        336,094   

Prepaid expenses and other current assets

     39,048        40,780   
  

 

 

   

 

 

 

Total current assets

     1,340,502        1,230,709   

Property and equipment, net

     196,598        189,583   

Long-term receivables, net

     83,930        90,285   

Goodwill

     803,125        795,616   

Identifiable intangibles, net

     215,529        227,216   

Other

     26,141        31,559   
  

 

 

   

 

 

 

Total assets

   $ 2,665,825      $ 2,564,968   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities:

    

Accounts payable

   $ 189,407      $ 210,033   

Accrued payroll expense

     55,836        56,575   

Other accrued expenses

     102,240        100,823   

Income taxes payable

     13,462        0   
  

 

 

   

 

 

 

Total current liabilities

     360,945        367,431   

Long-term debt

     850,000        525,000   

Other long-term liabilities

     103,793        111,997   
  

 

 

   

 

 

 

Total liabilities

     1,314,738        1,004,428   

STOCKHOLDERS’ EQUITY

    

Common stock

     1,110        1,211   

Additional paid-in capital

     —          —     

Accumulated other comprehensive income

     25,242        41,950   

Retained earnings

     1,439,853        1,632,497   

Unearned ESOP shares

     (115,118     (115,118
  

 

 

   

 

 

 

Total stockholders’ equity

     1,351,087        1,560,540   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 2,665,825      $ 2,564,968   
  

 

 

   

 

 

 

See accompanying notes.

 

-1-


Table of Contents

PATTERSON COMPANIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

AND OTHER COMPREHENSIVE INCOME

(In thousands, except per share amounts)

(Unaudited)

 

     Three Months Ended     Nine Months Ended  
     January 28,     January 29,     January 28,     January 29,  
     2012     2011     2012     2011  

Net sales

   $ 895,030      $ 824,650      $ 2,599,327      $ 2,531,851   

Cost of sales

     605,496        543,775        1,750,534        1,691,575   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     289,534        280,875        848,793        840,276   

Operating expenses

     199,628        188,168        593,635        568,393   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     89,906        92,707        255,158        271,883   

Other income and (expense):

        

Interest income

     1,052        1,577        3,778        7,118   

Interest expense

     (8,358     (6,380     (20,880     (19,499

Other gain (loss)

     (737     (1,620     (2,291     (2,097
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before taxes

     81,863        86,284        235,765        257,405   

Income taxes

     28,755        30,888        85,093        94,727   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 53,108      $ 55,396      $ 150,672      $ 162,678   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share:

        

Basic

   $ 0.50      $ 0.47      $ 1.35      $ 1.37   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.50      $ 0.47      $ 1.34      $ 1.36   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares:

        

Basic

     106,504        117,994        111,539        118,544   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     107,206        118,837        112,226        119,331   
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends declared per common share

   $ 0.12      $ 0.10      $ 0.36      $ 0.30   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other Comprehensive Income

        

Net income

   $ 53,108      $ 55,396      $ 150,672      $ 162,678   

Foreign currency translation (loss) gain

     (5,630     2,770        (16,615     2,070   

Cash flow hedge

     (31     (31     (93     (93
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive Income

   $ 47,447      $ 58,135      $ 133,964      $ 164,655   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes.

 

-2-


Table of Contents

PATTERSON COMPANIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

     Nine Months Ended  
     January 28,     January 29,  
     2012     2011  

Operating activities:

    

Net income

   $ 150,672      $ 162,678   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation

     18,442        18,768   

Amortization

     11,990        12,067   

ESOP compensation

     544        1,575   

Stock-based compensation

     9,428        7,911   

Excess tax benefits from stock-based compensation

     (608     (1,276

Bad debt expense

     2,216        2,613   

Change in assets and liabilities, net of acquired

     35,978        (12,881
  

 

 

   

 

 

 

Net cash provided by operating activities

     228,662        191,455   

Investing activities:

    

Additions to property and equipment, net

     (25,051     (29,199

Acquisitions and equity investments, net

     (14,193     (52,343
  

 

 

   

 

 

 

Net cash used in investing activities

     (39,244     (81,542

Financing activities:

    

Dividends paid

     (39,800     (35,543

Repurchases of common stock

     (323,519     (36,947

Proceeds from issuance of long-term debt

     325,000        0   

ESOP activity

     (1,307     881   

Debt issuance costs

     (1,862     0   

Common stock issued, net

     10,496        9,417   

Excess tax benefits from share-based compensation

     608        1,276   
  

 

 

   

 

 

 

Net cash used in financing activities

     (30,384     (60,916

Effect of exchange rate changes on cash

     (9,607     (1,549
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     149,427        47,448   

Cash and cash equivalents at beginning of period

     388,665        340,591   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 538,092      $ 388,039   
  

 

 

   

 

 

 

See accompanying notes.

 

-3-


Table of Contents

PATTERSON COMPANIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data, unless otherwise indicated)

(Unaudited)

January 28, 2012

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 January 28, 2012 and the results of operations and the cash flows for the periods ended January 28, 2012 and January 29, 2011. Such adjustments are of a normal recurring nature. The results of operations for the periods ended January 28, 2012 and January 29, 2011, 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 2011 Annual Report on Form 10-K filed on June 29, 2011.

The condensed consolidated financial statements of Patterson Companies, Inc. include the assets and liabilities of PDC Funding Company, LLC (“PDC Funding”) and PDC Funding Company II, LLC (“PDC Funding II”), wholly owned subsidiaries and separate legal entities under Minnesota law. PDC Funding and PDC Funding II are fully consolidated special purpose entities of the Company established to sell customer installment sale contracts to outside financial institutions in the normal course of business. The assets of PDC Funding and PDC Funding II would be available first and foremost to satisfy the claims of its creditors. There are no known creditors of PDC Funding or PDC Funding II.

Fiscal Year End

The fiscal year end of the Company is the last Saturday in April. The third quarter of fiscal 2012 and fiscal 2011 represents the 13 weeks ended January 28, 2012 and January 29, 2011, respectively. The nine months ended January 28, 2012 included 39 weeks, but because of an extra or fourteenth week in the first quarter of fiscal 2011, the nine months ended January 29, 2011 included 40 weeks. Fiscal 2012 will include 52 weeks of operations, while fiscal 2011 was comprised of 53 weeks.

Comprehensive Income

Other than net income, the only significant items included in comprehensive income are foreign currency translation adjustments. Foreign currency translation adjustments do not include a provision for income tax because earnings from foreign operations are considered to be indefinitely reinvested outside the U.S.

Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share (shares in thousands):

 

     Three Months Ended      Nine Months Ended  
     January 28,
2012
     January 29,
2011
     January 28,
2012
     January 29,
2011
 

Denominator:

           

Denominator for basic earnings per share—weighted- average shares

     106,504         117,994         111,539         118,544   

Effect of dilutive securities—stock options, restricted stock, ESOP and stock purchase plans

     702         843         687         787   
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator for diluted earnings per share— adjusted weighted average shares

     107,206         118,837         112,226         119,331   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

-4-


Table of Contents

Options to purchase 549 and 563 shares of common stock during the three and nine months ended January 28, 2012, respectively, and 595 and 606 shares during the three and nine months ended January 29, 2011, respectively, were excluded from the calculation of diluted earnings per share because the effect would have been anti-dilutive. Unvested restricted stock awards excluded from the calculation of diluted earnings per share were 80 and 186 shares during the three and nine months ended January 28, 2012, respectively, and 0 and 230 shares during the three and nine months ended January 29, 2011, respectively, because the effect would have been anti-dilutive.

Recently Issued Accounting Pronouncements

In December 2011, the Financial Accounting Standards Board (“FASB”) issued ASU 2011-11 “Disclosures about Offsetting Assets and Liabilities.” ASU 2011-11 enhances disclosures surrounding offsetting (netting) assets and liabilities. The standard applies to financial instruments and derivatives and requires companies to disclose both gross and net information about instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to a master netting arrangement. ASU No. 2011-11 is effective for interim and annual periods beginning on or after January 1, 2013. We are still evaluating the effect this standard will have on our Consolidated Financial Statements, but do not believe that the adoption of these new pronouncements will have a material effect on our Consolidated Financial Statements.

In September 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-08, Testing Goodwill for Impairment (“ASU 2011-08”). Under ASU 2011-08, entities testing goodwill for impairment now have the option to perform a qualitative assessment before having to calculate the fair value of a reporting unit. If an entity determines, on the basis of qualitative factors, that the fair value of the reporting unit is more-likely-than-not less than the carrying amount, the existing quantitative impairment test is required. Otherwise, no further impairment testing is required. This update is effective for fiscal years beginning after December 15, 2011, with early adoption permitted. We do not anticipate that the adoption of this provision will have a material impact on the Company’s financial position, results of operations or cash flows.

In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income (“ASU 2011-05”), which requires an entity to present the total of comprehensive income, the components of net income and the components of other comprehensive income, either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05, which should be applied retrospectively, is effective for annual or interim periods beginning after December 15, 2011, with early adoption permitted. The Company early adopted ASU 2011-05 effective at the beginning of fiscal 2012. This adoption did not have an impact on the Company’s financial position, results of operations or cash flows, as it only requires a change in the format of the Company’s current presentation. We have presented other comprehensive income in two consecutive statements in conjunction with our statement of income.

In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”). ASU 2011-04 clarifies guidance on how to measure fair value and is largely consistent with existing fair value measurement principles. This ASU also expands existing disclosure requirements for fair value measurements and makes other amendments. This ASU is effective prospectively beginning January 29, 2012, the first day of the Company’s fourth quarter of fiscal 2012. The adoption of this standard is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

NOTE 2 GOODWILL AND OTHER INTANGIBLE ASSETS

The goodwill balances and related activity by business segment as of April 30, 2011 and January 28, 2012 are as follows:

 

                   Translation        
     Balance at      Acquisition      And Other     Balance at  
     April 30, 2011      Activity      Activity     January 28, 2012  

Dental Supply

   $ 132,670       $ —         $ (277   $ 132,393   

Rehabilitation Supply

     537,995         —           (1,707     536,288   

Veterinary Supply

     124,951         4,895         4,598        134,444   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 795,616       $ 4,895       $ 2,614      $ 803,125   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

-5-


Table of Contents

Balances of other intangible assets excluding goodwill are as follows:

 

     January 28,     April 30,  
     2012     2011  

Unamortized—indefinite lived:

    

Copyrights, trade names and trademarks

   $ 76,422      $ 76,422   

Amortized:

    

Distribution agreement, customer lists and other

     229,621        229,649   

Less: Accumulated amortization

     (90,514     (78,855
  

 

 

   

 

 

 

Net amortized other intangible assets

     139,107        150,794   
  

 

 

   

 

 

 

Total identifiable intangible assets, net

   $ 215,529      $ 227,216   
  

 

 

   

 

 

 

NOTE 3 DERIVATIVE FINANCIAL INSTRUMENTS

The Company is a party to certain offsetting and identical interest rate cap agreements. These cap agreements are not designated for hedge accounting treatment and were entered into to fulfill certain covenants of a sale agreement between a commercial paper conduit managed by The Bank of Tokyo-Mitsubishi UFJ, Ltd. and PDC Funding. On December 2, 2011 this agreement was amended on terms consistent with the expiring agreement. These agreements are structured to expire at the end of a 364-day term, so effectively are amended annually. The cap agreements provide a credit enhancement feature for the financing contracts sold by PDC Funding to the commercial paper conduit and replace a minimum interest rate margin previously required under the sale agreement.

The cap agreements are cancelled and new agreements entered into periodically to maintain consistency with the dollar maximum of the sale agreements and the maturity of the underlying financing contracts. As of January 28, 2012, PDC Funding had purchased two interest rate caps from a bank with combined notional amounts of $459 million and maturity dates of September 2018. Patterson Companies, Inc. sold two identical interest rate caps to the same bank.

Similar to the above agreements, PDC Funding II and Patterson Companies, Inc. had entered into offsetting and identical interest rate swap agreements with a notional amount of $110 million. During the second quarter of 2012, these agreements were terminated and replaced with offsetting and identical interest rate cap agreements. As of January 28, 2012 these agreements had notional amounts of $75 million and maturity dates of October 2017.

In addition to the identical purchased and sold interest rate contracts described above, the Company has entered into two interest rate swap agreements with banks to economically hedge the interest rate risk associated with our finance contracts. One agreement ended in November 2011, and as of January 28, 2012, the second agreement has a notional amount of $0.2 million and matured in February 2012.

The Company’s interest rate contracts do not qualify for hedge accounting treatment and, accordingly, the Company records the fair value of the agreements as an asset or liability and the change in any period as income or expense during the period in which the change occurs.

In the first quarter of fiscal 2011, the Company entered into a foreign currency forward contract that was settled in the same quarter. This contract served as an economic hedge and was not designated as a hedge for accounting purposes. The total gain on the contract was $0.1 million.

In the second quarter of fiscal 2011, the Company entered into a foreign currency forward contract that served to manage foreign exchange risk on a short-term intercompany loan. The forward contract and intercompany loan were both settled during the quarter. The loss on the contract was $2.0 million.

 

-6-


Table of Contents

The following table presents the fair value of the Company’s interest rate contracts (in millions):

 

Derivative type

   Classification    January 28,
2012
     April 30,
2011
     January 29,
2011
 

Assets:

     

Interest rate contracts

   Other noncurrent assets    $ 0.3       $ 5.5       $ 6.2   

Liabilities:

           

Interest rate contracts

   Other noncurrent liabilities    $ 0.3       $ 5.6       $ 6.5   

The following table presents the effect of interest rate and foreign currency contracts on the consolidated statements of income (in millions):

 

    

Location of gain(loss)

recognized on derivative

   Three Months Ended      Nine Months Ended  

Derivative type

      January 28,
2012
     January 29,
2011
   January 28,
2012
   January 29,
2011
 

Interest rate contracts

   Other income(expense), net    $ 0.0       $ 0.0       $0.0    $ 0.0   

Foreign currency contracts

   Other income(expense), net      0.0         0.0       0.0      (1.9

NOTE 4 FAIR VALUE MEASUREMENTS

Fair value is the price at which an asset could be exchanged in a current transaction between knowledgeable, willing parties. The fair value hierarchy of measurements is categorized into one of three levels based on the lowest level of significant input used:

 

  Level 1       Quoted prices in active markets for identical assets and liabilities at the measurement date.
  Level 2       Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
  Level 3       Unobservable inputs for which there is little or no market data available. These inputs reflect management’s assumptions of what market participants would use in pricing the asset or liability.

 

-7-


Table of Contents

The Company’s hierarchy for its assets and liabilities measured at fair value on a recurring basis as of January 28, 2012 is as follows (in millions):

 

     Total      Quoted Prices in
Active Markets
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Significant
Unobservable Inputs
(Level 3)
 

Assets:

           

Cash equivalents

   $ 316.9       $ 316.9       $ 0       $ 0   

Derivative instruments

     0.3         0         0.3         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 317.2       $ 316.9       $ 0.3       $ 0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Derivative instruments

   $ 0.3       $ 0       $ 0.3       $ 0   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company’s hierarchy for its assets and liabilities measured at fair value on a recurring basis as of April 30, 2011 is as follows (in millions):

 

     Total      Quoted Prices in
Active Markets
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Significant
Unobservable Inputs
(Level 3)
 

Assets:

           

Cash equivalents

   $ 188.2       $ 188.2       $ 0       $ 0   

Derivative instruments

     5.5         0         5.5         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 193.7       $ 188.2       $ 5.5       $ 0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Derivative instruments

   $ 5.6       $ 0       $ 5.6       $ 0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Cash equivalents – The Company values cash equivalents at current market rates. The carrying value of cash equivalents, including government securities and money market funds, approximates fair value. Maturities of cash equivalents are less than three months.

Derivative instruments – The Company’s derivative instruments consist of interest rate contracts. These instruments are valued using inputs such as interest rates and credit spreads.

Certain assets are measured at fair value on a consolidated basis. These assets are not measured at fair value on an ongoing basis, but are subject to fair value adjustments under certain circumstances, such as when there is evidence of impairment. There were no fair value adjustments to such assets during the periods ended January 28, 2012 or January 29, 2011.

The carrying amounts of receivables, net of allowances, accounts payable, and certain accrued and other current liabilities, approximate fair value on January 28, 2012.

 

-8-


Table of Contents

NOTE 5 CUSTOMER FINANCING

As a convenience to its customers, the Company offers several different financing alternatives including both a Company sponsored program and a third party program. For the third party program, the Company acts as a facilitator between the customer and the third party financing entity with no on-going involvement in the financing transaction. Under the Company sponsored program, equipment purchases by customers with strong credit are financed to a maximum of $0.4 million for any one customer. The Company generally sells the customers’ financing contracts to outside financial institutions in the normal course of its business. The Company currently has two arrangements under which it sells these contracts.

In fiscal 2003, the Company initiated an agreement to sell its equipment finance contracts to a commercial paper conduit managed by JPMorgan Chase Bank N.A. To participate in the commercial paper conduit, the Company was required to establish a special purpose entity (“SPE”), PDC Funding Company, LLC, a consolidated, wholly owned subsidiary. In December 2010, this agreement was amended and restated, and The Bank of Tokyo-Mitsubishi UFJ, Ltd. became the managing agent under the amended agreement.

The Company transfers financing contracts to the SPE and in turn, the SPE sells the contracts to the commercial paper conduits. The SPE does not issue any debt. While there is no recourse to the Company by the commercial paper conduits on the sale of contracts, the Company receives only approximately 84% of the principal amount of the contracts upon the sale. The remaining 16% of the proceeds is held by the conduit as security against the eventual performance of the portfolio. The deferred purchase price receivable from the conduit is recorded as a non-current asset, which is carried at its estimated fair market value. As of January 28, 2012, the capacity of this arrangement with the conduits is $500 million.

The Company also maintained an agreement with U.S. Bank National Association, as agent, whereby the U.S. Bank group purchased customers’ financing contracts. The Company has established another SPE, PDC Funding II, as a consolidated, wholly owned subsidiary, which sold financing contracts to the U.S. Bank group. The Company received a portion of the principal amounts of the contracts upon sale, with the remaining portion of the proceeds held by the banks as security against the eventual performance of the portfolio. The holdback receivable from the banks is recorded as a non-current asset, which is carried at its estimated fair market value. The capacity under the agreement was $110 million. In the fourth quarter of fiscal 2010, this agreement was amended such that no additional contracts would be sold, but the contracts previously sold and outstanding under the agreement would continue under the agreement. On August 12, 2011, Fifth Third Bank replaced U.S. Bank and the agreement was amended and restated. Under the restated agreement, Fifth Third Bank is the agent and contracts may be sold, with a capacity under the agreement of $75 million. Approximately $75 million of such contracts were outstanding as of January 28, 2012.

These financing arrangements are accounted for as a sale of assets under the provisions of ASC Topic No. 860, “Transfers and Servicing” (“ASC 860”). During the three months and nine months ended January 28, 2012, the Company sold $ 77.2 million and $213.0 million, respectively, of its contracts under these arrangements.

Effective at the beginning of fiscal 2011 and through the second quarter of fiscal 2011 ended October 30, 2010, under the revised accounting standards of ASC 860, transfers under the agreement with the commercial paper conduit were accounted for as secured borrowings. Accordingly, the assets transferred during fiscal 2011 were not derecognized and a liability for the cash advances received was included on the balance sheet as of October 30, 2010. In addition, the transfers for the six months ended October 30, 2010 were reflected as an operating cash usage and a corresponding financing cash inflow within the condensed consolidated statement of cash flows.

In the third quarter of fiscal 2011, the Company amended and restated the agreement with the commercial paper conduit. Under the terms of the amended and restated agreement, the transfers of the finance contract receivables again qualify for sale accounting under ASC 860.

The Company retains servicing responsibilities under both agreements, for which it is paid a servicing fee. The servicing fees received by the Company are considered adequate compensation for services rendered. Accordingly, no servicing asset or liability has been recorded. The agreements require the Company to maintain a minimum current ratio and maximum leverage ratio. The Company was in compliance with the covenants at January 28, 2012.

Included in current receivables in the consolidated balance sheets are approximately $68.1 million, net of unearned income of $2.9 million, and $78.5 million, net of unearned income of $3.6 million, as of January 28, 2012 and April 30, 2011, respectively, of finance contracts not yet sold by the Company. A total of $471.0 million of finance contracts receivable sold under the agreements were outstanding at January 28, 2012. The residual receivable under the arrangements was approximately $70.4 million and $78.0 million as of January 28, 2012 and April 30, 2011, respectively.

 

-9-


Table of Contents

Since the internal financing program began in 1994, bad debt write-offs have amounted to less than one-percent of the loans originated.

NOTE 6 SEGMENT REPORTING

Patterson Companies, Inc. is comprised of three reportable segments: dental, veterinary, and rehabilitation supply. The Company’s 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 throughout North America. The veterinary supply segment provides consumable supplies, equipment, diagnostic products, biologicals (vaccines) and pharmaceuticals to companion-pet veterinary clinics in the majority of regions throughout the United States. The rehabilitation supply segment provides a comprehensive range of distributed and self-manufactured rehabilitation 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 set forth in Note 1 to the consolidated financial statements included in the Company’s 2011 Annual Report on Form 10-K filed June 29, 2011. The Company evaluates segment performance based on operating income. The corporate office general and administrative expenses are included in the dental supply segment and consist of home office support costs in areas such as informational technology, finance, human resources and facilities. The cost to operate the distribution centers are allocated to the business segments based on the through-put of each segment.

The following table presents information about the Company’s reportable segments:

 

     Three Months Ended      Nine Months Ended  
     January 28,      January 29,      January 28,      January 29,  
     2012      2011      2012      2011  

Net sales

           

Dental supply

   $ 605,041       $ 557,048       $ 1,689,013       $ 1,662,936   

Rehabilitation supply

     115,346         117,876         383,368         377,976   

Veterinary supply

     174,643         149,726         526,946         490,939   
  

 

 

    

 

 

    

 

 

    

 

 

 

Consolidated net sales

   $ 895,030       $ 824,650       $ 2,599,327       $ 2,531,851   
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating income

           

Dental supply

   $ 67,064       $ 73,785       $ 176,933       $ 198,337   

Rehabilitation supply

     14,859         12,846         51,436         48,381   

Veterinary supply

     7,983         6,076         26,789         25,165   
  

 

 

    

 

 

    

 

 

    

 

 

 

Consolidated operating income

   $ 89,906       $ 92,707       $ 255,158       $ 271,883   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents sales information by product for the Company:

 

      Three Months Ended      Nine Months Ended  
     January 28,      January 29,      January 28,      January 29,  
     2012      2011      2012      2011  

Net sales

           

Consumable and printed products

   $ 550,888       $ 520,011       $ 1,695,822       $ 1,653,946   

Equipment and software

     273,573         232,594         687,249         668,372   

Other

     70,569         72,045         216,256         209,533   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 895,030       $ 824,650       $ 2,599,327       $ 2,531,851   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

-10-


Table of Contents

NOTE 7 EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)

During 1990, the Company’s Board of Directors adopted a leveraged ESOP. In fiscal 1991, under the provisions of the plan and related financing arrangements, the Company loaned the ESOP $22,000 (the “1990 note”) for the purpose of acquiring its then-outstanding preferred stock, which was subsequently converted to common stock. The contribution from the ESOP to employees is determined annually by the Board of Directors. Shares of stock acquired by the plan are allocated to each participant who has completed 1,000 hours of service during the plan year. The shares under the 1990 note were grandfathered from the accounting provisions of ASC Topic 718-40, “Employer Stock Ownership Plans” (“ASC 718-40”) and, therefore, the provisions of the former SOP 76-3 applied throughout 2011. The remaining unallocated shares in the ESOP were acquired in fiscal year 2002 and fiscal year 2006 and these shares are accounted for under ASC 718-40. Accordingly, these shares are not considered outstanding for computation of earnings per share until the shares are committed for release to the participants. When the shares are committed for release and allocated to the participants, the expense to the Company is determined based on the current fair value. As of January 28, 2012, a total of 4,473,987 of unallocated shares were held by the ESOP.

The ESOP expense recognized during the three months ended January 28, 2012 and January 29, 2011 was $6,100 and $525, respectively. The ESOP expense recognized during the nine months ended January 28, 2012 and January 29, 2011 was $18,250 and $1,575, respectively. In fiscal year 2011 and prior years, substantially all contributions to participants were made using an allocation of shares under the 1990 note, with expense recognized based on the original cost of acquiring the shares. Beginning in fiscal year 2012, contributions to participants will be recognized based on the fair value of the shares released and allocated to participants.

NOTE 8 DEBT ISSUANCE

On December 8, 2011, the Company entered into a note purchase agreement (“Note Purchase Agreement”) among Patterson Companies, Inc., Patterson Medical Holdings, Inc., Patterson Medical Supply, Inc., Patterson Dental Holdings, Inc., Patterson Dental Supply, Inc., Webster Veterinary Supply, Inc., and Webster Management, LP, as borrowers, and various private lenders.

Under the Note Purchase Agreement, the Company issued fixed rate senior notes in an aggregate principal amount of $325,000 consisting of (i) $60,000 at an interest rate of 2.95%, due December 10, 2018; (ii) $165,000 at an interest rate of 3.59%, due December 8, 2021; and (iii) $100,000 at an interest rate of 3.74%, due December 8, 2023.

A portion of the proceeds of the Note Purchase Agreement were used to repay borrowings under the Company’s revolving line of credit, and proceeds may be used to repurchase shares of the Company’s common stock and for general corporate purposes.

The Company is subject to various financial covenants under the agreement including the maintenance of leverage and interest coverage ratios. In the event of a default by the Company under the Note Purchase Agreement, any outstanding obligations may become due and payable immediately.

As of January 28, 2012, $300 million was available under the Company’s $300 million revolving credit facility. On December 1, 2011, the previous credit facility, which was due to expire in November 2012, was terminated and the Company entered into a new credit agreement on terms and conditions consistent with the previous agreement, except the interest rates pricing schedule reflect the current market for similar arrangements. The new credit agreement also expires in December 2016.

 

-11-


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) should be read in conjunction with the MD&A included in our 2011 Annual Report on Form 10-K filed June 29, 2011, for important background information regarding, among other things, an overview of the markets in which we operate and our business strategies.

There are two matters that have an overriding impact on the Company’s financial results for fiscal 2012. First, the Company operates with a 52-53 week accounting convention with its fiscal year ending on the last Saturday in April. Fiscal year 2011 included 53 weeks, with an additional or fourteenth week included in the first quarter ended July 31, 2010. Fiscal 2012 ending April 28, 2012 will include 52 weeks, and the first quarter operations include one less, or thirteen weeks of activity compared to the prior year period. It is difficult to precisely quantify the impact of the extra week, but estimates have been provided in those areas where it is possible to make reasonable approximations. We estimate that the impact of the extra week reduced sales growth by two or three percentage points in the first nine months of fiscal 2012 as compared to the first nine months of fiscal 2011.

The second matter involves the level of expense associated with the Company’s Employee Stock Ownership Plan (“ESOP”). For the past twenty years allocations of shares to employees have been made almost entirely from shares of Company stock acquired by the ESOP in 1990 (“the 1990 Shares”). Although the accounting standards in effect in 1990 were subsequently revised, the accounting for the 1990 shares was grandfathered under the revised standards and called for the expensing of the shares released for allocation to employees to be based on the original cost of the shares.

The revised standards require the expensing of shares released to be based on fair value at the time the shares are committed to be released and since the revision of the accounting standards, the ESOP has acquired approximately 4.5 million additional shares, nearly all of which are still held for future allocation to employees. As the final allocation of the 1990 shares was made at the end of fiscal 2011, the ESOP shares that have been subsequently acquired will be released and allocated to employees in fiscal 2012 and beyond. When these shares are committed to be released to employees, it will result in a non-cash expense equal to the average fair value of the shares committed to be released.

We expect the ESOP expense will increase our operating expenses by approximately $23 million or $0.12 per diluted share in fiscal 2012 as compared to fiscal 2011. This change from historical cost to fair value in recognizing ESOP expense creates a comparability discrepancy between the Company’s past and foreseeable future operating results.

The following table presents the ESOP expense reconciliation for the Company for comparability purposes:

 

     Three Months Ended      Nine Months Ended  
     January 28,
2012
     January 29,
2011
     January 28,
2012
     January 29,
2011
 

Net Income

   $ 53,108       $ 55,396       $ 150,672       $ 162,678   

Incremental ESOP expense

     3,468         —           10,372         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted Net Income (non-GAAP)

   $ 56,576       $ 55,396       $ 161,044       $ 162,678   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted Earnings Per Share

   $ 0.50       $ 0.47       $ 1.34       $ 1.36   

Incremental ESOP expense

     0.03         —           0.10         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted Earnings Per Share (non-GAAP)

   $ 0.53       $ 0.47       $ 1.44       $ 1.36   
  

 

 

    

 

 

    

 

 

    

 

 

 

In the second quarter of fiscal 2012, the Company made a cash contribution of approximately $23 million to the ESOP, which was then used by the ESOP to acquire shares through open market purchases. The Company has instructed the ESOP trustee to hold these shares in suspense for allocation to employees at the end of the current ESOP fiscal year. Since the fiscal 2012 contribution to the ESOP was made in cash as opposed to using shares previously acquired by the ESOP, the expense for the current fiscal year will be a cash expense to the Company.

 

-12-


Table of Contents

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  
     January 28,     January 29,     January 28,     January 29,  
     2012     2011     2012     2011  

Net sales

     100.0     100.0     100.0     100.0

Cost of sales

     67.7     65.9     67.3     66.8
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     32.3     34.1     32.7     33.2

Operating expenses

     22.3     22.8     22.9     22.4
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     10.0     11.2     9.8     10.7

Other expense, net

     (0.9 %)      (0.8 %)      (0.7 %)      (0.6 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before taxes

     9.1     10.5     9.1     10.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     5.9     6.7     5.8     6.4
  

 

 

   

 

 

   

 

 

   

 

 

 

QUARTER ENDED JANUARY 28, 2012 COMPARED TO QUARTER ENDED JANUARY 29, 2011.

Net Sales. Consolidated net sales for the three months ended January 28, 2012 (“Current Quarter”) were $895.0 million, an 8.5% increase from $824.7 million for the three months ended January 29, 2011(“Prior Quarter”). Acquisitions contributed 0.6% to Current Quarter sales growth, and the impact of foreign exchange rate changes on net sales had a minimal unfavorable effect of 0.1%.

Sales of the Dental segment were $605.0 million, an increase of 8.6% from $557.0 million in the Prior Quarter. Sales of consumables grew approximately 3.2% as the Company believes demand for routine dental work is continuing on a consistent basis, if not improving slightly, although it appears certain discretionary procedures continued to be deferred. Sales of equipment and software increased 21.4% from the prior year. This strong growth was driven by double-digit increases in sales of CEREC dental restorative products and digital radiography offerings, including sensors, panoramic and cone beam products.

Sales of other services and products in the Dental segment declined 3.8% in the Current Quarter as last year’s third quarter benefited from gain on finance contract sales that was deferred from the second quarter of the prior year. Due to accounting rule changes, the gain was deferred to the third quarter when certain amendments were completed to agreements with a commercial paper conduit. See Note 5 of the accompanying consolidated financial statements.

Veterinary segment sales rose 16.6% to $174.6 million. This sales growth included a 15.1% increase in consumable sales as well as the acquisition of American Veterinary Supply Corporation (“AVSC”), which accounted for 3.1% of the segment’s sales increase. Equipment and software sales grew 35.2% from the year-earlier period to $13.4 million. We plan to continue investing in Webster’s relatively new equipment and service business, since it further strengthens the segment’s full-service platform.

Rehabilitation sales declined 2.1% in the Current Quarter to $115.3 million. Unfavorable changes in foreign currency translation rates decreased sales in the Current Quarter by 0.2%. Sales of consumables increased 0.4% while equipment sales fell by 10.3%. The Company believes that regulatory uncertainty as it relates to domestic dealers and the overall economy are both adversely affecting this segment.

Gross Margins. Consolidated gross margin decreased 180 basis points in the Current Quarter to 32.3%. Dental and Veterinary segments gross margins declined by 200 and 70 basis points, respectively, while Rehabilitation’s gross margin increased by 40 basis points.

The improved gross margin of the Rehabilitation segment is due primarily to the further integration of recently acquired entities into the division’s pricing structure.

 

-13-


Table of Contents

Dental’s gross margins decreased mostly due to sales mix, as the relative amount of revenues from consumables was lower than equipment. Within equipment, a relatively high percentage of revenues from certain higher technology products, which produce a lower margin than the average equipment transaction, also contributed to the decrease. Because the Dental division accounts for the majority of the financing transactions, the negative impact of the comparatively lower financing gain on gross margin is approximately 60 basis points.

Veterinary’s gross margins declined mainly due to the decision by a manufacturer to re-price its product at the beginning of calendar 2011.

Operating Expenses. The consolidated operating expense ratio improved 50 basis points from the Prior Quarter to 22.3%. The improvement would have been 110 basis points had it not been for the incremental ESOP expense discussed in the Overview section above. This incremental expense of $5.5 million in the Current Quarter increased our operating expense ratio by 60 basis points.

The Dental segment’s operating expense ratio increased 20 basis points due to the impact of the incremental ESOP expense. As the Company’s largest segment, Dental absorbed the majority of the increase in the ESOP expense.

The operating expense ratio of the Veterinary segment improved 110 basis points mainly due to improved revenues. The Rehabilitation segment’s operating expenses as a percent of sales improved 160 basis points in the Current Quarter. The Rehabilitation segment took aggressive action to trim its expense structure and also benefitted from reduced integration costs in the Prior Quarter related to the DCC acquisition.

Operating Income. Current Quarter operating income was $89.9 million, or 10.0% of net sales. In the Prior Quarter, operating income was $92.7 million, or 11.2% of net sales. The decrease is due primarily to the $5.5 million of incremental ESOP expense.

Other (Expense) Income, Net. Net other expense was $8.0 million in the Current Quarter compared to $6.4 million in the Prior Quarter. Net other expense is comprised primarily of interest expense, partly offset by interest income. Interest income of $1.1 million was down $0.5 million from the Prior Quarter due to fewer unsold finance receivables in the Current Quarter. The incremental interest expense on the newly issued debt cost in the quarter approximated $1.7 million.

Income Tax Expense. The effective income tax rate for the Current Quarter was 35.1% and was favorably affected by the portion of our cash dividends paid on allocated shares owned by the ESOP. The Current Quarter’s cash dividend was $0.12 per common share compared to $0.10 in the Prior Quarter. In the Prior Quarter, the tax rate was 35.8%.

Net Income and Earnings Per Share. Net income decreased 4.2% to $53.1 million, compared to $55.4 in the Prior Quarter. Earnings per diluted share were $0.50 in the Current Quarter compared to $0.47 in the Prior Quarter. The incremental ESOP expense in the Current Quarter reduced net income by $3.5 million and reduced earnings per diluted share by $0.03. Diluted shares outstanding in the Current Quarter were 107,206,000 compared to 118,837,000 in the Prior Quarter. The decrease is due to share repurchase activity.

NINE MONTHS ENDED JANUARY 28, 2012 (39 WEEKS) COMPARED TO NINE MONTHS ENDED JANUARY 29, 2011 (40 WEEKS).

As described in the Overview section above, the first quarter of fiscal 2011 included an extra week due to the Company’s fiscal year convention. Accordingly, the nine months ended January 29, 2011 included 40 weeks while the nine months ended January 28, 2012 include 39 weeks. It is difficult to precisely quantify the impact of the extra week, but estimates have been provided in those areas where it is possible to make reasonable approximations. We estimate that the impact of the extra week reduced sales growth by two to three percentage points in the nine months of fiscal 2012 as compared to the nine months of fiscal 2011.

Net Sales. Consolidated net sales for the nine months ended January 28, 2012 (“Current Period”) totaled $2,599.3 million compared to $2,531.9 million for the nine months ended January 29, 2011 (“Prior Period”). Sales included a contribution from acquisitions of 0.7% and a positive impact from foreign currency translation rates of 0.4%. The Prior Period includes an additional week of sales due to the Company’s fiscal year convention discussed above. We believe that consolidated sales growth was approximately 4.8%, excluding the estimated impact of the extra week, an impact on consolidated sales growth of approximately two percentage points.

 

-14-


Table of Contents

Dental segment sales of $1,689.0 million were 1.6% higher than the $1,662.9 million in the Prior Period. We believe the sales growth was approximately 3.4% excluding the impact of the additional week. Currency translation rates favorably impacted Current Period sales by 0.3%. Consumable sales increased 2.4% excluding the estimated impact of the extra week in the Prior Period.

Dental equipment and software sales improved 4.1% compared to the Prior Period, led by sales of digital sensors, cone beam and panoramic imaging systems. Sales of other services and products in the Dental segment rose 2.2% in the Current Period.

Sales of the Veterinary segment rose 7.3% to $526.9 million in the Current Period and include a 1.2% contribution from the AVSC acquisition. The impact of the extra week in the Prior Period reduced Current Period sales growth by approximately 3%.

In the Current Period, Rehabilitation segment sales of $383.4 million were 1.4% higher than the $378.0 million of sales in the Prior Period. The impact of acquisitions contributed 3.0% to sales growth while currency translation rates favorably impacted sales in the Current Period sales by 1.1%. The Current Period includes approximately six weeks of incremental sales from the acquisition of the DCC Healthcare entities in the first quarter of fiscal 2011. Excluding the extra week from the Prior Period, sales growth would be approximately 3.6% for the Current Period.

Gross Margins. Consolidated gross margin decreased 50 basis points in the Current Period to 32.7%. Dental gross margin decreased 30 basis points due mostly to product mix. Gross margins for the Veterinary segment decreased 90 basis points due primarily to a pricing change by a manufacturer on a line of products at the beginning of calendar 2011. Rehabilitation segment gross margin improved 10 basis points.

Operating Expenses. The consolidated operating expense ratio increased 40 basis points from the Prior Period to 22.8%. The Dental segment’s operating expense ratio increased 110 basis points due to the impact of the higher ESOP expense. As the Company’s largest segment, the Dental unit absorbed the majority of the increase in the ESOP expense. If the increase in ESOP expense were excluded from the current year operations, the operating expense ratio would have been 22.1%, a decrease of 30 basis points from the Prior Period.

The Rehabilitation segment’s operating expenses as a percent of sales were 50 basis points lower in the Current Period resulting from the cost savings from the integration of the DCC businesses acquired in June 2010 and focused cost management in the Current Period.

The operating expense ratio of the Veterinary segment was 80 basis points lower in the Current Period and benefitted from the final integration activities related to the October 2008 acquisition of Columbus Serum. These integration activities were completed in the middle of fiscal 2011.

Operating Income. Current Period operating income totaled $255.2 million, or 9.8% of sales, compared to Prior Period operating income of $271.9 million, or 10.7% of net sales. If the increase in ESOP expense were excluded from current year operations, the operating margin would have been 10.5%. Intuitively, the positive impact of the extra week on the Prior Period’s operating margin further affected comparability between the two periods, although this effect is more difficult to quantify.

Other (Expense) Income, Net. Net other expense was $19.4 million in the Current Period, $4.9 million higher than $14.5 million in the Prior Period. The increase in the net expense is due primarily to a reduction in interest income of $3.3 million resulting from fewer finance contracts being held by the Company in the Current Period. Also, the December 2011 debt issuance of $325 million resulted in incremental interest expense of approximately $1.7 million.

Income Taxes. The effective income tax rate for the Current Period was 36.1% compared to 36.8% in the Prior Period. The tax rate was favorably affected by the portion of our cash dividends paid on allocated shares owned by the Employee Stock Ownership Plan. The Current Period’s cash dividends were $0.36 per common share compared to $0.30 in the Prior Period.

Net Income and Earnings Per Share. Net income decreased 7.4% to $150.7 million, compared to $162.7 in the Prior Period. Earnings per diluted share was $1.34 in the Current Period compared to $1.36 in the Prior Period. The incremental ESOP expense in the Current Period reduced net income by $10.4 million and reduced earnings per diluted share by $0.10. Diluted shares outstanding in the Current Period were 112,226,000 compared to 119,331,000 in the Prior Period. The decrease is due to share repurchase activity.

 

-15-


Table of Contents

LIQUIDITY AND CAPITAL RESOURCES

The Company’s cash flows from operations in the Current Period was $228.7 million compared to $191.5 million in the Prior Period.

Net cash used in investing activities of $39.2 million in the Current Period represents $25.1 million of capital expenditures and $14.2 million for acquisitions. The Prior Period’s $81.5 million used in investing activities included $29.2 million of capital expenditures and $52.3 million for acquisitions, primarily related to the acquisition of the rehabilitation businesses of DCC Healthcare in June 2010. The Company opened its newly-built Patterson Technology Center during the second quarter of fiscal 2012 and has no major construction projects planned for the remainder of fiscal 2012. The Company expects to use a total of approximately $30 million for capital expenditures in fiscal 2012.

Cash used in financing activities during the Current Period was $30.4 million, including stock repurchases of $323.5 million and dividends paid of $39.8 million, offset by $325 million of proceeds from the long-term debt issuance. In the Prior Period, cash used in financing activities was $60.9 due to stock repurchases of $36.9 million and dividends of $35.5 million.

The Company expects funds generated by operations, existing cash balances and credit availability under existing debt facilities will be sufficient to meet the Company’s working capital needs and finance anticipated expansion plans and strategic initiatives over the remainder of fiscal 2012.

As of January 28, 2012, $300 million was available under the Company’s $300 million revolving credit facility. On December 1, 2011, the previous credit facility, which was due to expire in November 2012, was terminated and the Company entered into a new credit agreement on terms and conditions consistent with the previous agreement, except the interest rates pricing schedule reflect the current market for similar arrangements. The new credit agreement also expires in December 2016.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

There have been no material changes in the Company’s Critical Accounting Policies and Estimates, as disclosed in its 2011 Annual Report on Form 10-K filed June 29, 2011.

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. These statements are not guaranties of future performance and are subject to certain risks, uncertainties or assumptions that are difficult to predict; therefore, the Company cautions shareholders and prospective investors that the following important factors, among others, could cause the Company’s actual operating results to differ materially from those expressed in any forward-looking statements. The statements under this caption are intended to serve as cautionary statements within the meaning of the Private Securities Litigation Reform Act of 1995. The following information is not intended to limit in any way the characterization of other statements or information under other captions as cautionary statements for such purpose. The order in which such factors appear below should not be construed to indicate their relative importance or priority. The Company assumes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

 

   

Economic conditions and volatility in the financial markets could adversely affect our operating results and financial condition.

 

   

The Company’s ability to meet increased competition from national, regional and local full-service distributors and mail-order distributors of dental, veterinary and rehabilitation products, while maintaining current or improved profit margins.

 

   

The ability of the Company to effectuate modifications to the business models of its three operating units to address changes in the individual markets of those business units.

 

-16-


Table of Contents
   

The ability of the Company to consolidate the distribution, information services, human resources, financial and other administrative functions of its three business units jointly shared services which meet the needs of the individual business units.

 

   

The ability of the Company to manage rapidly changing energy and commodity prices.

 

   

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 ability of the Company to provide for an orderly management succession, including the ability to recruit skilled personnel for the business, and then identify and train our personnel for their transition into key roles to support the long-term growth of the business.

 

   

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 Company’s assumptions concerning future per capita expenditures for dental services, including assumptions as to population growth and the demand for preventive and specialty 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 rehabilitation and assistive products.

 

   

Acquisitions of businesses could negatively impact our profitability and return on invested capital.

 

   

Our international operations are subject to risks that could adversely affect our operating results.

 

   

We sell products that could be subject to market and technological obsolescence.

 

   

Audits by tax authorities could result in additional tax payments for prior periods.

 

   

We are subject to a variety of litigation that could adversely affect our results of operations and financial condition.

 

   

We may be required to record a significant charge to earnings if our goodwill or other intangible assets become impaired.

 

   

We are exposed to the risk of changes in interest rates.

 

   

Certain U.S. and foreign laws could subject us to claims or otherwise harm our business.

 

-17-


Table of Contents
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes since April 30, 2011 in the Company’s market risk. For further information on market risk, refer to Item 7A in the Company’s 2011 Annual Report on Form 10-K filed June 29, 2011.

 

ITEM 4. CONTROLS AND PROCEDURES

Under the supervision and with the participation of the Company’s management, including the Company’s President and Chief Executive Officer (“CEO”) and its Chief Financial Officer (“CFO”), management evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of January 28, 2012. 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 January 28, 2012.

There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) or 15d-15(f) under the Exchange Act) that occurred during the quarter ended January 28, 2012 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

-18-


Table of Contents

PART II—OTHER INFORMATION

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

In December 2007, the Company’s Board of Directors expanded an existing authorization to allow for the purchase of up to twenty five million shares of common stock. As of March 2011, approximately 20.5 million shares had been repurchased under this authorization. In March 2011, the Board of Directors cancelled the existing share repurchase program and replaced it with a new authorization to repurchase an additional twenty-five million shares of common stock. As of January 28, 2012, 12,336,902 shares remained available for purchase under the authorization, which expires on March 15, 2016.

The following table presents activity under the stock repurchase program during the third quarter of fiscal 2012 ended January 28, 2012:

 

     Total Number
of Shares
Purchased
     Average
Price Paid
per Share
     Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
     Maximum Number
of Shares That May
Be Purchased Under
the Plan
 

October 30, 2011 to November 26, 2011

     2,931,700       $ 29.71         2,931,700         12,586,902   

November 27, 2011 to December 24, 2011

     250,000       $ 28.88         250,000         12,336,902   

December 25, 2011 to January 28, 2012

     —           —           —           12,336,902   
  

 

 

    

 

 

    

 

 

    

 

 

 
     3,181,700         29.66         3,181,700      

 

ITEM 6. EXHIBITS

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 were previously reported in the 2011 Annual Report on Form 10-K filed June 29, 2011.

 

-19-


Table of Contents

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 COMPANIES, INC.
      (Registrant)
Dated: March 8, 2012      
    By:   /s/ R. Stephen Armstrong
      R. Stephen Armstrong
      Executive Vice President, Chief Financial Officer and     Treasurer
      (Principal Financial Officer and Principal Accounting Officer)

 

-20-


Table of Contents

EXHIBIT INDEX

 

Exhibit
Number

  

Exhibit Description

31.1    Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2    Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a), under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32    Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101    Financials in XBRL format (1)

 

(1) IN ACCORDANCE WITH THE TEMPORARY HARDSHIP EXEMPTION PROVIDED BY RULE 201 OF REGULATION S-T, THE DATE BY WHICH THE INTERACTIVE DATA FILE IS REQUIRED TO BE SUBMITTED HAS BEEN EXTENDED BY SIX BUSINESS DAYS.

 

-21-

XNAS:PDCO Patterson Companies Inc Quarterly Report 10-Q Filling

Patterson Companies Inc XNAS:PDCO Stock - Get Quarterly Report SEC Filing of Patterson Companies Inc XNAS:PDCO stocks, including company profile, shares outstanding, strategy, business segments, operations, officers, consolidated financial statements, financial notes and ownership information.

XNAS:PDCO Patterson Companies Inc Quarterly Report 10-Q Filing - 1/28/2012
Name |  Ticker |  Star Rating |  Market Cap |  Stock Type |  Sector |  Industry Star Rating |  Investment Style |  Total Assets |  Category |  Top Holdings |  Top Sectors |  Symbol |  Title Star Rating |  Category |  Total Assets |  Top Holdings |  Top Sectors |  Symbol |  Name Title |  Date |  Author |  Collection |  Interest |  Popularity Topic |  Sector |  Key Indicators |  User Interest |  Market Cap |  Industry Name |  Ticker |  Star Rating |  Market Cap |  Stock Type |  Sector |  Industry Star Rating |  Investment Style |  Total Assets |  Category |  Top Holdings |  Top Sectors |  Symbol / Ticker |  Title Star Rating |  Category |  Total Assets |  Symbol / Ticker |  Name Title |  Date |  Author |  Collection |  Popularity |  Interest Title |  Date |  Company |  Symbol |  Interest |  Popularity Topic |  Sector |  Key Indicators |  User Interest |  Market Cap |  Industry Name |  Ticker |  Popularity |  Our Choices |  Most Recent Title |  Date |  Company |  Symbol |  Interest |  Popularity

Previous: XNAS:PDCO Patterson Companies Inc Insider Activity 4 Filing - 9/27/2012  |  Next: XNAS:PDCO Patterson Companies Inc Quarterly Report 10-Q Filing - 7/28/2012