FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JANUARY 29, 2000. [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934. Commission File No. 0-20572 PATTERSON DENTAL COMPANY ------------------------------------------------------ (Exact Name of Registrant as Specified in its Charter) Minnesota 41-0886515 --------- ---------- (State of Incorporation) (IRS Employer Identification No.) 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 at least the past 90 days. X Yes No -------- --------- Patterson Dental Company has outstanding 33,670,406 shares of common stock as of March 7, 2000. Page 1 of 14
PATTERSON DENTAL COMPANY INDEX Page ---- PART I - FINANCIAL INFORMATION Item 1 - Financial Statements 3-7 Condensed Consolidated Balance Sheets as of January 29, 2000 and April 24, 1999 3 Condensed Consolidated Statements of Income for the Three Months and Nine Months Ended January 29, 2000 and January 23, 1999 4 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended January 29, 2000 and January 23, 1999 5 Notes to Condensed Consolidated Financial Statements 6-7 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 8-12 PART II - OTHER INFORMATION Item 6 - Exhibits and Reports on Form 8-K 13 Signatures 14 Safe Harbor Statement Under The Private Securities Litigation Reform Act Of 1995: This Form 10-Q for the period ended January 29, 2000, contains certain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, which may be identified by the use of forward-looking terminology such as "may", "will", "expect", "anticipate", "estimate", "believe", "goal", or "continue", or comparable terminology that involves risks and uncertainties and that are qualified in their entirety by cautionary language set forth in the Company's Annual Report on Form 10-K filed July 19, 1999, and other documents filed with the Securities and Exchange Commission. See also pages 11-12 of this Form 10-Q. 2
PART I FINANCIAL INFORMATION PATTERSON DENTAL COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in thousands) ASSETS <TABLE> <CAPTION> January 29, April 24, 2000 1999 ----------- --------- (unaudited) <S> <C> <C> Current assets: Cash and cash equivalents............................................. $ 81,871 $ 78,746 Short-term investments................................................ 6,662 --- Receivables, net...................................................... 108,601 112,521 Inventory............................................................. 110,053 91,722 Prepaid expenses and other current assets............................. 5,318 3,655 -------- -------- Total current assets........................................... 312,505 286,644 Property and equipment, net.................................................. 45,088 37,018 Intangibles, net ............................................................ 45,588 46,867 Long-term receivables, net................................................... 15,930 1,575 Other........................................................................ 1,610 1,146 -------- -------- Total assets.................................................. $420,721 $373,250 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable...................................................... $ 72,985 $ 67,213 Accrued payroll expense............................................... 15,777 14,342 Other accrued expenses................................................ 11,760 16,722 Current maturities of long-term debt.................................. 357 415 -------- -------- Total current liabilities...................................... 100,879 98,692 Long-term debt............................................................... 1,362 1,682 Deferred taxes............................................................... 1,660 1,650 -------- -------- Total liabilities.............................................. 103,901 102,024 Deferred credits............................................................. 5,363 6,027 Stockholders' equity: Preferred stock....................................................... --- --- Common stock.......................................................... 337 336 Additional paid-in capital............................................ 65,975 66,992 Accumulated other comprehensive loss.................................. (1,439) (2,222) Retained earnings..................................................... 260,252 213,761 Note receivable from ESOP............................................. (13,668) (13,668) -------- -------- Total stockholders' equity..................................... 311,457 265,199 -------- -------- Total liabilities and stockholders' equity..................... $420,721 $373,250 ======== ======== </TABLE> See accompanying notes. 3
PATTERSON DENTAL COMPANY CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In thousands except per share amounts) (Unaudited) <TABLE> <CAPTION> Three Months Ended Nine Months Ended ------------------- --------------------- Jan. 29, Jan. 23, Jan. 29, Jan. 23, 2000 1999 2000 1999 -------- -------- -------- -------- (40 weeks) (39 weeks) <S> <C> <C> <C> <C> Net sales.......................................... $260,172 $230,176 $763,206 $643,574 Cost of sales ..................................... 163,756 144,335 482,470 405,218 -------- -------- -------- -------- Gross profit ...................................... 96,416 85,841 280,736 238,356 Operating expenses ................................ 70,445 64,343 210,313 181,939 -------- -------- -------- -------- Operating income .................................. 25,971 21,498 70,423 56,417 Other income and expense: Amortization of deferred credits .............. 222 222 664 665 Finance income, net ........................... 1,285 462 3,325 1,263 Interest expense .............................. (37) (113) (139) (398) Profit (loss) on currency exchange ............ 31 (9) (5) (154) -------- -------- -------- -------- Income before income taxes ........................ 27,472 22,060 74,268 57,793 Income taxes ...................................... 10,280 8,312 27,776 21,919 -------- -------- -------- -------- Net income ........................................ $ 17,192 $ 13,748 $ 46,492 $ 35,874 ======== ======== ======== ======== Earnings per share - basic ........................ $ 0.51 $ 0.41 $ 1.38 $ 1.08 ======== ======== ======== ======== Earnings per share - diluted ...................... $ 0.51 $ 0.41 $ 1.38 $ 1.07 ======== ======== ======== ======== </TABLE> See accompanying notes. 4
PATTERSON DENTAL COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited) <TABLE> <CAPTION> Nine Months Ended ------------------------- Jan. 29, Jan. 23, 2000 1999 ---------- ---------- (40 weeks) (39 weeks) <S> <C> <C> Operating activities: Net income..................................................... $ 46,492 $ 35,874 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation............................................ 5,030 4,505 Amortization of deferrals............................... (664) (664) Amortization of goodwill................................ 2,236 2,011 Bad debt expense........................................ 890 755 Change in assets and liabilities, net of acquired....... (12,372) (39,151) -------- -------- Net cash provided by operating activities............................. 41,612 3,330 Investing activities: Proceeds from sale of facilities............................... --- 2,250 Additions to property and equipment, net....................... (12,700) (5,331) Acquisitions, net.............................................. (2,842) (344) Purchase of short-term investments............................. (6,662) --- Investment in equipment contracts.............................. (14,940) --- -------- -------- Net cash used in investing activities................................ (37,144) (3,425) Financing activities: Decrease in bank indebtedness.................................. --- (632) Payments and retirement of long-term debt and obligations under capital leases............................. (457) (3,232) Common stock issued (purchased), net........................... (1,016) 3,151 -------- -------- Net cash used in financing activities ................................ (1,473) (713) Effect of exchange rate changes on cash............................... 130 (29) -------- -------- Net increase (decrease) in cash and cash equivalents.................. 3,125 (837) Cash and cash equivalents at beginning of period...................... 78,746 35,619 -------- -------- Cash and cash equivalents at end of period............................ $ 81,871 $ 34,782 ======== ======== </TABLE> See accompanying notes. 5
PATTERSON DENTAL COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands except per share data) (Unaudited) January 29, 2000 1. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly the financial position as of January 29, 2000, and the results of operations and the cash flows for the periods ended January 29, 2000, and January 23, 1999. Such adjustments are of a normal recurring nature. The results of operations for the quarter ended January 29, 2000, and January 23, 1999, are not necessarily indicative of the results to be expected for the full year. The balance sheet at April 24, 1999, is derived from the audited balance sheet as of that date. These financial statements should be read in conjunction with the financial statements included in the 1999 Annual Report on Form 10-K filed on July 19, 1999. 2. The fiscal year end of the Company is the last Saturday in April. The third quarter of fiscal year 2000 and 1999 represent the 13 weeks ended January 29, 2000 and January 23, 1999, respectively. The first nine months of fiscal year 2000 include 40 weeks while the first nine months of fiscal year 1999 include 39 weeks. 3. Cash equivalents consist of investments in money market funds, highly rated commercial paper and government securities. The maturities of these securities at the time of purchase is 90 days or less. Short-term investments consist of highly rated commercial paper and government securities with maturities longer than 90 days at the date of purchase. All cash equivalents and short-term investments are classified as available for sale and cost approximates market value. 4. The Company made the following acquisitions that affect the periods covered by these financial statements: Dentaplex, Inc. July 27, 1998 J&S Dental Supply Company, Inc. February 9, 1999 Barr Dental Supply, Inc. June 28, 1999 Kentucky Dental Supply Company, Inc. October 25, 1999 These acquisitions were accounted for as purchases and, accordingly, the net assets and operating results are included in the Company's financial statements from the date of acquisition. The results of operations of these acquisitions individually, and in the aggregate, were not material to the financial statements on a pro forma basis. 5. On February 5, 1999, the Company acquired Professional Business Systems, Inc. in exchange for 214,317 shares of common stock. The acquisition was accounted for as a pooling-of-interests and was not material to the financial statements on a pro forma basis. The financial statements have not been restated to reflect the financial position and results of the operations prior to the date of acquisition based on materiality. 6
6. Total comprehensive income was $17,625 and $47,275 for the three and nine months ended January 29, 2000 and $14,084 and $34,628 for the three and nine months ended January 23, 1999, respectively. 7. The following table sets forth the denominator for the computation of basic and diluted earnings per share: <TABLE> <CAPTION> Three Months Ended Nine Months Ended ------------------- -------------------- Jan. 29, Jan. 23, Jan. 29, Jan. 23, 2000 1999 2000 1999 -------- -------- -------- -------- <S> <C> <C> <C> <C> Denominator: Denominator for basic earnings per share - weighted-average shares 33,687 33,360 33,672 33,325 Effect of dilutive securities: Director Stock Option Plan 62 60 61 57 Employee Stock Purchase Plan 4 5 5 5 Capital Accumulation Plan 44 47 45 45 ------ ------ ------ ------- Dilutive potential common shares 110 112 111 107 ------ ------ ------ ------ Denominator for diluted earnings per share - adjusted weighted-average shares and assumed conversions 33,797 33,472 33,783 33,432 ====== ====== ====== ====== </TABLE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentage of net sales represented by certain operational data. Three Months Ended Nine Months Ended -------------------- ------------------- Jan. 29, Jan. 23, Jan. 29, Jan. 23, 2000 1999 2000 1999 -------- -------- -------- -------- Net sales ........................ 100.0% 100.0% 100.0% 100.0% Cost of sales .................... 62.9% 62.7% 63.2% 63.0% ----- ----- ----- ----- Gross profit ..................... 37.1% 37.3% 36.8% 37.0% Operating expenses ............... 27.1% 28.0% 27.6% 28.3% ----- ----- ----- ----- Operating income ................. 10.0% 9.3% 9.2% 8.7% Other income and expense, net .... 0.6% 0.3% 0.5% 0.3% ----- ----- ----- ----- Income before income taxes ....... 10.6% 9.6% 9.7% 9.0% Income taxes ..................... 4.0% 3.6% 3.6% 3.4% ----- ----- ----- ----- Net income ....................... 6.6% 6.0% 6.1% 5.6% ===== ===== ===== ===== QUARTER ENDED JANUARY 29, 2000 COMPARED TO QUARTER ENDED JANUARY 23, 1999. Net Sales. Net sales increased 13.0% to $260.2 million for the three months ended January 29, 2000 ("Current Quarter") from $230.2 million for the three months ended January 23, 1999 ("Prior Quarter"). All product categories contributed to the sales increase. Sales of dental sundry products increased 16.3% due primarily to an increase in the customer base and a 9 percent year-to-year increase in the sales force. Equipment sales increased 5.3% over the Prior Quarter despite an equipment financing promotion in 1999 that benefited the Prior Quarter. Sales of Colwell printed office products were up 29.8%, which included the February 1999 acquisition of Professional Business Systems ("PBS"). Excluding the impact of PBS, sales were up 6.2%. EagleSoft software and related product sales were up 29.5%. Sales in Canada improved 31.3%, benefiting from an improving economy. 8
Gross Profit. Gross profit margin declined to 37.1% for the Current Quarter from 37.3% for the Prior Quarter. The 20 basis point gross margin decrease was due primarily to the absence of certain buying opportunities that were available last year. Gross profit increased 12.3% to $96.4 million for the Current Quarter from $85.8 million for the Prior Quarter. The increase in gross profit was due to increased sales. Operating Expenses. Operating expenses increased 9.5% to $70.4 million for the Current Quarter from $64.3 million for the Prior Quarter. The increase in operating expenses was principally related to the higher sales volume and greater occupancy costs. Operating expenses as a percent of sales, however, decreased from 28.0% in the Prior Quarter to 27.1% in the Current Quarter. Operating Income. Operating income increased 20.8% to $26.0 million for the Current Quarter from $21.5 million for the Prior Quarter. Operating income as a percent of net sales increased from 9.3% to 10.0%, due to improved operating leverage. Finance Income. Finance income, net of expenses, was $1.3 million for the Current Quarter compared to $.5 million for the Prior Quarter. Finance income increased $.8 million due primarily to higher average short-term investments of cash. Income Taxes. The effective income tax rate decreased slightly to 37.4% for the Current Quarter from 37.7% for the Prior Quarter. Net Income. Net income was $17.2 million, up $3.5 million or 25.1% from $13.7 million reported in the second quarter of last year due to the factors discussed above. Earnings Per Share. Earnings per share were 51 cents which represents a 10 cent or 24.4% increase over the same quarter a year ago. NINE MONTHS ENDED JANUARY 29, 2000 COMPARED TO NINE MONTHS ENDED JANUARY 23, 1999. Net Sales. Net sales increased 18.6% to $763.2 million for the nine months ended January 29, 2000 ("Current Period") from $643.6 million for the nine months ended January 23, 1999 ("Prior Period"). The Current Period includes 40 weeks versus 39 weeks in the Prior Period. Excluding the impact of the additional week, sales increased approximately 16%. Sales references in parentheses exclude the additional week. Sales of consumables increased 19.4%(16%) due primarily to contributions from an expanded sales force and an increase in the number of customers. Equipment sales increased 14.4%(12%) due to strong demand across all product lines. Sales of printed office products through Colwell Systems were up 33.9%. Excluding the impact of the acquisition of PBS and the additional week sales increased approximately 6%. An expanded product offering and better account penetration by the dental sales force were the major factors contributing to the increase. Sales of EagleSoft software and related services increased 51.1%(47%) as customers upgraded their systems to be year 2000 compliant. Gross Profit. Gross profit margin decreased to 36.8% for the Current Period from 37.0% for the Prior Period due primarily to the absence of certain buying opportunities that were available last year. Gross profit increased 17.8% to $280.7 million for the Current Period from $238.4 million for the Prior Period. The increase in gross profit was due primarily to the increase in sales volume. 9
Operating Expenses. Operating expenses increased 15.6% to $210.3 million for the Current Period from $181.9 million for the Prior Period. The majority of the increase in operating expenses was related to greater sales volume, incentive compensation and higher health care costs. Operating expenses as a percent of sales declined from 28.3% to 27.6% due to improved operating leverage. Operating Income. Operating income increased 24.8% to $70.4 million for the Current Period from $56.4 million for the Prior Period. As a percent of net sales, operating income increased from 8.7% to 9.2%, due to better leverage of the Company's infrastructure. Finance Income. Finance income, net of expenses, was $3.3 million for the Current Period compared to $1.3 million for the Prior Period. Finance income increased $2.0 million due primarily to increased average short-term investments of cash. Income Taxes. The effective income tax rate decreased to 37.4% for the Current Period from 37.9% for the Prior Period as a result of operating profit in Canada and utilization of tax-loss carryforwards in that country. Net Income. Net income was $46.5 million, up $10.6 million or 29.6 % from $35.9 million reported in the first nine-months of last year due to the factors discussed above. Earnings Per Share. Diluted earnings per share were $1.38 which represents a 31 cent or 29.0% increase over the same period a year ago. LIQUIDITY AND CAPITAL RESOURCES The Company's financial condition remains strong. Cash generated from operating activities was the principal source of funds during the nine months ended January 29, 2000 and was used primarily to invest in working capital and fund capital expenditures. Operating activities generated cash of $41.6 million in the first nine months of 2000, compared to the same period in 1999 where operating activities provided cash of $3.3 million. The increase of $38.3 million was due to a number of favorable factors, including a $10.6 million increase in net income, a decrease in accounts receivable, resulting from a special equipment financing program which ended in the third quarter of 1999 and a change in the timing of accounts payable payments. This was offset by an increase in inventory resulting from safety stock purchases for Y2K and the temporary duplication of the new distribution center inventory build-up. Both of these factors will be worked through the system by the end of the fiscal year. Inventory turnover did increase from 6.1 turns at January 23, 1999 to 6.3 turns at January 29, 2000. Capital expenditures for the first nine months of 2000 were $12.7 million compared with $5.3 million for the same period in 1999. The increase reflects spending for the new distribution center which came on line in February 2000. 10
The investment in equipment contracts resulted from the decision to hold, as opposed to sell, $20.1 million of equipment contracts receivable, $14.9 million of which was classified as a long-term asset on the balance sheet. If these contracts had been sold the proceeds would have been invested in short-term investment instruments. By holding the contracts, the return to the Company is enhanced without a significant increase in risk. In September 1999, the Board of Directors authorized the repurchase of up to one million shares of our common stock. For the nine months ended January 29, 2000, the Company repurchased 90,000 shares for $3.8 million. Available liquid resources at January 29, 2000 consisted of $88.5 million of cash and short-term investments and $23.2 million available under existing bank lines at January 29, 2000. The Company believes that cash and short-term investments and the remainder of its credit lines are sufficient to meet any existing and presently anticipated cash needs. In addition, because of its low debt to equity ratio, the Company believes it has sufficient debt capacity to replace its existing revolver and provide the necessary funds to achieve its corporate objectives. IMPACT OF YEAR 2000 In prior quarters, the Company discussed the nature and progress of its plans to become Year 2000 ready. In late 1999, the Company completed its remediation and testing of its major information technology and technology reliant operating systems. As a result of those planning and implementation efforts, the Company experienced no significant disruptions in mission critical information technology and technology reliant operating systems and believes those systems successfully responded to the Year 2000 date change. The Company is not aware of any material problems resulting from Year 2000 issues, either with its products, its internal systems, or the products and services of third parties. The Company will continue to monitor its mission critical computer applications and those of its suppliers and vendors throughout the year 2000 to ensure that any latent Year 2000 matters that may arise are addressed promptly. FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS Certain information of a non-historical nature contain forward-looking statements. Words such as "believes", "expects", "plans", "estimates" and variations of such words are intended to identify such forward-looking statements. The statements are not guaranties of future performance and are subject to certain risks, uncertainties or assumptions that are difficult to predict: therefore, the Company cautions shareholders and prospective investors that the following important factors, among others, could in the future affect the Company's actual operating results which could differ materially from those expressed in any forward-looking statements. The statements under this caption are intended to serve as cautionary statements within the meaning of the Private Securities Litigation Reform Act of 1995. The following information is not intended to limit in any way the characterization of other statements or information under other captions as cautionary statements for such purpose. The order in which such factors appear below should not be construed to indicate their relative importance or priority. o Reduced growth in expenditures for dental services by private dental insurance plans. 11
o Accuracy of the Company's assumptions concerning future per capita expenditures for dental services, including assumptions as to population growth and the demand for preventive dental services such as periodontic, endodontic and orthodontic procedures. o 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. o The effects of health care reform, increasing emphasis on controlling health care costs and legislation or regulation of health care pricing, all of which may affect the ability of dentists to obtain reimbursement for use of new and state-of-the-art procedures and technologies. o The effects of, and changes in, U.S. and world social and economic conditions, monetary and fiscal conditions, laws and regulations, other activities of governments, agencies and similar organizations, trade policies and taxes, import and other charges, inflation and monetary fluctuations; the ability or inability of the Company to obtain or hedge against foreign currencies, foreign exchange rates and fluctuations in those rates. o Ability of the Company to retain its base of customers and to increase its market share. o The ability of the Company to maintain satisfactory relationships with qualified and motivated sales personnel. o Changes in economics of dentistry affecting dental practice growth and the demand for dental products, including the ability and willingness of dentists to invest in high-technology diagnostic and therapeutic products. o The Company's ability to meet increased competition from national, regional and local full-service distributors and mail-order distributors of dental products, while maintaining current or improved profit margins. o 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. o Future operating results of the Company's printed office products group depends upon its ability to attract and retain customers by offering quick response time and innovative products that meet industry reporting standards. Because the cost of paper stock represents over half the cost of its paper and printed products, future operating results may be subject to fluctuations in paper prices. In addition, the introduction of computer-based technologies into the management of health care practices may affect future demand for printed products. 12
PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Item 27 Financial Data Schedule. (b) No reports on Form 8-K were filed during the quarter for which this report is filed. All other items under Part II have been omitted because they are inapplicable or the answers are negative, or, in the case of legal proceedings, were previously reported in the annual report on Form 10-K filed July 19, 1999. 13
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PATTERSON DENTAL COMPANY (Registrant) Dated: March 13, 2000 By: /s/ R. Stephen Armstrong ----------------------------------- R. Stephen Armstrong Executive Vice President, Treasurer and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) 14