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