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 JULY 28, 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 67,864,739 shares of common stock as of September 4, 2001. Page 1 of 14
PATTERSON DENTAL COMPANY INDEX Page ---- PART I - FINANCIAL INFORMATION Item 1 - Financial Statements 3-10 Consolidated Balance Sheets as of July 28, 2001 and April 28, 2001 3 Consolidated Statements of Income for the Three Months Ended July 28, 2001 and July 29, 2000 4 Consolidated Statements of Cash Flows for the Three Months Ended July 28, 2001 and July 29, 2000 5 Notes to Consolidated Financial Statements 6 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations. 10-13 Item 3 - Quantitative and Qualitative Disclosures About Market Risk 13 PART II - OTHER INFORMATION Item 2 - Changes in Securities and Use of Proceeds 13 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 July 28, 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 24, 2001, and other documents filed with the Securities and Exchange Commission. See also pages 12-13 of this Form 10-Q. 2
PART I FINANCIAL INFORMATION PATTERSON DENTAL COMPANY CONSOLIDATED BALANCE SHEETS (Dollars in thousands) July 28, April 28, 2001 2001 --------- --------- ASSETS (unaudited) Current assets: Cash and cash equivalents $ 98,941 $ 160,024 Short-term investments 19,512 24,484 Receivables, net 157,362 144,625 Inventory 136,845 103,700 Prepaid expenses and other current assets 9,928 9,928 --------- --------- Total current assets 422,588 442,761 Property and equipment, net 51,953 48,575 Intangibles, net 120,897 51,892 Other 6,151 5,952 --------- --------- Total assets $ 601,589 $ 549,180 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 101,244 $ 89,321 Accrued payroll expense 16,741 20,866 Income taxes payable 15,635 4,805 Other accrued expenses 21,545 17,723 --------- --------- Total current liabilities 155,165 132,715 Non-current liabilities 3,570 3,693 --------- --------- Total liabilities 158,735 136,408 Deferred credits 4,036 4,257 STOCKHOLDERS' EQUITY Preferred stock -- -- Common stock 678 675 Additional paid-in capital 79,205 68,049 Accumulated other comprehensive loss (2,779) (2,316) Retained earnings 373,978 354,371 Note receivable from ESOP (12,264) (12,264) --------- --------- Total stockholders' equity 438,818 408,515 --------- --------- Total liabilities and stockholders' equity $ 601,589 $ 549,180 ========= ========= See accompanying notes. 3
PATTERSON DENTAL COMPANY CONSOLIDATED STATEMENTS OF INCOME (In thousands except per share amounts) (Unaudited) Three Months Ended July 28, July 29, 2001 2000 --------- --------- Net sales $ 303,254 $ 270,040 Cost of sales 196,187 176,945 --------- --------- Gross margin 107,067 93,095 Operating expenses 77,627 68,897 --------- --------- Operating income 29,440 24,198 Other income and expense: Amortization of deferred credits 221 221 Finance income, net 1,675 1,347 Interest expense (37) (30) Profit (loss) on currency exchange 37 (26) --------- --------- Income before income taxes 31,336 25,710 Income taxes 11,723 9,616 --------- --------- Net income $ 19,613 $ 16,094 ========= ========= Earnings per share - basic and diluted $ 0.29 $ 0.24 ========= ========= Weighted average common and dilutive potential common shares 68,012 67,647 ========= ========= See accompanying notes. 4
PATTERSON DENTAL COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited) <TABLE> <CAPTION> Three Months Ended July 28, July 29, 2001 2000 --------- --------- <S> <C> <C> Operating activities: Net income $ 19,613 $ 16,094 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 2,094 1,921 Amortization of deferred credits (221) (221) Amortization of goodwill 857 830 Bad debt expense 547 200 Change in assets and liabilities, net of acquired (2,444) (5,060) --------- --------- Net cash provided by operating activities 20,446 13,764 Investing activities: Additions to property and equipment, net (3,076) (2,398) Acquisitions, net (83,819) -- Sale (purchase) of short-term investments 4,972 (2,902) --------- --------- Net cash used in investing activities (81,923) (5,300) Financing activities: Payments and retirement of long-term debt and obligations under capital leases (136) (135) Common stock issued, net 446 150 --------- --------- Net cash provided by financing activities 310 15 Effect of exchange rate changes on cash 84 95 --------- --------- Net (decrease) increase in cash and cash equivalents (61,083) 8,574 Cash and cash equivalents at beginning of period 160,024 113,453 --------- --------- Cash and cash equivalents at end of period $ 98,941 $ 122,027 ========= ========= </TABLE> See accompanying notes. 5
PATTERSON DENTAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands except per share data) (Unaudited) July 28, 2001 1. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the financial position of the Company as of July 28, 2001, and the results of operations and the cash flows for the periods ended July 28, 2001 and July 29, 2000. Such adjustments are of a normal recurring nature. The results of operations for the quarter ended July 28, 2001 and July 29, 2000, are not necessarily indicative of the results to be expected for the full year. The balance sheet at April 28, 2001, 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 2001 Annual Report on Form 10-K filed on July 24, 2001. 2. The fiscal year end of the Company is the last Saturday in April. The first quarter of fiscal 2002 and 2001 represent the 13 weeks ended July 28, 2001 and July 29, 2000, respectively. 3. Total comprehensive income was $19,150 for the three months ended July 28, 2001, and $16,226 for the three months ended July 29, 2000. 4. On July 9, 2001, the Company purchased substantially all of the assets of J. A. Webster, Inc. and assumed certain liabilities, for a purchase price of $94,008, consisting of $83,301 in cash and $10,707 in stock. The value of the 322,524 common shares issued was determined based on the average market price of Patterson's common shares on July 9, 2001. The acquisition agreement also includes an earnout provision tied to future product sales, which could result in additional cash payments over five years if certain minimum revenue milestones are achieved. J. A. Webster is the leading distributor of veterinary supplies to companion-pet veterinary clinics in the eastern United States and the third largest nationally. The acquisition was accounted for under the purchase method of accounting; accordingly, the results of J. A. Webster, Inc.'s operations are included in the accompanying financial statements since the date of acquisition. The purchase price plus direct acquisition costs have been allocated on the basis of estimated fair values at the date of acquisition, pending final determination of the fair value of certain acquired assets. The preliminary purchase price allocation is as follows: Purchase price $ 95,662 Accounts receivable $ 25,367 Inventory 19,758 Fixed assets 2,383 Other assets 278 Accounts payable (18,839) Accrued expenses (2,621) -------- Excess of purchase price over fair value of tangible net assets 69,336 6
The following pro forma summary presents the results of operation, as if the acquisition had occurred at the beginning of the fiscal period. The pro forma results of operations are not necessarily indicative of the results that would have been achieved had the two companies been combined: Three Months Ended July 28, 2001 July 29, 2000 ------------------------------------------------------------------------- Net sales $336,882 $310,062 Net income 20,085 (1) 16,733 (1) Earnings per share - basic and diluted $0.29 (1) $0.25 (1) (1) Reflects the amortization of goodwill over a twenty year useful life. Because the transaction was consummated following the effective date specified in the recently issued Statement of the Financial Accounting Standards Board No. 142 "Goodwill and Other Intangible Assets," the Company will not amortize goodwill for this transaction in future financial statements, but the goodwill becomes subject to periodic evaluations of possible impairment in its value. 5. The following table sets forth the denominator for the computation of basic and diluted earnings per share: Three Months Ended ----------------------- July 28, July 29, 2001 2000 -------- -------- Denominator: Denominator for basic earnings per share - weighted-average shares 67,566 67,383 Effect of dilutive securities: Stock Option Plans 375 193 Employee Stock Purchase Plan 9 10 Capital Accumulation Plan 62 61 ------ ------ Dilutive potential common shares 446 264 ------ ------ Denominator for diluted earnings per share - adjusted weighted-average shares and assumed conversions 68,012 67,647 ====== ====== 7
6. Historically, the Company has operated in one reportable segment, dental supply. In July 2001, the Company purchased J. A. Webster, Inc. The acquisition became a reportable business segment of the Company, and now Patterson Dental Company is comprised of two reportable segments, dental supply and veterinary supply. The Company's reportable 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 healthcare providers throughout North America. The veterinary supply segment provides consumable supplies, equipment, diagnostic products, biologicals (vaccines) and pharmaceuticals to companion-pet veterinary clinics primarily in the Eastern, Mid-Atlantic and Southeastern regions of the United States. The accounting policies of the segments are the same as those described in the summary of significant accounting policies included in the Notes to the Consolidated Financial Statements in the Annual Report on Form 10-K filed July 24, 2001. The Company evaluates segment performance based on operating income. Certain financial information relating to the Company's reportable segments is as follows: <TABLE> <CAPTION> Three Months Ended --------------------- July 28, July 29, 2001 2000 -------- -------- <S> <C> <C> Net sales: Dental supply: Consumable dental and printed office products $187,659 $171,274 Equipment and software 79,570 75,471 Other 26,543 23,295 -------- -------- 293,772 270,040 Veterinary supply 9,482 -- -------- -------- Consolidated net sales $303,254 $270,040 ======== ======== Operating income: Dental supply $ 28,876 $ 24,198 Veterinary supply 564 -- -------- -------- Consolidated operating income $ 29,440 $ 24,198 ======== ======== Total assets: Dental supply $483,350 $475,582 Veterinary supply 118,239 -- -------- -------- Consolidated total assets $601,589 $475,582 ======== ======== </TABLE> 8
7. In July 2001, The Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS 141 addresses financial accounting and reporting for business combinations. Specifically, effective for business combinations occurring after June 30, 2001, it eliminates the use of the pooling method of accounting and requires all business combinations to be accounted for under the purchase method. SFAS 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets. The primary change related to this new standard is that the amortization of goodwill and intangible assets with indefinite useful lives will be discontinued and instead an annual impairment approach will be applied. As provided in the standards, the Company will not amortize the goodwill related to the acquisition of the assets of J. A. Webster, Inc. The Company will discontinue amortization on the remainder of its indefinite lived intangible assets, including goodwill effective April 28, 2002. With the adoption of the remaining provisions of these standards, Patterson's reported net earnings per share are projected to increase by approximately $.03 on a going forward basis. In fiscal 2003, there also will be an additional one-time benefit of $.04 per share as Patterson is required to write-off the remaining balance of its deferred credit. The deferred credit is negative goodwill that arose from acquisitions in the 1980's and currently amounts to approximately $4.0 million. 9
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 ------------------- July 28, July 29, 2001 2000 -------- -------- Net sales ...................... 100.0% 100.0% Cost of sales .................. 64.7% 65.5% ----- ----- Gross profit ................... 35.3% 34.5% Operating expenses ............. 25.6% 25.5% ----- ----- Operating income ............... 9.7% 9.0% Other income and expense, net... 0.6% 0.6% ----- ----- Income before income taxes ..... 10.3% 9.6% Income taxes ................... 3.8% 3.6% ----- ----- Net income ..................... 6.5% 6.0% ===== ===== QUARTER ENDED JULY 28, 2001 COMPARED TO QUARTER ENDED JULY 29, 2000. Net Sales. Net sales for the three months ended July 28, 2001("Current Quarter") totaled $303.3 million up 12.3% from $270.0 million for the three months ended July 29, 2000 ("Prior Quarter"). The Company's sales growth reflected strong sales of consumables and basic equipment to the dental supply market, combined with $9.5 million of incremental veterinary supply sales from the acquisition of the assets of J. A. Webster, Inc. on July 9, 2001. Dental supply sales for the Current Quarter amounted to $293.8 million, an 8.8% increase over the year earlier period led by solid performance from the Company's consumable and basic equipment product lines. Total dental supply sales growth was diluted by below-plan sales of the CEREC 3 dental restorative system, the Company's most technologically sophisticated and costly product line. While dental acquisitions had almost no effect on Current Quarter net sales growth, acquisitions had a 3% positive impact on Prior Quarter net sales growth. Sales of consumable dental supplies, including printed office products, increased 9.6% paced by an 11.0% increase in the U.S. dental market. Flat printed office product sales tempered consumable dental supply sales growth in the Current Quarter. Dental equipment and software sales improved 5.4% in the Current Quarter. In addition to basic dental equipment, demand for new generation digital equipment was strong resulting in clinical software sales more than twice that of the Prior Quarter. 10
Sales of other dental products and services, consisting of parts, technical service, software support and insurance e-claims, grew 13.9% in this year's first quarter. Sales in Canada for the quarter increased 4.4% versus the year earlier quarter reflecting improved performance in the Company's consumable dental product lines. Sales were adversely affected by the strengthening of the U.S. dollar. On a currency-adjusted basis, Canada's net sales would have increased by 8.0%. This represents a $700,000 revenue impact. Gross Margins. Gross margins increased $14.0 million or 15.0% over the first quarter of fiscal 2001 due to increased sales volumes and an improvement in the gross margin rate. Combined with Webster Veterinary Supply, the Company's gross margin increased 80 basis points over last year. The dental supply gross margin rate was favorable to the Prior Quarter by 120 basis points, benefiting from improved sundries point-of-sale margins, the mix impact of growth in software and related services, and improvement in printed office products gross margins as this product group begins to see results from some of its realignment efforts. Operating Expenses. Operating expenses increased 12.7% over the Prior Quarter to $77.6 million and amounted to 25.6% of sales up from $68.9 million or 25.5% reported a year earlier. The dental operating expense rate increased 40 basis points over prior year. The dental supply business continued to improve its operating leverage and reduce costs through a variety of cost containment initiatives. However, these gains were more than offset by higher commissions on improved gross margins, and increased insurance and advertising costs. First quarter 2002 consolidated expenses as a percent of sales also reflects Webster Veterinary Supply, which provides a favorable year-over-year impact on the consolidated results of about 30 basis points. Operating Income. Operating income increased 21.7% to $29.4 million for the Current Quarter from $24.2 million for the Prior Quarter. Operating income increased as a percent of net sales from 9.0% to 9.7%. Dental supply operating income increased 19.3% due to improved gross margin performance. Veterinary supply operating income was $0.6 million in the Current Quarter. Other Income. Other income, net of expenses, was $1.9 million for the Current Quarter compared to $1.5 million for the Prior Quarter. Higher investment income from short-term investments and interest income from long-term equipment contracts generated the increase in other income. Income Taxes. The effective income tax rate at 37.4% remained the same as last year. Net Income. Net income increased to $19.6 million, or 21.9% over prior year due to the factors discussed above. Earnings Per Share. Diluted earnings per share increased to $0.29 versus $0.24 reported a year ago, a 5 cent or 20.8% increase over the same quarter a year ago. 11
LIQUIDITY AND CAPITAL RESOURCES The Company's financial condition remains strong. Cash generated from operating activities was our principal source of funds during the three months ended July 28, 2001 and was used primarily to invest in working capital, make acquisitions and fund capital expenditures. Operating activities generated cash of $20.4 million in the Current Quarter, compared to the Prior Quarter where operating activities provided cash of $13.8 million. The increase of $6.6 million was due primarily to a 21.9% increase in net income and a reduction in accounts receivable. In the Current Quarter, the Company invested $83.3 million of cash to acquire the assets of J. A. Webster, Inc. The Company made no acquisitions in the year earlier quarter. Available liquid resources at July 28, 2001 consisted of $118.5 million of cash and short-term investments and $13.5 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. o The Company's ability to meet increased competition from national, regional and local full-service distributors and mail-order distributors of dental and veterinary products, while maintaining current or improved profit margins. o The 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 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. 12
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 Reduced growth in expenditures for dental services by private dental insurance plans. o 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 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 Changes in the economics of the veterinary supply market, including reduced growth in per capital expenditures for veterinary services and reduced growth in the number of households owning pets. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes in market risk during the three months ended July 28, 2001. For additional information refer to Item 7A of the Company's 2001 Form 10K. PART II OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds. (a) None. (b) None. (c) On July 9, 2001, 322,524 unregistered shares of the Company's common stock were issued in reliance on Regulation D of the Securities Act of 1933. The shares were issued as part of the consideration paid by the Company for certain assets of J. A. Webster, Inc. The Asset Purchase Agreement by and among Patterson Dental Company and J. A. Webster, Inc., pursuant to which the shares were issued, was filed as Exhibit 10.12 to the Company's Form 10-K filed with the Securities and Exchange Commission on July 24, 2001. See also, Note 4 to Notes to Consolidated Financial Statements on pages 6-7 of this Form 10-Q. Item 6. Exhibits and Reports on Form 8-K. (a) None. (b) A Form 8-K was filed on July 9, 2001, announcing the Company's acquisition of certain assets of J. A. Webster, Inc. 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 24, 2001. 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: September 10, 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