10-Q 1 0001.txt FORM 10-Q 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 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 67,400,118 shares of common stock as of September 6, 2000. Page 1 of 11 PATTERSON DENTAL COMPANY INDEX
Page ---- PART I - FINANCIAL INFORMATION Item 1 - Financial Statements 3-6 Consolidated Balance Sheets as of July 29, 2000 and April 29, 2000 3 Consolidated Statements of Income for the Three Months Ended July 29, 2000 and July 31, 1999 4 Condensed Consolidated Statements of Cash Flows for the Three Months Ended July 29, 2000 and July 31, 1999 5 Notes to Consolidated Financial Statements 6 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 7-9 Item 3 - Quantitative and Qualitative Disclosures About Market Risk 9 PART II - OTHER INFORMATION Item 6 - Exhibits and Reports on Form 8-K 10 Signatures 11
Safe Harbor Statement Under The Private Securities Litigation Reform Act Of --------------------------------------------------------------------------- 1995: ---- This Form 10-Q for the period ended July 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 Form 10-K report filed July 25, 2000, and other documents filed with the Securities and Exchange Commission. See also pages 8-9 of this Form 10-Q. 2 PART I FINANCIAL INFORMATION PATTERSON DENTAL COMPANY CONSOLIDATED BALANCE SHEETS (Dollars in thousands) ASSETS July 29, April 29, 2000 2000 -------- --------- (unaudited) Current assets: Cash and cash equivalents................................ $122,027 $113,453 Short-term investments................................... 7,622 4,720 Receivables, net......................................... 125,477 132,419 Inventory................................................ 107,040 92,838 Prepaid expenses and other current assets................ 12,822 7,978 -------- -------- Total current assets.................................... 374,988 351,408 Property and equipment, net................................ 46,499 46,022 Intangibles, net........................................... 50,182 50,730 Other...................................................... 3,913 3,816 -------- -------- Total assets............................................ $475,582 $451,976 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable........................................ $ 82,647 $ 80,097 Accrued payroll expense................................. 11,669 15,194 Income taxes payable.................................... 10,527 1,110 Other accrued expenses.................................. 15,611 16,505 -------- -------- Total current liabilities........................... 120,454 112,906 Non-current liabilities................................... 3,361 3,458 -------- -------- Total liabilities................................... 123,815 116,364 Deferred credits.......................................... 4,921 5,142 Stockholders' equity: Preferred stock......................................... --- --- Common stock............................................ 674 674 Additional paid-in capital.............................. 67,177 67,022 Accumulated other comprehensive loss.................... (1,928) (2,060) Retained earnings....................................... 293,985 277,896 Note receivable from ESOP............................... (13,062) (13,062) -------- -------- Total stockholders' equity.......................... 346,846 330,470 -------- -------- Total liabilities and stockholders' equity.......... $475,582 $451,976 ======== ========
See accompanying notes. 3 PATTERSON DENTAL COMPANY CONSOLIDATED STATEMENTS OF INCOME (In thousands except per share amounts) (Unaudited)
Three Months Ended ----------------------- July 29, July 31, 2000 1999 ---------- ---------- (13 weeks) (14 weeks) Net sales............................................. $268,294 $254,599 Cost of sales......................................... 171,282 161,068 -------- -------- Gross profit.......................................... 97,012 93,531 Operating expenses.................................... 72,814 71,388 -------- -------- Operating income...................................... 24,198 22,143 Other income and expense: Amortization of deferred credits..................... 221 221 Finance income, net.................................. 1,347 891 Interest expense..................................... (30) (46) Loss on currency exchange............................ (26) (59) -------- -------- Income before income taxes............................ 25,710 23,150 Income taxes.......................................... 9,616 8,661 -------- -------- Net income............................................ $ 16,094 $ 14,489 ======== ======== Earnings per share - basic and diluted................ $ 0.24 $ 0.21 ======== ======== Weighted average and dilutive potential common shares......................................... 67,647 67,493 ======== ========
See accompanying notes. 4 PATTERSON DENTAL COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited)
Three Months Ended ----------------------- July 29, July 31, 2000 1999 ---------- ---------- (13 weeks) (14 weeks) Operating activities: Net income................................................. $ 16,094 $ 14,489 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation........................................... 1,921 1,752 Amortization of deferrals.............................. (221) (221) Amortization of goodwill............................... 830 738 Bad debt expense....................................... 200 305 Change in assets and liabilities, net of acquired...... (5,060) (8,766) -------- -------- Net cash provided by operating activities..................... 13,764 8,297 Investing activities: Additions to property and equipment, net................... (2,398) (3,347) Acquisitions, net.......................................... --- (750) Purchase of investments.................................... (2,902) (9,711) -------- -------- Net cash used in investing activities......................... (5,300) (13,808) Financing activities: Payments and retirement of long-term debt and obligations under capital leases.......................... (135) (146) Common stock issued, net................................... 150 121 -------- -------- Net cash provided by (used in) by financing activities........ 15 (25) Effect of exchange rate changes on cash....................... 95 (28) -------- -------- Net increase (decrease) in cash and cash equivalents.......... 8,574 (5,564) Cash and cash equivalents at beginning of period.............. 113,453 78,746 -------- -------- Cash and cash equivalents at end of period.................... $122,027 $ 73,182 ======== ========
See accompanying notes. 5 PATTERSON DENTAL COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands except per share data) (Unaudited) July 29, 2000 1. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the financial position as of July 29, 2000, and the results of operations and the cash flows for the periods ended July 29, 2000, and July 31, 1999. Such adjustments are of a normal recurring nature. The results of operations for the quarter ended July 29, 2000, and July 31, 1999, 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 first quarter of fiscal year 2001 ended July 29, 2000 includes 13 weeks, while the first quarter of fiscal 2000 ended July 31, 1999 includes 14 weeks. 3. Total comprehensive income was $16,226 for the three months ended July 29, 2000, and $14,238 for the three months ended July 31,1999. 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. 5. The following table sets forth the denominator for the computation of basic and diluted earnings per share:
Three Months Ended ------------------ July 29, July 31, 2000 1999 ------------------ Denominator: Denominator for basic earnings per share - weighted-average shares 67,383 67,310 Effect of dilutive securities: Director Stock Option Plan 193 104 Employee Stock Purchase Plan 10 10 Capital Accumulation Plan 61 69 ------ ------ Dilutive potential common shares 264 183 ------ ------ Denominator for diluted earnings per share - adjusted weighted-average shares and assumed conversions 67,647 67,493 ====== ======
6 ITEM 2. 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 ------------------ Jul. 29, Jul. 31, 2000 1999 ---- ---- Net sales................................................. 100.0% 100.0% Cost of sales............................................. 63.8% 63.3% ----- ----- Gross profit.............................................. 36.2% 36.7% Operating expenses........................................ 27.1% 28.0% ----- ----- Operating income.......................................... 9.0% 8.7% Other income and expense, net............................. 0.6% 0.4% ----- ----- Income before income taxes................................ 9.6% 9.1% Income taxes.............................................. 3.6% 3.4% ----- ----- Net income................................................ 6.0% 5.7% ===== =====
QUARTER ENDED JULY 29, 2000 COMPARED TO QUARTER ENDED JULY 31, 1999. Net Sales. Net sales for the three months ended July 29, 2000 ("Current Quarter") increased 5.4% to $268.3 million from $254.6 million for the three months ended July 31, 1999 ("Prior Quarter"). The Current Quarter includes 13 weeks versus 14 weeks in the Prior Quarter. Excluding the impact of the additional week, sales increased approximately 13%. Acquisitions and increases in both sales representatives and customer base were the primary contributors to the sales increase offset by softer sales in printed products and software. Acquisitions added approximately $7 million or 3 percentage points to the overall sales increase. The Company's sales force grew by 48 representatives and the total number of customers who purchased consumable dental supplies from the Company increased approximately 14%. Strong equipment sales and lower sales of printed products resulted in a shift in the Company's sales mix. Equipment and software sales comprised 28.1% of total sales in the Current Quarter compared to 26.8 % in the Prior Quarter. Alternatively, consumable dental and office products accounted for 63.8% of sales in the Current Quarter compared to 65.2% a year ago. Sales references in parentheses exclude the additional week. Sales of consumable dental and office products increased 3.2%(11%) due to a 4.6%(13%) increase in consumable dental products offset by a 8.2%(1%) decline in printed office products. Contributions from an expanded sales force and an increase in the number of customers were the primary factors causing the growth in consumable dental products. Alternatively, the printed products business closed several smaller sales locations and experienced turnover in its direct sales force in this year's first quarter resulting in a quarter-over-quarter decline in sales. Equipment and software sales increased 10.8%(18%) and benefited from strong demand across the equipment product lines. Equipment and software sales were negatively impacted by the Company's software business due primarily to slower than anticipated clinical software sales which are now more closely linked with digital equipment sales. The Company believes future software sales will be heavily dependent on market acceptance of new digital technologies by dental practices. In addition, software sales in this year's first quarter were negatively affected by the previously announced major realignment of the software sales force to support customers as they transition to digital technology. In the year-earlier quarter, software sales benefited from the need of many dental offices to become Y2K compliant. Gross Profit. Gross profit margin declined to 36.2% for the Current Quarter from 36.7% for the Prior Quarter. The 50 basis point gross margin decrease was due primarily to the shift in the sales mix related to software and printed office products. Point-of-sale margins in both consumable dental products and equipment were flat with prior year. Gross profit increased 3.7% to $97.0 million for the Current Quarter from $93.5 million for the Prior Quarter. The increase in gross profit was due to increased sales. 7 Operating Expenses. Operating expenses increased 2.0% to $72.8 million for the Current Quarter from $71.4 million for the Prior Quarter. Operating expenses as a percent of sales, however, decreased from 28.0% in the Prior Quarter to 27.1% in the Current Quarter reflecting increased productivity across all business lines and lower incentive compensation, commission and distribution expenses. Lower incentive compensation and commission expense resulted from the below plan performance of the printed office and software product lines. The shift in product mix and an increase in the amount of delivery costs recovered from the customer caused the reduction in distribution costs. Operating Income. Operating income increased 9.3% to $24.2 million for the Current Quarter from $22.1 million for the Prior Quarter. Operating income, which increased as a percent of net sales from 8.7% to 9.0%, benefited from a reduction in operating costs as a percent of net sales and improved operating leverage but was negatively impacted by the reduction in the gross margin rate. Other Income. Other income, net of expenses, was $1.5 million for the Current Quarter compared to $1.0 million for the Prior Quarter. Finance income increased due primarily 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 $16.1 million, or 11.1% due to the factors discussed above. Earnings Per Share. Diluted earnings per share increased to $0.24 versus $0.21 reported a year ago, a 3 cent or 14.3% increase over the same quarter a year ago. Intuitively Prior Quarter earnings were increased by the additional week in fiscal 2000; however, the impact on earnings of that additional week cannot be reasonably measured. LIQUIDITY AND CAPITAL RESOURCES Our financial condition remains strong. Cash generated from operating activities was the principal source of funds during the three months ended July 29, 2000 and was used primarily to invest in working capital and fund capital expenditures. Operating activities generated cash of $13.8 million in the Current Quarter, compared to the Prior Quarter where operating activities provided cash of $8.3 million. The increase of $5.5 million was due to a number of favorable factors, including a $1.6 million increase in net income and a change in the timing of accounts payable payments. This was offset by an increase in inventory resulting from the increase in sales volume. However, inventory turnover increased from 6.2 turns at July 31, 1999 to 6.5 turns at July 29, 2000. Capital expenditures for the Current Quarter were $2.4 million compared with $3.3 million for the Prior Quarter. The decrease reflects spending for the new distribution center in the Prior Quarter which came on line in February 2000. Available liquid resources at July 29, 2000 consisted of $129.6 million of cash and short-term investments and $15.5 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. . Reduced growth in expenditures for dental services by private dental insurance plans. 8 . 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. . 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 July 29, 2000. For additional information refer to item 7A of the Company's 2000 Form 10K. 9 PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Item 27 Financial Data Schedule. (b) Reports on Form 8-K. On June 14, 2000 the Company filed a report on Form 8-K relating to the two-for-one stock split declared June 13, 2000 in the form of a 100% stock dividend payable July 21, 2000 to shareholders of record June 30, 2000. 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. 10 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 11, 2000. By: _____________________________________ R. Stephen Armstrong Executive Vice President, Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer) 11