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 OCTOBER 28, 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 67,413,365 shares of common stock as of December 7, 2000. Page 1 of 14 PATTERSON DENTAL COMPANY INDEX Page ---- PART I - FINANCIAL INFORMATION Item 1 - Financial Statements 3-7 Consolidated Balance Sheets as of October 28, 2000 and April 29, 2000 3 Consolidated Statements of Income for the Three and Six Months Ended October 28, 2000 and October 30, 1999 4 Condensed Consolidated Statements of Cash Flows for the Six Months Ended October 28, 2000 and October 30, 1999 5 Notes to Consolidated Financial Statements 6 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 8-12 Item 3 - Quantitative and Qualitative Disclosures About Market Risk 12 PART II - OTHER INFORMATION Item 4 - Submission of Matters to a Vote of Security Holders 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 October 28, 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 11-12 of this Form 10-Q. 2 PART I FINANCIAL INFORMATION PATTERSON DENTAL COMPANY CONSOLIDATED BALANCE SHEETS (Dollars in thousands) ASSETS
Oct. 28, April 29, 2000 2000 ---------- ----------- (unaudited) Current assets: Cash and cash equivalents........................... $ 124,853 $ 113,453 Short-term investments.............................. 5,203 4,720 Receivables, net.................................... 147,384 132,419 Inventory........................................... 99,156 92,838 Prepaid expenses and other current assets........... 10,402 7,978 --------- --------- Total current assets................................ 386,998 351,408 Property and equipment, net............................ 47,102 46,022 Intangibles, net....................................... 51,540 50,730 Other.................................................. 4,824 3,816 --------- --------- Total assets........................................ $ 490,464 $ 451,976 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable..................................... $ 81,563 $ 80,097 Accrued payroll expense.............................. 14,963 15,194 Income taxes payable................................. 3,334 1,110 Other accrued expenses............................... 17,678 16,505 --------- --------- Total current liabilities............................ 117,538 112,906 Non-current liabilities................................ 3,238 3,458 --------- --------- Total liabilities.................................... 120,776 116,364 Deferred credits....................................... 4,700 5,142 Stockholders' equity: Preferred stock...................................... -- -- Common stock......................................... 674 674 Additional paid-in capital........................... 67,284 67,022 Accumulated other comprehensive loss................. (2,863) (2,060) Retained earnings.................................... 312,955 277,896 Note receivable from ESOP............................ (13,062) (13,062) --------- --------- Total stockholders' equity.......................... 364,988 330,470 --------- --------- Total liabilities and stockholders' equity.......... $ 490,464 $ 451,976 ========= =========
See accompanying notes. 3 PATTERSON DENTAL COMPANY CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In thousands except per share amounts) (Unaudited)
Three Months Ended Six Months Ended ------------------------- ----------------------------- Oct. 28, Oct. 30, Oct. 28, Oct. 30, 2000 1999 2000 1999 --------- ---------- ---------- ---------- (26 weeks) (27 weeks) Net sales ........................................................... $ 288,872 $ 248,435 $ 557,166 $ 503,034 Cost of sales ....................................................... 182,976 157,645 354,258 318,714 --------- --------- ---------- ---------- Gross profit ........................................................ 105,896 90,790 202,908 184,320 Operating expenses .................................................. 77,114 68,480 149,928 139,868 --------- --------- ---------- ---------- Operating income .................................................... 28,782 22,310 52,980 44,452 Other income and expense: Amortization of deferred credits ................................ 226 221 447 442 Finance income, net ............................................. 1,398 1,149 2,745 2,040 Interest expense ................................................ (27) (56) (57) (102) Profit (loss) on currency exchange .............................. (90) 23 (116) (36) --------- --------- --------- ---------- Income before income taxes .......................................... 30,289 23,647 55,999 46,796 Income taxes ........................................................ 11,320 8,836 20,936 17,496 --------- --------- --------- --------- Net income .......................................................... $ 18,969 $ 14,811 $ 35,063 $ 29,300 ========= ========= ========= ========= Earnings per share - basic and diluted .............................. $ 0.28 $ 0. 22 $ 0.52 $ 0. 43 ========= ========= ========= ========= Weighted average common and dilutive potential common shares ................................................... 67,674 67,614 67,661 67,553 ========= ========= ========= =========
See accompanying notes. 4 PATTERSON DENTAL COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited)
Six Months Ended ---------------------------- Oct. 28, Oct. 30, 2000 1999 --------- ---------- (26 weeks) (27 weeks) Operating activities: Net income................................................................. $ 35,063 $ 29,300 Adjustments to reconcile net income........................................ to net cash provided by operating activities: Depreciation........................................................ 3,932 3,455 Amortization of deferrals........................................... (447) (443) Amortization of goodwill............................................ 1,639 1,485 Bad debt expense.................................................... 456 584 Change in assets and liabilities, net of acquired................... (21,279) (12,826) --------- --------- Net cash provided by operating activities......................................... 19,364 21,555 Investing activities: Additions to property and equipment, net................................... (4,661) (7,301) Acquisitions, net.......................................................... (2,486) (2,654) Purchase of short-term investments......................................... (483) (11,252) --------- --------- Net cash used in investing activities............................................ (7,630) (21,207) Financing activities: Payments and retirement of long-term debt and obligations under capital leases......................................... (439) (301) Common stock issued, net................................................... 257 732 --------- --------- Net cash provided by (used in) financing activities............................... (182) 431 Effect of exchange rate changes on cash........................................... (152) 33 --------- --------- Net increase in cash and cash equivalents......................................... 11,400 812 Cash and cash equivalents at beginning of period.................................. 113,453 78,746 --------- --------- Cash and cash equivalents at end of period........................................ $ 124,853 $ 79,558 ========= =========
See accompanying notes. 5 PATTERSON DENTAL COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands except per share data) (Unaudited) October 28, 2000 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 October 28, 2000, and the results of operations and the cash flows for the periods ended October 28, 2000 and October 30, 1999. Such adjustments are of a normal recurring nature. The results of operations for the quarter ended October 28, 2000 and October 30, 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 second quarter of fiscal year 2001 and 2000 represent the 13 weeks ended October 28, 2000 and October 30, 1999, respectively. The first six months of fiscal year 2001 include 26 weeks while the first six months of fiscal year 2000 include 27 weeks. 3. Total comprehensive income was $18,034 and $34,260 for the three and six months ended October 28, 2000, respectively, and $15,412 and $29,650 for the three and six months ended October 30, 1999, 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:
Three Months Ended Six Months Ended ------------------------- ------------------------- Oct. 28, Oct. 30, Oct. 28, Oct. 30, 2000 1999 2000 1999 --------- --------- ---------- ---------- Denominator: Denominator for basic earnings per share - weighted-average shares 67,396 67,350 67,389 67,330 Effect of dilutive securities: Director Stock Option Plan 153 138 173 121 Employee Stock Purchase Plan 11 10 11 10 Capital Accumulation Plan 114 116 88 92 ------ ------ ------ ------ Dilutive potential common shares 278 264 272 223 ------ ------ ------ ------ Denominator for diluted earnings per share - adjusted weighted-average shares and assumed conversions 67,674 67,614 67,661 67,553 ====== ====== ====== ======
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 our 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 Six Months Ended ------------------ ---------------- Oct. 28, Oct. 30, Oct. 28, Oct. 30, 2000 1999 2000 1999 ------- ------- ------- ------- Net sales........................ 100.0% 100.0% 100.0% 100.0% Cost of sales.................... 63.3% 63.4% 63.6% 63.4% ----- ----- ----- ----- Gross profit..................... 36.7% 36.6% 36.4% 36.6% Operating expenses............... 26.7% 27.6% 26.9% 27.8% ----- ----- ----- ----- Operating income................. 10.0% 9.0% 9.5% 8.8% Other income and expense, net.... 0.5% 0.5% 0.5% 0.5% ----- ----- ----- ----- Income before income taxes....... 10.5% 9.5% 10.0% 9.3% Income taxes..................... 3.9% 3.5% 3.7% 3.5% ----- ----- ----- ----- Net income....................... 6.6% 6.0% 6.3% 5.8% ===== ===== ===== ===== QUARTER ENDED OCTOBER 28, 2000 COMPARED TO QUARTER ENDED OCTOBER 30, 1999. Net Sales. Net sales for the three months ended October 28, 2000 ("Current Quarter") increased 16.3% to $288.9 million from $248.4 million for the three months ended October 30, 1999 ("Prior Quarter"). Strong demand across all product-lines contributed to the $40.5 million sales increase. Sales of consumable dental supplies, including printed office products, increased 11.4% to $181.2 million led by the 14.0% sales growth of consumable dental products in the U.S. market. Sales of printed office products negatively impacted consumable dental supply sales in the Current Quarter declining 2.5% versus the year-earlier period. Dental equipment and software totaled $84.3 million up from $65.6 million in the same period in fiscal 2000. The 28.4% increase in equipment and software sales was driven by significantly higher volumes of new-generation dental equipment. Sales of clinical software grew with digital equipment, but total software unit sales declined in the Current Quarter due to reduced sales of front-office practice management software. Sales of practice management software were boosted significantly in the Prior Quarter by the need of many dental offices to become Y2K compliant. Sales of other services and products grew 16.0% to $23.4 million in the Current Quarter compared to $20.2 million in the Prior Quarter due to strong sales of software-related services, technical services and parts. 8 Gross Margin. Gross margins increased $15.1 million or 16.6% over the Prior Quarter due mostly to the increased sales volumes. The gross margin rate improved to 36.7% in the Current Quarter from 36.6% in the Prior Quarter. The 10 basis point increase in the gross margin rate reflects better margins at the point-of-sale and the shift in the sales mix toward higher-margin, new-generation dental equipment. Operating Expenses. Operating expenses increased 12.6% to $77.1 million in the Current Quarter but declined as a percent of sales from 27.6% in the Prior Quarter to 26.7% for the Current Quarter. This 90 basis point improvement was the result of increased sales volume without a corresponding increase in non-selling salaries and other fixed expenses. A reduction in net delivery costs also positively contributed to the operating expense rate improvement. Incentive compensation negatively impacted expenses in the Current Quarter increasing 40% over the Prior Quarter due to the improved operating results of the Company in the period. Operating Income. Operating income increased 29.0% to $28.8 million for the Current Quarter from $22.3 million for the Prior Quarter. Operating income increased as a percent of net sales from 9.0% to 10.0% due to the combined improvement of operating leverage and the gross margin rate. Other Income. Other income, net of expenses, was $1.5 million for the Current Quarter compared to $1.3 million for the Prior Quarter. Other 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 $19.0 million, or 28.1% due to the factors discussed above. Earnings Per Share. Diluted earnings per share increased to $0.28 versus $0.22 reported a year ago, a 6 cent or 27.3% increase over the same quarter a year ago. SIX MONTHS ENDED OCTOBER 28, 2000 COMPARED TO SIX MONTHS ENDED OCTOBER 30, 1999. Net Sales. Net sales increased 10.8% to $557.2 million for the six months ended October 28, 2000 ("Current Period") from $503.0 million for the six months ended October 30, 1999 ("Prior Period"). The Current Period includes 26 weeks versus 27 weeks in the Prior Period. Excluding the impact of the additional week, sales increased approximately 15%. Sales references in parentheses exclude the additional week from the Prior Period. Acquisitions contributed 3 percentage points, or approximately $14 million, to the overall sales growth. Six-month trends are similar to second quarter results. Sales of consumable dental supplies, including printed office products, increased 7.3%(11%) due primarily to contributions from an expanded sales force and an increase in the number of customers. 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 5.3%(2%). Dental equipment and software sales increased 19.4%(24%) 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 9.2% (13%) in the Current Period due mostly to increases in technical services and parts. 9 Gross Margin. Gross margins increased $18.6 million to $202.9 million for the Current Period due solely to the increase in sales volumes. The gross margin rate decreased to 36.4% for the Current Period from 36.6% for the Prior Period. Although margins improved in the second quarter, the increase was not sufficient to offset the mix related margin decline experienced in the first quarter due to lower software and printed office product sales as a percent of total sales. Operating Expenses. Operating expenses increased 7.2% to $149.9 million for the Current Period from $139.9 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 90 basis point reduction in the operating expense rate which declined from 27.8% in the Prior Period to 26.9% in the Current Period. Operating Income. Operating income increased 19.2% to $53.0 million for the Current Period from $44.5 million for the Prior Period. Operating income, which increased as a percent of net sales from 8.8% to 9.5%, benefited from a reduction in operating costs and improved operating leverage but was negatively impacted by the reduction in the gross margin rate. Other Income. Other income, net of expenses, was $3.0 million for the Current Period compared to $2.3 million for the Prior Period. Other income increased $0.7 million due primarily to increased 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 was $35.1 million, up $5.8 million or 19.7% from $29.3 million reported in the first six-months of last year due to the factors discussed above. Earnings Per Share. Earnings per share were $0.52 which represents a 9 cent or 20.9% 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 six months ended October 28, 2000 and was used primarily to invest in working capital, fund capital expenditures and make acquisitions. Operating activities generated cash of $19.4 million in the first six months of 2000, compared to the same period in 2000 where operating activities provided cash of $21.6 million. The decrease of $2.2 million was primarily due to an increase in accounts receivable. Days sales outstanding increased to 46 days at the end of the quarter, an increase of 3 days from the beginning of the year. This increase was the result of carrying an additional $13 million of equipment contracts in receivables that related to an equipment promotion in June, July and August. These contracts will be sold in the Company's third fiscal quarter. The increase in accounts receivable was partially offset by a decline in inventory year-over-year and an increase in net income. Capital expenditures for the first six months of 2000 declined $2.6 million from the prior year period when the Company was funding the construction of a new distribution center. 10 For the six-months ended October 28, 2000 the Company invested $2.5 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 accounts payable processing through its web site. In comparison, the Company spent $2.7 million in the prior year period to acquire two dental distribution businesses. Available liquid resources at October 28, 2000 consisted of $130.1 million of cash and short-term investments and $16.1 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. . The ability of the Company to maintain satisfactory relationships with qualified and motivated sales personnel. 11 . 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 October 28, 2000. For additional information refer to item 7A of the Company's 2000 Form 10K. 12 PART II OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders a) The Company's Annual Meeting of Shareholders was held on September 11, 2000. c)(1) The shareholders voted for one director nominee, Burt E. Swanson, for a three year term. 60,419,086 shares were voted for Mr. Swanson and 2,618,662 shares withheld authority. There were no abstentions and no broker non-votes. (2) The shareholders voted to approve the amendments to the Company's Employee Stock Purchase Plan to increase the number of shares reserved thereunder for issuance from 675,000 to 1,375,000 and to modify the eligibility requirements for participation by reducing the number of months of continuous employment with the Company from twelve (12) months to six (6) months. The vote was 62,551,738 shares for, 373,847 shares against and 112,162 abstentions. There were no broker non-votes. (3) The shareholders voted to ratify the appointment of Ernst & Young LLP as independent auditors of the Company for the fiscal year ending April 28, 2001. The vote was 62,948,669 shares for, 59,935 shares against and 29,144 abstentions. There were no broker non-votes. 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: December 12, 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