<PAGE>
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
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(Exact Name of Registrant as Specified in its Charter)
Minnesota 41-0886515
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(State of Incorporation) (IRS Employer Identification No.)
1031 Mendota Heights Road, St. Paul, Minnesota 55120
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(Address of Principal Executive Offices)
(Zip Code)
(651) 686-1600
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(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
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Patterson Dental Company has outstanding 67,400,118 shares of common stock as of
September 6, 2000.
Page 1 of 11
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PATTERSON DENTAL COMPANY
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C>
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
</TABLE>
Safe Harbor Statement Under The Private Securities Litigation Reform Act Of
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1995:
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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
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PART I FINANCIAL INFORMATION
PATTERSON DENTAL COMPANY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
ASSETS
<TABLE>
July 29, April 29,
2000 2000
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(unaudited)
<S> <C> <C>
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
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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
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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
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Total current liabilities........................... 120,454 112,906
Non-current liabilities................................... 3,361 3,458
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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)
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Total stockholders' equity.......................... 346,846 330,470
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Total liabilities and stockholders' equity.......... $475,582 $451,976
======== ========
</TABLE>
See accompanying notes.
3
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PATTERSON DENTAL COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(In thousands except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
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July 29, July 31,
2000 1999
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(13 weeks) (14 weeks)
<S> <C> <C>
Net sales............................................. $268,294 $254,599
Cost of sales......................................... 171,282 161,068
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Gross profit.......................................... 97,012 93,531
Operating expenses.................................... 72,814 71,388
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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)
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Income before income taxes............................ 25,710 23,150
Income taxes.......................................... 9,616 8,661
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Net income............................................ $ 16,094 $ 14,489
======== ========
Earnings per share - basic and diluted................ $ 0.24 $ 0.21
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Weighted average and dilutive potential
common shares......................................... 67,647 67,493
======== ========
</TABLE>
See accompanying notes.
4
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PATTERSON DENTAL COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
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July 29, July 31,
2000 1999
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(13 weeks) (14 weeks)
<S> <C> <C>
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)
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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)
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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
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Net cash provided by (used in) by financing activities........ 15 (25)
Effect of exchange rate changes on cash....................... 95 (28)
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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
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</TABLE>
See accompanying notes.
5
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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:
<TABLE>
<CAPTION>
Three Months Ended
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July 29, July 31,
2000 1999
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<S> <C> <C>
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
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Dilutive potential common shares 264 183
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Denominator for diluted earnings per
share - adjusted weighted-average
shares and assumed conversions 67,647 67,493
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</TABLE>
6
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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.
<TABLE>
<CAPTION>
Three Months Ended
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Jul. 29, Jul. 31,
2000 1999
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<S> <C> <C>
Net sales................................................. 100.0% 100.0%
Cost of sales............................................. 63.8% 63.3%
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Gross profit.............................................. 36.2% 36.7%
Operating expenses........................................ 27.1% 28.0%
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Operating income.......................................... 9.0% 8.7%
Other income and expense, net............................. 0.6% 0.4%
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Income before income taxes................................ 9.6% 9.1%
Income taxes.............................................. 3.6% 3.4%
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Net income................................................ 6.0% 5.7%
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</TABLE>
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
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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
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. 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
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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
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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
