Note: This report contains substantially new information. Subsequent reports will have changes highlighted.
Reason for Report: 3Q18 Earnings Flash Update
Prev. Ed.: Jan 16, 2018, 2Q18 Earnings Update With Estimate Revisions
Flash Update [Note: Earnings update in progress; final report to follow]
Patterson Companies Inc.reported adjusted earnings of 43 cents per share in third-quarter fiscal 2018 (3Q18). Earnings fell 25.9% year over year (y/y).
Net sales dipped 1.6% from the year-ago quarter (3Q17) to $1.375 billion.
Adjusting the effects of foreign currency exchange, sales declined 2.7% y/y.
Decreased sales and gross margin-compression marred the company’s results in 3Q18.
Segmental Analysis
The company currently distributes its products mainly through two subsidiaries — Patterson Dental and Patterson Animal Health.
Dental Segment
This segment provides a virtually complete range of consumable dental products, equipment, software, turnkey digital solutions and value-added services to dentists and dental laboratories throughout North America.
In 3Q18, dental sales (42% of total sales) declined 8.1% at cc y/y to approximately $577.9 million. Changes in sales force, disruptions from enterprise resource planning implementation and the expansion of the company’s digital equipment portfolio marred revenues in the segment.
Dental Consumable
Sales in the segment were $302.3 million, down 7.4% y/y.
Dental Equipment & Software
Sales at the segment declined 10.6% y/y to $207 million.
Other Services and Products
This segment is primarily composed of technical service, parts and labor, software support services and office supplies decreased 3.4% y/y to $65.6 million.
Animal Health Segment
This segment is a leading distributor of products, services and technologies to the production and companion animal health markets in North America and the U.K.
Coming 3Q18 performance of the platform (58% of total sales), sales increased almost 4.2% at cc y/y to $794.9 million.
Global companion animal sales inched up 0.4%. Production animal sales increased 8.8%, reflecting strong performance across swine and beef-cattle segment.
Margin Analysis
Gross profit in 3Q18 was $294.7 million, down 10.6% y/y. As a percentage of revenues, gross margin contracted 200 basis points (bps) to 21.4% in 3Q18..
Operating income in 3Q18 was $50.04 million, up 7.5% y/y. . As a percentage of revenues, operating margin expanded 31 bps to 21.4% in 3Q18.
Share Repurchase Update
Patterson Companies repurchased approximately 0.4 million shares of outstanding common stock for $13.5 million in 3Q18. The company also paid $24.7 million in cash dividends to shareholders.
Guidance Downbeat
The company expects adjusted earnings per share for fiscal 2018 (FY18) in the range of $1.65-$1.70 per share, much lower than the previously issued range of $2.00-$2.10.
Patterson Companies expects deal amortization expenses of $26.9 million or 29 cents per share.
The company estimates integration and business restructuring expenses at $5.7 million or 6 cents per share.
MORE DETAILS WILL COME IN LATER, IMMINENT EDITIONS OF ZACKS RD REPORTS ON PDCO
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Portfolio Manager Executive Summary[Note: Earnings update in progress; final report to
follow]
Patterson Companies Inc. (PDCO) is a leading distributor of dental and veterinary products. The company serves three markets: North American dental supply; the United States companion-pet (dogs, cats and other common household pets), and equine veterinary supply. Revenues increased 2.3% on a year-over-year basis (y/y) to $1.39 billion in 2Q18.
Of the 14 firms covering Patterson, 9 (64.3%) provided neutral rating, 3 (21.4%) assigned positive rating, while 2 (14.3%) assigned a negative rating. The target price ranges from $31.00 to $53.00, the average being $39.80.
Neutral or equivalent outlook(9/14 firms):Neutral firms are optimistic about the prospects of the dental and the companion animals’ markets. However, decline in revenues of the Dental segment, is a concern. Meanwhile, the positive organic revenue growth instills optimism. These firms also believe that earnings per share will relatively be on the higher side in the second half of FY18. Further, these firms believe that Patterson’s newly appointed CEO, Mark Walchirk will boost the company’s exposure to the niche markets. However, inorganic growth and cutthroat competition in the niche space can be detrimental in the long run.
Conclusion: Prospects of the Animal Health and companion animals market is encouraging. Despite stiff competition, company is expected to deliver strong earnings.
Aug 22, 2016
Overview[Note: Earnings update in progress; final report to follow]
Based in St. Paul, MN, Patterson Companies Inc. (PDCO) is a leading distributor of dental and veterinary products. Patterson also offers services, such as installation and maintenance of dental office equipment, office design and equipment financing. The company currently distributes its products mainly through two subsidiaries – Patterson Dental and Patterson Animal Health.
Patterson Dental
Patterson’s largest business segment is Dental Supply. This 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 health care providers throughout North America.
The company also distributes technology equipment that includes the CEREC family of products- a chair-side restoration system; digital x-ray; and inter-oral cameras. Patterson develops and markets its own line of practice management and clinical software for dental professionals.
Patterson Animal Health
Animal Health is a production animal health distribution company based in the U.S. which sells products for pets, horses, beef and dairy cattle, poultry and pigs. The segment is one of the largest distributors of consumable veterinary supplies, equipment and software, diagnostic products, vaccines, and pharmaceuticals to companion-pet veterinary clinics.
In 2015, Patterson completed the acquisition of Animal Health International. Subsequently, Patterson Veterinary segment was renamed as Patterson Animal Health.
The firms have identified the following factors for evaluating the investment merits of PDCO:
Key Positive Arguments / Key Negative ArgumentsDeteriorating dental revenues continue to plague the company. / Growth at Patterson Companies is dependent, partly, on acquisitions. However, frequent acquisitions heighten integration risks.
The divesture of Patterson’s medical business will help the company focus on its key operations. / Patterson Companies faces a high level of competition within the North American dental and companion animal veterinary supply markets.
Patterson Companies is likely to benefit from an improving animal health market. The company’s Veterinary business is poised to gain market share, on the back of the acquisition of Animal Health.
The company’s healthy balance sheet and cash flows allow it to offer incremental returns to shareholders and enable more consistent executions. / The company is likely to gain new synergies from the recent AHI acquisition.
Additional information is available online at
Note: The company’s fiscal year ends on Apr 30; fiscal references do not coincide with the calendar year.
May 23, 2016
Long-Term Growth[Note: Earnings update in progress; final report to follow]
For FY19, firms’ estimated EPS of $2.41 has moved to $2.28.
Patterson’s growing Animal Health unit is a key long-term growth driver. Management at Patterson Companies expects solid margin improvement in the Animal Health Unit through stronger partnerships with product manufacturers and strong sales execution. Patterson Companies is focused on the enterprise-wide productivity and efficiency initiatives that are essential for optimizing the company’s operating model.
Primarily on the back of high growth in companion pet population, the veterinary market seems to provide ample growth opportunity for the company. Moreover, the acquisition of Animal Health International is expected to double the size of Patterson Companies' existing veterinary business. It will help the company gain a strong foothold in the animal health market, complementing its existing presence in the companion pet market.
Patterson has been putting consistent efforts to enhance its equipment and technical service offerings. The primary motive of the company is to cash in on the favorable marketplace dynamics, as reflected by the increase in pet ownership and the amount people invest toward veterinary care. Thus, taking into consideration the rising demand in the veterinarian clinics and hospitals, firms believe that Patterson Companies has a lot of room to run over the long haul. Further, firms’ earlier concern for the company’s underexposure to faster growing market has also been addressed by the newly appointed CEO, Mark Walchirk, who has recently discussed his interest in increasing Patterson’s exposure to the market.
In the Dental segment, the company is working toward enhancing the segment’s technology portfolio, by digitization of dentistry.
The acquisition of Animal Health International has been a prudent move, as it continues to contribute immensely to Patterson’s current veterinary business. It will help the company gain a strong foothold in the animal health space, complementing its presence in the companion pet market. The company is currently committed to improving the sales execution of this segment.
The deployment of the ERP system in the U.S. dental and veterinary business is expected to provide the foundation for a more ambitious platform.
Patterson Dental has recently signed a distribution agreement with SprintRay in Dec, in an initiative to overhaul dental practice throughout United States and Canada.
May 23, 2016
Target Price/Valuation[Note: Earnings update in progress; final report to follow]
Rating DistributionPositive / 21.4%
Neutral / 34.3%
Negative / 14.3%
Avg. Target Price / $39.80↓
Maximum Target / $53
Minimum Target / $31↓
Upside from current / 10.4
No. of Analysts with Target Price/Total / 10
Risks to the price target include capital market volatility, acquisition integration risks and consumer sentiment that is important for it impacts demand for dental and pet care, as well as currency fluctuation that could hurt international revenues.
Recent Events[Note: Earnings update in progress; final report to follow]
On Nov 21, 2017 Patterson reported 2Q18 results. Highlights are as follows:
- Net sales declined 2.3% y/y to $1.4 billion
- Gross margin
- Adjusted EPS fell 8.9% on a y/y basis to 51 cents
On Dec 4, 2017SprintRay and Patterson Dental, a business unit of Patterson Companies, announced a distribution agreement to bring high-resolution desktop 3D printers, resins and accessories to dental practitioners throughout the United States and Canada.
Revenues [Note: Earnings update in progress; final report to follow]
According to the 2Q18 press release, net sales from continuing operations fell 2.3% on a y/y basis to $1.39 billion, falling short of the Zacks Consensus Estimate of $1.42 billion. Adjusting the effects of foreign currency exchange, sales declined 2.8% y/y, including a negative impact of approximately 60 basis points (bps) from the hurricanes.
Revenue($ in million) / 2Q17A / FY17A / 1Q18A / 2Q18A / 3Q18E / FY18E / FY19E / FY20E
Digest High / $1,419.2 / $5,594.1 / $1,304.1 / $1,385.7 / $1,396.9 / $5,550.8 / $5,734.9 / $5,931.0
Digest Low / $1,418.2 / $5,592.6 / $1,304.1 / $1,385.7 / $1,396.9 / $5,507.0 / $5,726.0 / $5,903.0
Digest Average / $1,418.3 / $5,593.2 / $1,304.1 / $1,385.7 / $1,396.9 / $5,528.9 / $5,730.5 / $5,917.0
Segment Discussion
Patterson Animal Health (59.2% of total sales) sales increased almost 1.4% at cc y/y basis to $823.6 million.
Companion animal sales declined 1.4%. Production animal sales increased 4.2%, reflecting strong performance across all segments, especially the swine business.
Patterson Dental (39.8% of total sales) sales decreased 8.4% at cc y/y to approximately $553.6 million. The downside was caused by lower sales of CEREC and digital technology products.
Equipment sales in the dental segment fell 17.7%. Consumable dental supplies decreased 4.4%. However, other services and products, primarily comprising technical service, parts and labor, software support services and office supplies increased, 0.6%.
Share Repurchase Update
Patterson Companies repurchased approximately 1 million shares of its outstanding common stock for $36.5 million in 2Q18. The company also paid $24.8 million in cash dividends to shareholders. For the first six months of fiscal 2018, the company has returned a total of $124 million to shareholders in the form of share repurchases and dividends.
Outlook: Organic revenues are expected to rise in the long run at an increasing rate, though, significant declines in Patterson’s equipment sales are expected by bearish firms.
Revenue($ in million) / 2Q17A / FY17A / 1Q18A / 2Q18A / 3Q18E / FY18E / FY19E / FY20E
Dental Supply / $601.6 / $2,390.4 / $518.8 / $553.6 / $2,242.0 / $2,332.0 / $2,402.0
Animal Health / $807.1 / $3,159.8 / $776.1 / $823.6
Margins[Note: Earnings update in progress; final report to follow]
Per the 2Q18 press release, gross profit fell 1% y/y to $315.7 million. However, gross margin expanded 30 bps y/y to 22.8%.
Total operating expense surged 2% y/y to $244 million.
Operating income decreased 10.1% y/y in 2Q18. Operating profit declined 10% y/y in 2Q18. However, adjusted operating margin contracted 47 bps to 6%.
In the Animal Health Segment, operating margins expanded 24 basis points y/y.
Outlook: The company expects a decline in margin in the second half of FY18.
Margins / 2Q17A / FY17A / 1Q18A / 2Q18A / 3Q18E / FY18E / FY19E / FY20EGross / 22.5% / 23.3% / 22.9% / 22.8% / 22.9% / 23.0% / 22.8% / 22.5%
Operating / 6.5% / 6.7% / 5.6% / 6.0% / 6.2% / 6.1% / 6.3% / 6.5%
Pre-Tax / 5.9% / 6.0% / 4.9% / 5.3% / 5.5% / 5.4% / 5.6% / 5.8%
Net / 3.8% / 4.0% / 3.2% / 3.4% / 3.6% / 3.5% / 3.7% / 3.8%
Earnings per Share [Note: Earnings update in progress; final report to follow]
According to the 2Q18 press release, reported adjusted earnings fell 8.9%, to 51 cents on a y/y basis. It missed the Zacks Consensus Estimate of 54 cents. Hurricanes have hurt Patterson Companies’ earnings per share by approximately a penny in 2Q18.
Guidance: Patterson Companies forecasts adjusted EPS in the range of $2.00-$2.10 per diluted share, way below the previously issued band of $2.25 to $2.40, excluding expenses on amortization, integration and business restructuring.
Outlook: The company foresees earnings towards a moderately higher band, despite a decline in dental revenues.
EPS / 2Q17A / FY17A / 1Q18A / 2Q18A / 3Q18E / FY18E / FY19E / FY20EDigest High / $0.56 / $2.34 / $0.44 / $0.51 / $0.54 / $2.08 / $2.35 / $2.60
Digest Low / $0.56 / $2.34 / $0.44 / $0.51 / $0.54 / $2.05 / $2.28 / $2.45
Digest Average / $0.56 / $2.34 / $0.44 / $0.51 / $0.54 / $2.07 / $2.32 / $2.53
Analyst / Sreyoshi Mukherjee
Content Editor
Lead Analyst / Nabaparna Bhattacharya
QCA / Urmimala Biswas
Reason for Update / 3Q18 Earnings Flash Update