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Patterson Companies Inc.’s (PDCO - Analyst Report) fourth-quarter fiscal 2013 earnings per share (EPS) of 62 cents per share (up 6.9% year over year) was in line with the Zacks Consensus Estimate. In the reported quarter, profit grew 2.4% year over year to $63.6 million.

For fiscal 2013, EPS of $2.03 was also in line with the Zacks Consensus Estimate and exceeded the year-ago EPS by 5.7%. Profit edged down 1.2% year over year to $210.3 million, which included a $6.1 million increase in interest expense from fiscal 2012.


Revenue for the fourth quarter grew 3.1% year over year to $964.9 million, but was lower than the Zacks Consensus Estimate of $967 million. For the fiscal year, revenues increased 3% year over year to $3,637 million, slightly missing the Zacks Consensus Estimate of $3,639 million.

Segment Analysis

Revenues from the core Patterson Dental climbed an impressive 6.4% year over year to $636.9 million, led by strong sales of equipment and software. Within Patterson Dental, sales of consumable and printed products grew 2.4% to $339 million in the quarter.

Sales from the equipment and software offerings jumped 13.6% to $228.6 million, on the back of strong growth across all categories. Other services and products grew 4.2% year over year to $69.3 million.

Revenues from Patterson Veterinary segment inched down 1.5% to $204.4 million. Barring the change in a distribution agreement related to nutritional offerings in 2012, sales increased by roughly 2% in the quarter.

Revenues from Patterson Medical segment dropped 4.9% year over year to $123.6 million due to soft sales in the overseas market. The division continues to be adversely impacted by the uncertainties related to the global healthcare economy. Despite such uncertainties, the segment is geared to grow in the long-term on the back of its advanced products portfolio as well as utilize the underlying favorable demographics.


Gross margin was 33.6% in the fourth quarter, almost in line with the 33.5% in the prior-year quarter. Operating margin declined to 10.8% from 11.0%.

Balance Sheet and Other

Patterson exited the fourth quarter with cash and cash equivalents of $505.2 million, up 6.9%, sequentially. Long-term debt remained flat at $725 million.

In fiscal 2013, Patterson repurchased roughly 5.2 million shares under its share buyback program. In addition, the company announced a share repurchase program in Mar 2013 to buyback up to 25 million shares. About 24.4 million shares are still available for repurchase before the authorization expires in 2018.

Patterson also increased its quarterly dividend by 14% to 16 cents a share from 14 cents in the fourth quarter. This lifted the annual dividend to 64 cents per share.


The company divulged its EPS guidance in the range of $2.10–$2.20 per share for fiscal 2014, assuming stability across external as well as internal environment. The current Zacks Consensus Estimate for EPS for fiscal 2014 is pegged at $2.24.

Management has undertaken an initiative to transform its information systems and will be investing about $55 to $65 million over the next 5 years. Half of the amount will be capitalized and amortized, while about $10 million will be used for this project in fiscal 2014.

Our View

We remain on the sidelines regarding Patterson’s in-line fourth quarter results. Except the core Dental business, all other segments underperformed. The Dental business is poised to grow as dentistry shifts to a digital platform.

The Veterinary business failed to impress due to major internal issues which dampened top-line growth. However, the segment is geared to grow in fiscal 2014 as the demand for veterinary care is on the rise in the U.S.

The guidance provided by the company also appears to be bleak given the difficult macroeconomic condition in the global dental market. Management has assumed that the North American dental market will remain stable throughout fiscal 2014. We believe that a lot remains to be done by Patterson in the near-term to boost results as well as investor confidence.

The company carries a Zacks Rank #4 (Sell). Medical/Dental Supplies companies worth a look are Luxottica Group SpA (LUX - Snapshot Report), Conmed (CNMD - Analyst Report) and Becton, Dickinson and Company (BDX - Analyst Report). The former carries a Zacks Rank #1 (Strong Buy), while the other 2 stocks carry a Zacks Rank #2 (Buy).

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