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Patterson Companies Inc. (PDCO - Analyst Report) posted a 9.6% rise in second-quarter fiscal 2014 adjusted earnings per share (EPS) to 57 cents per share, which was up 9.6% from 52 cents in the year-ago quarter but were in line with the Zacks Consensus Estimate. Adjusted net earnings rose 8.0% to $57.9 million from $53.6 million in the year-ago quarter.

Earnings per share in the quarter ended Jan 25, 2014 excluded costs related to the Medical unit restructuring as well as contribution of one cent per share from the acquisition of NVS, which was closed on Aug 16, 2013.

Revenues for the quarter grew 18.2% to $1,082.7 million, higher than the Zacks Consensus Estimate of $1,062 million.

Adjusted gross margin fell 40 basis points (bps) to 32.4% in the quarter from 32.8% a year ago. However, adjusted operating margin rose 30 bps to 10.1% from 9.8% in the fiscal 2013 quarter.

Segment Results

Revenues from the core Patterson Dental rose 3.2% on a constant currency basis to $642.0 million in the third quarter. By category, revenues on a constant currency basis in Consumable dental supplies went up 1.5% to $310.7 million, Dental equipment and software revenues rose 5.8% due to strong performance in all product categories; and Other services and products (consisting primarily of technical service, parts and labor, software support services, and artificial teeth) inched up 1.8% in the fiscal 2014 third quarter.

Revenues from Patterson Veterinary surged about 90% to $333.4 million. U.S. revenues went up 7.1% to $187.9 million. Consumable veterinary revenues rose 5.6% to $170.8 million, and Veterinary equipment revenues grew 26.1% to $14.4 million.

However, revenues from Patterson Medical dipped to $107.3 million. The decline was attributable to lower sales from the non-core product lines that were divested in the quarter as well as continuing challenges in international business.

Share Repurchase

In the first three quarter of fiscal 2014, Patterson Companies repurchased about 1.1 million shares of its outstanding common stock, leaving 23.0 million shares under the current authorization. The company repurchased roughly 0.6 million shares for $26 million and paid $16.6 million in cash dividends in the fiscal third quarter.

Financial Position

Patterson Companies exited the third quarter with cash and cash equivalents of $464.6 million, down from $505.2 million as of Apr 27, 2013. Long-term debt remained flat at $725 million as of Jan 25, 2014 compared with the same as of Apr 27, 2013.

In the first nine months of fiscal 2014, Patterson Companies had cash flow of $149.75 million from operations, down 16.5% from $179.3 million in the year-ago period. Capital expenditures (net) more than doubled to $30.3 million in the above period from $14.3 million in the same period of fiscal 2013.


Patterson Companies narrowed its EPS guidance to the range of $2.13–$2.20 from $2.13–$2.24 per share for fiscal 2014, which includes a 3–4 cents contribution from the NVS acquisition. However, the outlook does not include restructuring charges of 12 cents. The current Zacks Consensus Estimate for fiscal 2014 EPS of $2.16 lies within the guided range.

Our Take

Patterson Companies continues to face a challenging macro environment as well as continued weakness in Medical segment. However, we praise the company’s nearly unchanged guidance, which reflects stability. Further, the company’s restructuring efforts to streamline the business should leverage the bottom line in the long term.

Currently, Patterson Companies carries a Zacks Rank #4 (Sell). While we avoid the company, some better-ranked stocks from the medical/dental supplies industry that worth a look include Align Technology (ALGN - Analyst Report), CR Bard Inc. (BCR - Analyst Report), and Becton, Dickinson and Co. (BDX - Analyst Report). All of them carry a Zacks Rank #2 (Buy).

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