Patterson Misses, Narrows View

Patterson Companies (PDCO - Analyst Report), a leading distributor of dental, veterinarian and rehabilitation medical supplies, posted second-quarter fiscal 2012 (ended October 29) earnings of 43 cents a share, which missed the Zacks Consensus Estimate by 4 cents and trailed the year-ago earnings of 45 cents.

Net income slid 8.3% year over year to roughly $48.95 million, hurt by costs associated with the company’s Employee Stock Ownership Plan (“ESOP”). Barring the impact, Patterson reported earnings of 46 cents a share.

Revenues

Revenues were essentially flat year over year at roughly $856.9 million, largely missing the Zacks Consensus Estimate of $887 million. The Minnesota-based company saw lower sales in its core Dental Supply division in the quarter, which offset higher revenues from the Veterinary Supply unit and modest growth in the Rehabilitation Supply (“Patterson Medical”) business. Softness in the company’s equipment business across the board impacted the second quarter results.  

Segment Highlights

By business segment, revenues from the Dental Supply division fell 2.2% year over year to $550.6 million. The company witnessed lower sales from its CEREC dental restoration systems in the quarter which led to a 12.5% decline in dental equipment and software sales that registered $174.9 million. CEREC sales were impacted by a difficult year-over-year comparison.

Excluding CEREC revenues, dental equipment and software sales went up 3.8%.  Consumable and printed product sales grew 2.4% to $312.2 million.

Revenues from the Webster Veterinary Supply division climbed 6.9% year over year to roughly $172.7 million, aided by the contributions of veterinary distributor American Veterinary Supply Corporation, which Patterson bought in August 2011.

The Patterson Medical unit posted tepid growth of roughly 1% in the quarter, recording sales of $133.6 million. The results were impaired by lower equipment and software sales, which dipped 12.6% in the quarter, offsetting a 5.3% growth in consumable and printed products sales.

Patterson’s move to boost promotional activities for its dental technology equipment offerings is expected to contribute to higher demand for this product category in the back half of fiscal 2012.

Margins

Gross margin improved to 32.8% from 32.6% a year ago. Operating margin clipped to 9.7% from 10.5% a year ago. Operating expenses (as a percentage of sales) rose to 23.1% from 22%.

Financial Condition

Patterson ended the quarter with cash and short-term investments of roughly $373.8 million, down 24% year over year. Long-term debt remained flat year over year and sequentially at $525 million. The company repurchased roughly 5.6 million shares during the second quarter.

Guidance

Patterson has tightened its earnings per share forecast for fiscal 2012 to a band of $1.90 to $1.97 from its earlier view of $1.90 to $2.00. The current corresponding Zacks Consensus Estimate is $1.94. Patterson continues to expect that the total impact of ESOP expense in fiscal 2012 to be 12 cents a share.

Patterson provides a wide range of consumables, equipment and software and value-added services to its customers. The company competes head-to-head with Henry Schein Inc (HSIC - Snapshot Report) in the dental market. We currently have a Neutral recommendation on the stock, which is in agreement with a short-term Zacks #3 Rank (Hold).

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