Patterson Co. Tops, Snips View

Patterson Companies ( PDCO - Analyst Report ) , a leading distributor of dental, veterinarian and rehabilitation medical supplies, posted third-quarter fiscal 2012 (ended January 28) adjusted earnings of 53 cents a share, topping the Zacks Consensus Estimate of 50 cents and surpassing the year-ago earnings of 47 cents.

Adjusted earnings exclude costs associated with the company’s Employee Stock Ownership Plan (“ESOP”). Net income fell 4% year over year to roughly $53.1 million (or 50 cents a share), impacted by the ESOP expenses.

Revenues

Revenues rose 8.5% year over year to roughly $895 million, comfortably beating the Zacks Consensus Estimate of $865 million. The Minnesota-based company witnessed higher sales across its Dental Supply and Veterinary Supply divisions in the quarter, which offset modest decline in the Rehabilitation Supply (“Patterson Medical”) business.

Segment Review

By business segment, revenues from the Dental Supply division climbed 9% year over year to $605 million. The company recorded double-digit growth in revenues from its CEREC dental restoration systems and digital imaging products in the quarter, leading to a 21% surge in dental equipment and software sales that registered $231.4 million. Increased promotional initiative is benefiting the dental equipment business.

Dental consumable and printed product sales grew 3% to $311.4 million. Other services and products revenues dipped 4% to $62.3 million.

Revenues from the Webster Veterinary Supply unit jumped roughly 17% year over year to roughly $174.6 million, helped by the contributions of veterinary distributor American Veterinary Supply Corporation, which Patterson bought in August 2011. Patterson is investing in technologies to boost the profitability of its veterinary business.

Patterson Medical was the weak spot in the quarter with sales declining 2% to $115.3 million. The results were hurt by lower equipment and software sales, which slipped 10.3% in the quarter.

Margins

Gross margin fell to 32.3% from 34.1% a year ago. Operating margin declined to 10% from 11.2% a year ago. Operating expenses (as a percentage of sales) edged down to 22.3% from 22.8%.

Financial Condition

Patterson ended the quarter with cash and short-term investments of roughly $538 million, up 39% year over year. Long-term debt climbed 62% year over year to $850 million. The company bought back roughly 3.2 million shares during the third quarter under its 25 million repurchase authorization.

Guidance

Patterson has tightened its earnings per share forecast for fiscal 2012 to a band of $1.90 to $1.94 from its earlier view of $1.90 to $1.97. The current corresponding Zacks Consensus Estimate is $1.92. Patterson still expects 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).