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Patterson Cos Reports Dismal Q2 Earnings

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Patterson Companies Inc.’s (PDCO - Free Report) first-quarter fiscal 2014 earnings per share (EPS) of 45 cents per share was flat year over year and missed the Zacks Consensus Estimate by 3 cents. The company’s planned investment in IT lowered EPS by a cent. In the reported quarter, net income declined 3.4% to $45.9 million from $47.5 million in the year-ago period.

Revenues for the first quarter dropped marginally by 1% to $880.1 million from $889.2 million reported in the first quarter of fiscal 2014. Revenues were lower than the Zacks Consensus Estimate of $918 million.

Gross margin was 32.0% in the quarter, slightly lower than 32.1% in the prior-year quarter. Operating margin was also lower at 9.2% versus 9.3% in the comparable year-ago period.

Segment Analysis

Revenues from the core Patterson Dental declined 2.3% to $554.2 million due to a difficult year-over-year comparisons as the year-ago quarter had benefited from the CEREC trade-up program. Within Patterson Dental, sales of consumable and printed products grew 3.3% to $320.3 million in the quarter.

However, sales from the equipment and software offerings declined 11.7% to $169.6 million. Other services and products revenues also dipped 1.4% to $64.4 million.

On a positive note, revenues from Patterson Veterinary segment rose 4.5% to $199.7 million. The unit gained from a 4% rise in consumable sales along with double-digit growth in the equipment and software category. Recently, the business announced its decision to purchase the largest veterinary distributor in the U.S., National Veterinary Services Limited (NVS) from Dechra Pharmaceuticals PLC.

Revenues from Patterson Medical segment dropped 3.5% to $126.2 million due to soft sales in the overseas market. The division continues to be adversely impacted by the uncertainties persisting in the global healthcare economy.

Management announced a strategic initiative to divest some non-core products from its medical unit, which is expected to result in a pre-tax restructuring charge in the band of $15 million–$17 million, or about 12 cents per share.

A majority of the expenses will be borne by the company in the second quarter of fiscal 2014. Following the successful completion of the divestment, the company is likely to generate operational savings of roughly $2 million or 1 cent per share from fiscal 2015.

Balance Sheet and Other

Patterson exited the first quarter with cash and cash equivalents of $603.4 million, up 19.4% from $505.2 million as of Apr 27, 2013. Long-term debt remained flat at $725 million as of Jul 27, 2013 compared with the same as of Apr 27, 2013.

In the reported quarter, Patterson repurchased roughly 0.5 million shares under its share buyback program. About 23.9 million shares are still available for repurchase before the authorization expires in 2018. PDCO also paid $29.8 million in cash dividends to its shareholders.


PDCO has updated its EPS guidance to the range of $2.13–$2.24 per share for fiscal 2014, which now includes 3 cents–4 cents benefit from the NVS acquisition. However, the outlook does not include restructuring charges of 12 cents. The current Zacks Consensus Estimate for EPS for fiscal 2014 is pegged at $2.19.

Our View

We remain disappointed with Patterson’s fiscal 2014 first quarter results, which missed the Zacks Consensus Estimates on both fronts, reflecting a challenging macro environment. The core dental business faced difficult year-over-year comparisons; however, management is confident that the business will deliver incremental returns for the rest of fiscal 2014 on the back of new products (CEREC Omnicam) and rising demand.

We also note that the Veterinary business grew modestly in the quarter, reflecting a tailwind in the underlying market. Despite uncertainties in the Medical business, 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. Further, the company’s restructuring effort to streamline the business should leverage the bottom line in the long term.

Patterson carries a Zacks Rank #2 (Buy). Other medical stocks that are worth considering include MWI Veterinary Supply , Align Technology (ALGN - Free Report) and The Cooper Companies (COO - Free Report) . All these stocks carry a Zacks Rank #2 (Buy).

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