Patterson Companies Q1 Fiscal Earnings Rise but Miss

Patterson Companies Inc. (PDCO) posted a 6.7% rise in fiscal 2015-first quarter adjusted earnings per share to 48 cents from 45 cents in the comparable quarter of fiscal 2014 but fell shy of the Zacks Consensus Estimate by a couple of cents. The increased earnings can be attributable to higher revenues in the quarter.

Earnings per share in the quarter ended Jul 26, 2014 excluded earnings contribution of 2 cents from the acquisition U.K.-based National Veterinary Services Limited (NVS), which closed on Aug 16, 2013.

Revenues in the quarter grew 20.4% to $1,059.5 million, higher than the Zacks Consensus Estimate of $1,036 million. Excluding revenues of $173.6 million from the NVS acquisition, revenues were $885.9 million in the quarter.

Adjusted gross margin rose 30 basis points (bps) to 32.3% in the quarter from 32.0% a year ago. However, adjusted operating margin fell 10 bps to 9.1% from 9.2% in the fiscal 2014 quarter.

Segment Results

Revenues from the core Patterson Dental slid 0.3% to $552.7 million in the quarter due to lower dental equipment and software sales. By category, on a constant currency basis, revenues from consumable dental supplies rose 1.9% to $334.3 million; Dental equipment and software declined 8.1% to $148.8 million, and Other services and products (consisting primarily of technical service, parts and labor, software support services and artificial teeth) went up 8.0% to $69.5 million.

Revenues from Patterson Veterinary nearly doubled to $386.3 million from $199.7 million in the fiscal 2014-quarter. Revenues from Consumable veterinary sales soared 97.1% to $370.9 million, but Veterinary equipment sales dipped 5.6% to $7.6 million. Patterson Veterinary constitutes more than one-third of Patterson Companies sales. U.S. sales, which exclude NVS, went up nearly 7% to $212.7 million in the quarter.

Revenues from Patterson Medical (which is the rehabilitation supply and equipment business) fell 4.5% to $120.6 million, after accounting for the planned divestiture of non-core product lines as part of the restructuring of the division. Excluding the impact from these divestitures, year-over-year revenues were essentially flat in the quarter.

Share Repurchase

Patterson Companies repurchased roughly 1.1 million shares for $43.9 million in the quarter. At the end of the quarter, the company was left with about 21 million shares for repurchase under the current authorization.

Financial Position

Patterson Companies exited the fiscal first quarter with cash and cash equivalents of $302.3 million, down 1.1% from $305.7 million as of Apr 26, 2014. Long-term debt remained flat at $725 million as of Jul 26, 2014 compared with the same as of Apr 26, 2014.

In the fiscal first quarter, Patterson Companies had cash flow of $68.8 million from operations, more than tripled from $21.1 million in the prior-year quarter. Capital expenditures (net) nearly doubled to $11.1 million in the above period from $5.6 million in the first quarter of fiscal 2014.

Outlook

Patterson Companies reiterated its earnings per share guidance in the range of $2.20–$2.30 for fiscal 2015. The current Zacks Consensus Estimate for fiscal 2014 of $2.24 lies within the guided range.

Patterson Companies revealed that recent change announced by IDEXX Laboratories, Inc. (IDXX), to move to direct sales and distribution model in the veterinary market effective Jan 1, 2015, will not impact its fiscal 2015 guidance as it expects to mitigate the potential fall in net earnings from the move.

Our Take

Currently, Patterson Companies carries a Zacks Rank #3 (Hold). Some better-ranked stocks from the medical/dental supplies industry include The Cooper Companies Inc. (COO) and McKesson Corp. (MCK). Both of them carry a Zacks Rank #2 (Buy).

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