Patterson panies(PDCO) - 2022 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements Financial statements show increased assets and sales, but operating income declined sharply due to legal and inventory charges, offset by investment gains Condensed Consolidated Balance Sheets The balance sheets reflect increased total assets, liabilities, and stockholders' equity, driven by inventory and receivables - Total assets increased to $2.90 billion as of October 30, 2021, from $2.75 billion as of April 24, 2021, primarily driven by increases in Inventory (from $736.8 million to $830.1 million) and Receivables (from $449.2 million to $481.8 million)[9] - Total liabilities rose to $1.89 billion from $1.79 billion, mainly due to a significant increase in Accounts Payable from $609.3 million to $773.2 million[9] - Total stockholders' equity grew to $1.01 billion from $964.7 million, supported by retained earnings growth[9] Condensed Consolidated Statements of Operations and Other Comprehensive Income Statements of operations show sales growth but declining operating income, with year-to-date net income boosted by investment gains Q2 Fiscal 2022 vs Q2 Fiscal 2021 Performance (Three Months Ended) | Metric | Oct 30, 2021 ($) | Oct 24, 2020 ($) | Change | | :--- | :--- | :--- | :--- | | Net Sales | $1,649.2M | $1,553.2M | +6.2% | | Gross Profit | $326.4M | $320.4M | +1.9% | | Operating Income | $62.9M | $73.7M | -14.7% | | Net Income Attributable to Patterson | $48.3M | $54.1M | -10.7% | | Diluted EPS | $0.49 | $0.56 | -12.5% | YTD Fiscal 2022 vs YTD Fiscal 2021 Performance (Six Months Ended) | Metric | Oct 30, 2021 ($) | Oct 24, 2020 ($) | Change | | :--- | :--- | :--- | :--- | | Net Sales | $3,264.0M | $2,799.0M | +16.6% | | Operating Income | $23.3M | $111.6M | -79.1% | | Gains on Investments | $87.8M | $0 | N/A | | Net Income Attributable to Patterson | $82.3M | $78.5M | +4.8% | | Diluted EPS | $0.84 | $0.82 | +2.4% | Condensed Consolidated Statements of Changes in Stockholders' Equity Stockholders' equity increased, primarily driven by net income, partially offset by dividend payments during the six-month period - Total stockholders' equity increased from $964.7 million at April 24, 2021, to $1.012 billion at October 30, 2021[15] - The increase in equity was primarily driven by net income of $81.7 million, partially offset by dividends declared of $51.2 million during the six months ended October 30, 2021[15][11] Condensed Consolidated Statements of Cash Flows Cash flow statements show significant cash used in operations, largely offset by investing activities, resulting in a net cash increase Cash Flow Summary (Six Months Ended) | Cash Flow Activity | Oct 30, 2021 ($) | Oct 24, 2020 ($) | | :--- | :--- | :--- | | Net Cash Used in Operating Activities | ($539.0M) | ($423.0M) | | Net Cash Provided by Investing Activities | $607.6M | $394.9M | | Net Cash (Used in) Provided by Financing Activities | ($58.4M) | $86.6M | | Net Change in Cash | $10.9M | $61.5M | - Investing activities were a significant source of cash, primarily from the collection of deferred purchase price receivables ($585.6 million) and the sale of investments ($57.2 million)[17][18] - Financing activities used cash mainly for dividend payments ($50.4 million) and repayment of revolving credit ($10.0 million)[17] Notes to Condensed Consolidated Financial Statements Notes detail an acquisition, significant investment sale gains, a legal settlement, and segment operating income performance - During Q1 FY2022, the company acquired Miller Vet Holdings, LLC for $19.8 million in cash, recording $14.0 million in identifiable intangibles and $0.9 million in goodwill[35] - In Q1 FY2022, the company sold a portion of its investment in Vetsource, resulting in aggregate pre-tax gains of $87.8 million, which includes cash and non-cash components[65][22] - The company agreed to a $63.0 million settlement for a federal securities class action lawsuit. Insurers will contribute $35.0 million, resulting in a net expense of $36.0 million recorded in Q1 FY2022, with an additional $8.0 million gain from carrier reimbursement in Q2[78] Segment Operating Income (Six Months Ended) | Segment | Oct 30, 2021 ($) | Oct 24, 2020 ($) | | :--- | :--- | :--- | | Dental | $54.5M | $110.7M | | Animal Health | $49.9M | $35.0M | | Corporate | ($81.1M) | ($34.1M) | | Total | $23.3M | $111.6M | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion highlights sales growth but a sharp operating income decline from inventory and legal charges, with liquidity supported by investing activities Results of Operations - Quarter Ended October 30, 2021 Quarterly results show consolidated net sales growth driven by Animal Health, but operating income declined due to higher expenses - Consolidated net sales for Q2 FY2022 increased 6.2% to $1.65 billion. Internal sales, adjusting for currency and other factors, grew by approximately 8.3%[104] - Dental segment sales decreased 1.5% to $622.2 million, primarily due to lower sales of infection control products compared to the prior-year quarter[105] - Animal Health segment sales grew 12.4% to $1.03 billion, driven by increased demand across all businesses and geographies[106] - Consolidated operating income fell to $62.9 million (3.8% of sales) from $73.7 million (4.7% of sales) in the prior year, mainly due to higher personnel and travel-related expenses[109] Results of Operations - Six Months Ended October 30, 2021 Six-month results show sales growth, but gross profit and operating income declined sharply due to inventory and legal charges, offset by investment gains - Consolidated net sales for the six-month period increased 16.6% to $3.26 billion, with an estimated 4.1% of this growth attributed to an extra week in the fiscal period[117] - Gross profit margin decreased by 200 basis points to 18.5%, primarily due to a $49.2 million charge for inventory donations[120][102] - Operating expenses increased 25.6% to $580.9 million, largely due to higher personnel costs and the impact of the Fiscal 2022 Legal Reserve ($36.0 million net expense)[121][101] - Operating income decreased sharply to $23.3 million from $111.6 million in the prior year, impacted by the legal reserve and inventory donation charges[122] - Net other income was $85.3 million, compared to a net expense of $7.8 million in the prior year, driven by the $87.8 million gain on the Vetsource investment[126][99] Liquidity and Capital Resources Liquidity analysis shows net cash used in operations offset by investing activities, with sufficient cash and credit expected for fiscal 2022 - Net cash used in operating activities was $539.0 million for the six months ended October 30, 2021, primarily due to the impact of the Receivables Securitization Program and an increase in inventory[129] - Net cash provided by investing activities was $607.6 million, largely from $585.6 million in collections of deferred purchase price receivables and $57.2 million from the sale of investments[130] - As of October 30, 2021, the company had $300.0 million outstanding under its term loan and $43.0 million outstanding under its $700.0 million revolving credit facility[133][134] - Management expects existing cash, credit availability, and collections to be sufficient to meet working capital needs for the remainder of fiscal 2022[135] Item 3. Quantitative and Qualitative Disclosures about Market Risk No material changes in the company's market risk exposure have occurred since the 2021 Annual Report on Form 10-K - There have been no material changes in the company's market risk exposure since the last annual report filed on June 23, 2021[137] Item 4. Controls and Procedures Management concluded disclosure controls were effective, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the quarter[138] - No material changes to internal control over financial reporting were identified during the quarter ended October 30, 2021[139] PART II - OTHER INFORMATION Item 1. Legal Proceedings The company is involved in various legal proceedings, accruing liabilities when probable and estimable, with further details in Note 11 - The company is subject to various lawsuits and investigations in the ordinary course of business[141] - For detailed information on legal proceedings, the report refers to Note 11 of the Condensed Consolidated Financial Statements[143] Item 1A. Risk Factors No material changes to the risk factors previously disclosed in the 2021 Annual Report on Form 10-K have occurred - No material changes to the risk factors disclosed in the 2021 Annual Report on Form 10-K have occurred[144] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds A $500 million share repurchase program is authorized, but no shares were repurchased in Q2 FY2022, with repurchases subject to credit agreement covenants - A $500 million share repurchase program is authorized through March 16, 2024[145] - No shares were repurchased during the second quarter of fiscal 2022[145] Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including agreements, CEO/CFO certifications, and financial data in Inline XBRL format - Lists various agreements and required CEO/CFO certifications filed as exhibits[148]