Patterson panies(PDCO) - 2022 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements for Patterson Companies, Inc. as of January 29, 2022, including balance sheets, statements of operations, changes in stockholders' equity, cash flows, and accompanying notes. Condensed Consolidated Balance Sheets As of January 29, 2022, total assets increased to $2.86 billion from $2.75 billion at April 24, 2021, primarily driven by a rise in inventory, while total liabilities slightly increased to $1.82 billion and total stockholders' equity grew to $1.04 billion from $964.7 million. Condensed Consolidated Balance Sheet Highlights (in thousands) | Balance Sheet Item | Jan 29, 2022 | April 24, 2021 | | :--- | :--- | :--- | | Total current assets | $1,790,431 | $1,615,929 | | Inventory | $868,728 | $736,778 | | Total assets | $2,863,496 | $2,751,511 | | Total current liabilities | $1,132,097 | $1,089,666 | | Total liabilities | $1,819,318 | $1,786,840 | | Total stockholders' equity | $1,044,178 | $964,671 | Condensed Consolidated Statements of Operations and Other Comprehensive Income For Q3 FY2022, net sales increased 2.9% year-over-year to $1.60 billion, with net income attributable to the company rising to $57.0 million and diluted EPS of $0.58, while nine-month net sales grew 11.7% to $4.86 billion and net income increased to $139.3 million with diluted EPS of $1.42. Q3 FY2022 Performance vs. Q3 FY2021 (in thousands, except per share amounts) | Metric | Three Months Ended Jan 29, 2022 | Three Months Ended Jan 23, 2021 | | :--- | :--- | :--- | | Net sales | $1,596,596 | $1,551,268 | | Gross profit | $336,611 | $324,541 | | Operating income | $60,833 | $61,681 | | Net income attributable to Patterson | $57,006 | $48,759 | | Diluted EPS | $0.58 | $0.50 | Nine Months FY2022 Performance vs. Nine Months FY2021 (in thousands, except per share amounts) | Metric | Nine Months Ended Jan 29, 2022 | Nine Months Ended Jan 23, 2021 | | :--- | :--- | :--- | | Net sales | $4,860,633 | $4,350,273 | | Operating income | $84,164 | $173,259 | | Net income attributable to Patterson | $139,332 | $127,226 | | Diluted EPS | $1.42 | $1.32 | Condensed Consolidated Statements of Changes in Stockholders' Equity Total stockholders' equity increased from $964.7 million to $1.04 billion as of January 29, 2022, primarily driven by net income of $138.3 million, partially offset by $76.7 million in dividends declared and a foreign currency translation loss. - For the nine months ended January 29, 2022, key changes to stockholders' equity included net income of $138.3 million, offset by dividend declarations totaling $76.7 million ($25.5M + $25.6M + $25.6M) and an accumulated other comprehensive loss increase due to foreign currency translation[15] Condensed Consolidated Statements of Cash Flows For the nine months ended January 29, 2022, net cash used in operating activities was $834.1 million, largely due to changes in receivables and inventory, while net cash provided by investing activities was $946.4 million, driven by collections of deferred purchase price receivables and investment sales, and net cash used in financing activities was $90.5 million, primarily for debt repayment and dividends. Nine-Month Cash Flow Summary (in thousands) | Cash Flow Activity | Nine Months Ended Jan 29, 2022 | Nine Months Ended Jan 23, 2021 | | :--- | :--- | :--- | | Net cash used in operating activities | $(834,139) | $(604,884) | | Net cash provided by investing activities | $946,419 | $615,891 | | Net cash (used in) provided by financing activities | $(90,466) | $60,062 | | Net change in cash and cash equivalents | $21,800 | $78,017 | Notes to Condensed Consolidated Financial Statements The notes provide detailed explanations of the company's accounting policies and financial results, including the acquisition of Miller Vet Holdings, significant gains from investment sales, details on the receivables securitization program, segment performance data, and the settlement of a major legal proceeding. - During the first quarter of fiscal 2022, the company acquired Miller Vet Holdings, LLC, a veterinary distributor, for $19.8 million in cash and assumed liabilities of $6.8 million[34] - The company recognized a pre-tax gain of $13.1 million from the sale of a portion of its investment in Vets Plus in Q3 FY2022; this followed an aggregate pre-tax gain of $87.8 million related to its Vetsource investment in Q1 FY2022[65][66][97] - The company settled a federal securities class action lawsuit for $63.0 million; after insurance contributions of $35.0 million and reimbursement of $8.0 million in fees, the net expense recorded in operating expenses was $28.0 million[80][99] Segment Net Sales (Nine Months Ended, in thousands) | Segment | Jan 29, 2022 | Jan 23, 2021 | | :--- | :--- | :--- | | Dental | $1,879,715 | $1,710,989 | | Animal Health | $2,975,031 | $2,620,677 | | Corporate | $5,887 | $18,607 | Segment Operating Income (Nine Months Ended, in thousands) | Segment | Jan 29, 2022 | Jan 23, 2021 | | :--- | :--- | :--- | | Dental | $118,609 | $172,017 | | Animal Health | $73,360 | $55,605 | | Corporate | $(107,805) | $(54,363) | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the financial results for the third quarter and first nine months of fiscal 2022, highlighting sales growth in both Dental and Animal Health segments, but notes that operating income was significantly impacted by one-time events, including a large legal settlement reserve, inventory donation charges, and substantial gains on investments, while liquidity remains strong. Factors Affecting Our Results The company's results were materially affected by significant pre-tax gains on investments totaling over $100 million, a $63 million pre-tax legal reserve for a class action settlement, and a $49.2 million charge for donating personal protective equipment, with the COVID-19 pandemic's impact becoming less significant compared to the prior year. - Gains on Investments: Recorded an $87.8 million aggregate pre-tax gain related to its Vetsource investment and a $13.1 million pre-tax gain from its Vets Plus investment[97][98] - Legal Reserve: Recorded a $63.0 million pre-tax reserve for a litigation settlement, resulting in a net expense of $36.0 million in Q1 after accounting for probable insurance recoveries, with a further $8.0 million gain in Q2 from carrier reimbursement[99] - Inventory Donation Charges: Recorded a $49.2 million charge within cost of sales in Q1 for the planned donation of personal protective equipment[100] Results of Operations For Q3, consolidated sales grew 2.9% to $1.6 billion, with Animal Health sales up 5.6% and Dental sales nearly flat at +0.3%, while for the nine-month period, sales rose 11.7% to $4.86 billion, but nine-month operating income fell sharply to $84.2 million from $173.3 million, primarily due to the legal reserve and inventory donation charges. - Q3 FY2022 vs Q3 FY2021: - Consolidated net sales increased 2.9%[102] - Dental sales increased 0.3%, with consumable sales declining due to lower infection control product sales, offset by growth in equipment[103] - Animal Health sales increased 5.6%, driven by broad demand[104] - Nine Months FY2022 vs Nine Months FY2021: - Consolidated net sales increased 11.7%[116] - Gross profit margin decreased 130 basis points, primarily due to the $49.2 million Inventory Donation Charges[119] - Operating expenses increased 18.1%, mainly due to the Fiscal 2022 Legal Reserve and higher personnel costs[120] - Nine-month operating income decreased to $84.2 million from $173.3 million, primarily due to the Fiscal 2022 Legal Reserve and Inventory Donation Charges[122] Liquidity and Capital Resources The company's liquidity is primarily managed through operating cash flows, a receivables securitization program, and credit facilities; for the first nine months of FY2022, net cash used in operations was $834.1 million, while investing activities provided $946.4 million, largely from collecting deferred purchase price receivables, and the company retired $100.8 million in long-term debt and paid $75.7 million in dividends, with management expecting existing resources to be sufficient for the remainder of fiscal 2022. - Net cash used in operating activities of $834.1 million was primarily due to the impact of the Receivables Securitization Program and an increase in inventory[129] - Net cash provided by investing activities of $946.4 million was driven by $918.4 million in collections of DPP receivables and $74.3 million from the sale of investments[130] - As of January 29, 2022, the company had $300.0 million outstanding under its term loan and $135.0 million outstanding under its revolving credit facility[134] Item 3. Quantitative and Qualitative Disclosures about Market Risk The company states that there have been no material changes in its exposure to market risk from the information disclosed in its 2021 Annual Report on Form 10-K. - There have been no material changes in the company's market risk exposure since the 2021 Annual Report on Form 10-K filed on June 23, 2021[137] Item 4. Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of January 29, 2022, with no material changes to internal control over financial reporting occurring during the quarter. - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period, January 29, 2022[138] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[139] PART II - OTHER INFORMATION Item 1. Legal Proceedings This section refers to Note 11 of the financial statements for detailed information on legal matters, noting that the company is involved in various legal proceedings in the ordinary course of business and accrues for losses when they are probable and reasonably estimable. - For detailed information on legal proceedings, the report directs readers to Note 11 of the Condensed Consolidated Financial Statements[143] Item 1A. Risk Factors The company reports that there have been no material changes to the risk factors previously disclosed in its Annual Report on Form 10-K for the fiscal year ended April 24, 2021. - There have been no material changes to the risk factors disclosed in the 2021 Annual Report on Form 10-K[144] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company has a $500 million share repurchase program authorized through March 16, 2024, but no shares were repurchased under this plan during the third quarter of fiscal 2022. - No shares were repurchased under the company's $500 million share repurchase program during the third quarter of fiscal 2022[145] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications (Sections 302 and 906 of Sarbanes-Oxley) and financial data formatted in Inline XBRL. - Lists filed exhibits, including CEO/CFO certifications and Inline XBRL data[148]