Patterson Companies Inc. (PDCO) posted second-quarter fiscal 2014 adjusted earnings per share (EPS) of 47 cents per share, which was up 6.8% from 44 cents in the year-ago quarter but missed the Zacks Consensus Estimate by a penny.
Earnings per share in the quarter ended Oct 26, 2013 excluded costs related to the Medical unit restructuring as well as contribution of one cent per share from the acquisition of NVS, which was closed on Aug 16, 2013.
Revenues for the quarter fell 15.2% to $998.8 million. Revenues were higher than the Zacks Consensus Estimate of $995 million.
Adjusted gross margin fell marginally to 32.2% in the quarter from 32.4% a year ago. However, adjusted operating margin remained flat at 9.0% on a year-over-year basis.
Segment Results
Revenues from the core Patterson Dental rose 3.0% on a constant currency basis to $563.1 million in the second quarter. By category, revenues on a constant currency basis in Consumable dental supplies went up 2.3% to $321.0 million, Dental equipment and software rose 4.8% due to strong performance in technology sales and Other services and products (consisting primarily of technical service, parts and labor, software support services, and artificial teeth) inched up 2.1% in the fiscal 2014 second quarter.
On a positive note, revenues from Patterson Veterinary surged 67.1% to $308.1 million. After excluding the sales contribution from the NVS acquisition, U.S. revenues went up 3.3% to $190.4 million. Excluding the impact of NVS, Consumable veterinary revenues rose 1.8% to $77.7 million, and Veterinary equipment revenues grew strongly by 31.2% to $9.4 million.
However, revenues from Patterson Medical dipped 4.5% to $127.7 million. The decline was attributable to lower sales from the non-core product lines that were divested in the quarter as well as continuing challenges in international business.
Share Repurchase
Year to date, PDCO repurchased about 0.5 million shares of its outstanding common stock, leaving 23.9 million shares for repurchase under the current authorization. However, Patterson Companies did not repurchase any shares in the second quarter.
Financial Position
PDCO exited the second quarter with cash and cash equivalents of $516.1 million, up from $505.2 million as of Apr 27, 2013. Long-term debt remained flat at $725 million as of Oct 26, 2013 compared with the same as of Apr 27, 2013.
In the first half of fiscal 2014, Patterson Companies had cash flow of $93.2 million from operations, down 30.1% from $133.2 million in the year-ago period. Capital expenditures (net) nearly doubled to $17.4 million in the above period from $8.8 million in the same period of fiscal 2013.
Guidance
PDCO has reiterated its EPS guidance to the range of $2.13–$2.24 per share for fiscal 2014, which includes 3–4 cents contribution 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 $2.17.
Our Take
We remain disappointed with Patterson’s fiscal 2014 second quarter results, which missed the Zacks Consensus Estimate for EPS, reflecting a challenging macro environment, as well as continued weakness in Medical segment. However, we praise the company’s unchanged guidance which reflects stability. Further, the company’s restructuring efforts to streamline the business should leverage the bottom line in the long term.
Currently, PDCO carries a Zacks Rank #4 (Sell). While we avoid Patterson, some better-ranked stocks from the medical/dental supplies industry that worth a look include Align Technology (ALGN), McKesson Corp. (MCK) and Merit Medical Systems, Inc. (MMSI). All of them carry a Zacks Rank #1 (Strong Buy).
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