Patterson Companies Reports Fiscal 2025 Second Quarter Operating Results

• Second quarter reported net sales increased 1.3 percent year-over-year to $1.67 billion, and internal sales increased 0.6 percent.
• Delivered second quarter GAAP earnings of $0.30 per diluted share and adjusted earnings¹ of $0.47 per diluted share; both GAAP and adjusted earnings¹ were negatively impacted by the cybersecurity attack on Change Healthcare compared to the prior year.
• Returned $96.2 million to shareholders in the form of cash dividends and share repurchases through the first six months of fiscal 2025.
• Revises fiscal 2025 GAAP earnings guidance range to $1.83 to $1.93 per diluted share and adjusted earnings¹ guidance range to $2.25 to $2.35 per diluted share.
• Company announces evaluation of strategic alternatives to maximize shareholder value.

Patterson Companies, Inc. (NASDAQ:PDCO) today reported operating results for its fiscal 2025 second quarter ended October 26, 2024.

"Our second quarter results were mixed, given the challenging end market environment," said Don Zurbay, President and CEO of Patterson Companies. "To support sustainable, long-term growth, we took dedicated cost management actions to optimize our operations, made targeted investments in complementary businesses and invested in enhancing our higher margin products and services. As we continue to execute on our strategy, we remain confident in the opportunities within our end markets and our ability to meet the evolving needs of our dental and animal health customers and to drive improved performance."

Second Quarter Fiscal 2025 Results

Consolidated net sales were $1.67 billion (see attached Sales Summary for further details), an increase of 1.3 percent compared to the same period last year. Internal sales, which are adjusted for the effects of currency translation, the net impact of an interest rate swap and contributions from recent acquisitions, increased 0.6 percent over the prior year period.

Reported net income attributable to Patterson Companies, Inc. for the second quarter of fiscal 2025 was $26.8 million, or $0.30 per diluted share, compared to $40.0 million, or $0.42 per diluted share, in the second quarter of fiscal 2024. Adjusted net income¹ attributable to Patterson Companies, Inc., which excludes deal amortization, integration and business restructuring expenses, an inventory pre-payment write-off and a gain on the sale of an investment, totaled $41.8 million for the second quarter of fiscal 2025, or $0.47 per diluted share, compared to $47.3 million, or $0.50 per diluted share, in the second quarter of fiscal 2024. The year-over-year decrease in reported and adjusted net income attributable to Patterson Companies, Inc. in the second quarter of fiscal 2025 is related to lower sales of dental equipment and the continued negative impact of the widely reported cybersecurity attack on vendor Change Healthcare, within the value-added services category of the dental segment.

Patterson Dental

Reported net sales in the Dental segment for the second quarter of fiscal 2025 were $611.7 million. Internal sales decreased 2.3 percent compared to the fiscal 2024 second quarter. Internal sales of consumables increased 0.7 percent year-over-year. The deflationary impact of certain infection control products had a negligible impact on internal sales of dental consumables in the second quarter of fiscal 2025. Compared to the prior year period, internal sales of equipment decreased 7.5 percent. Internal sales of value-added services decreased 2.7 percent compared to the prior year period, primarily due to the negative impact of the cybersecurity attack on Change Healthcare.

Patterson Animal Health

Reported net sales in the Animal Health segment for the second quarter of fiscal 2025 were $1.05 billion. Internal sales increased 1.9 percent compared to the fiscal 2024 second quarter. Compared to the prior year period, internal sales of consumables increased 1.6 percent, equipment increased 1.4 percent and value-added services increased 17.1 percent.

Balance Sheet and Capital Allocation

During the first six months of fiscal 2025, Patterson Companies used $458.7 million of cash from operating activities and collected deferred purchase price receivables of $497.0 million, generating $38.4 million in cash, compared to generating $4.2 million during the first six months of fiscal 2024. Free cash flow¹ (see definition below and attached free cash flow table) during the first six months of fiscal 2025 improved by $41.5 million compared to the first six months of fiscal 2024.

In the second quarter of fiscal 2025, Patterson Companies declared a quarterly cash dividend of $0.26 per share, returning $22.9 million to shareholders. During the first six months of fiscal 2025, Patterson Companies returned $96.2 million to shareholders in the form of cash dividends and share repurchases.

Year-to-Date Results

Consolidated reported net sales for the first six months of fiscal 2024 totaled $3.22 billion, a 0.4 percent year-over-year decrease. Internal sales for the first six months of fiscal 2025, which are adjusted for the effects of currency translation and the net impact of an interest rate swap, decreased 1.1 percent year-over-year. Through the first six months of fiscal 2025, Dental segment internal sales decreased 2.6 percent, including a 0.7 percent decrease in consumables, a 5.4 percent decline in equipment and a 4.6 percent decrease in value-added services. Through the first six months of fiscal 2025, Animal Health segment internal sales decreased 0.4 percent, including 0.7 percent decrease in consumables, a 1.0 percent decline in equipment and a 12.8 percent increase in value-added services.

Reported net income attributable to Patterson Companies, Inc. was $40.5 million, or $0.46 per diluted share, compared to $71.2 million, or $0.74 per diluted share in last year's period. Adjusted net income¹ attributable to Patterson Companies, Inc., which excludes deal amortization, integration and business restructuring expenses, an inventory pre-payment write-off and a gain on the sale of an investment totaled $62.9 million, or $0.71 per diluted share, compared to $85.8 million, or $0.90 per diluted share, in the year-ago period.

Fiscal 2025 Guidance

Patterson Companies today revised its fiscal 2025 earnings guidance, which is provided on both a GAAP and non-GAAP adjusted¹ basis:

• GAAP earnings are expected to be in the range of $1.83 to $1.93 per diluted share.
• Non-GAAP adjusted earnings¹ are expected to be in the range of $2.25 to $2.35 per diluted share.
• Our non-GAAP adjusted earnings¹ guidance excludes the after-tax impact of:
  
  - Deal amortization expenses of approximately $29.9 million ($0.34 per diluted share).
  
  - Integration and business restructuring expenses of $7.6 million ($0.09 per diluted share).
  
  - Inventory pre-payment write-off of $2.8 million ($0.03 per diluted share).
  
  - Investment gain of $2.9 million ($0.03 per diluted share).

Our guidance reflects the strength of our business and competitive positioning as well as completed and previously announced acquisitions. It does not include the impact of unplanned share repurchases, potential future acquisitions or similar transactions, impairments, restructuring and integration expenses not previously publicly disclosed, or amortization expense of acquired intangible assets. Our guidance assumes North American and international end market conditions consistent with current market conditions.

Strategic Review

Today the Company also announced that it is evaluating potential strategic alternatives to maximize shareholder value. Such alternatives may include, but are not limited to, a sale, merger, strategic business combination or other transaction. There can be no assurances that such evaluation will result in a transaction or that any transaction, if pursued, will be successfully completed. Patterson Companies does not intend to disclose further developments unless and until it is determined that further disclosure is appropriate.

¹Non-GAAP Financial Measures

The term "internal sales" used in this release represents net sales adjusted for the effects of currency translation, the net impact of an interest rate swap and contributions from recent acquisitions. Foreign currency impact represents the difference in results that is attributable to fluctuations in currency exchange rates the company uses to convert results for all foreign entities where the functional currency is not the U.S. dollar. The company calculates the impact as the difference between the current period results translated using the current period currency exchange rates and using the comparable prior period's currency exchange rates. The company believes the disclosure of net sales excluding the impact of foreign currency and an interest rate swap provides useful supplementary information to investors in light of fluctuations in these variables that are independent of our period-over-period performance.

The term "free cash flow" used in this release is defined as net cash used in operating activities less capital expenditures plus the collection of deferred purchase price receivables.

The Reconciliation of GAAP to non-GAAP Measures table appearing behind the accompanying financial information is provided to adjust reported GAAP measures, namely net sales, gross profit, operating expenses, operating income, other income (expense), net, income before taxes, income tax expense, net income, net loss attributable to noncontrolling interests, net income attributable to Patterson Companies, Inc., and diluted earnings per share attributable to Patterson Companies, Inc. for the impact of deal amortization, integration and business restructuring expenses, an interest rate swap, an inventory pre-payment write-off, and a gain on the sale of an investment along with any related tax effects of these items.

• Deal amortization represents non-cash intangible amortization expense, primarily related to the acquisition of Animal Health International.

• Integration and business restructuring expenses represent restructuring charges to better align our organization to current market opportunities. Restructuring activities resulted in pre-tax asset impairment charges of $6.9 million to write down assets related to certain software offerings and pre-tax severance charges of $3.3 million.

• Interest rate swap -- Our customer financing net sales include the impact of changes in interest rates on deferred purchase price receivables, as the average interest rate in our contract portfolio may not fluctuate at the same rate as interest rate markets, resulting in an increase or reduction of gain on contract sales.
  
  
  
  We enter into an interest rate swap to hedge a portion of the related interest rate risk. These agreements do not qualify for hedge accounting, and the gains or losses on an interest rate swap are reported in other income and expense in our condensed consolidated statements of operation and other comprehensive income.
  
  
  
  We present a non-GAAP adjustment to reclassify the mark-to-market adjustment on the interest rate swap from other income (expense) to net sales to align the swap impact with the impact on customer financing net sales. We believe adjusted net sales, adjusted gross profit and adjusted operating income, which include the gains and losses on the interest rate swap, provides additional comparability from period to period because they present the impact of interest rate fluctuations, net of the mark-to-market swap adjustment, within adjusted net sales. We note the net impact of interest rate fluctuations has a minimal impact on net income.

• Inventory pre-payment write-off represents the write-off of the remaining balance of a transaction initiated during the COVID-19 pandemic. The inventory prepayment was made in a period of supply chain disruptions and increased demand for PPE and does not represent our normal process for purchasing inventory. The remaining balance of the prepayment was determined to be uncollectible in the second quarter of fiscal 2025.

• Gain on investment relates to the sale of our investment in VetSource.

Management believes that these non-GAAP measures may provide a helpful representation of the company's performance and enable comparison of financial results between periods where certain items may vary independent of business performance. These non-GAAP financial measures are presented solely for informational and comparative purposes and should not be regarded as a replacement for corresponding, similarly captioned, GAAP measures.

Second Quarter Conference Call Webcast and Audio Replay

Patterson Companies' fiscal 2025 second quarter conference call will start at 8:30 a.m. Eastern today. Investors can listen to a live webcast of the conference call at www.pattersoncompanies.com. The conference call will be archived on the Patterson Companies website.

An audio replay of the fiscal 2025 second quarter conference call will be available for one week. To access the audio replay, please pre-register at https://registrations.events/direct/Q4I672812531 to receive a unique access code to listen to the audio playback.

About Patterson Companies Inc.

Patterson Companies Inc. (NASDAQ:PDCO) connects dental and animal health customers in North America and the U.K. to the latest products, technologies, services and innovative business solutions that enable operational and professional success. Our comprehensive portfolio, distribution network and supply chain is equaled only by our dedicated, knowledgeable people who deliver unrivalled expertise and unmatched customer service and support.

Learn more: pattersoncompanies.com

This press release contains, and our officers and representatives may from time to time make, certain "forward-looking statements" within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995, including statements regarding future financial performance, and the objectives and expectations of management. Forward-looking statements often include words such as "believes," "expects," "anticipates," "estimates," "intends," "plans," "seeks" or words of similar meaning, or future or conditional verbs, such as "will," "should," "could" or "may."

Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not place undue reliance on any of these forward-looking statements.

Any number of factors could affect our actual results and cause such results to differ materially from those contemplated by any forward-looking statements, including, but not limited to, the following: our dependence on suppliers to manufacture and supply substantially all of the products we sell; potential disruption of distribution capabilities, including service issues with third-party shippers; our dependence on relationships with sales representatives and service technicians to retain customers and develop business; risks of selling private label products, including the risk of adversely affecting our relationships with suppliers; adverse changes in supplier rebates or other purchasing incentives; the risk of technological and market obsolescence for the products we sell; the risk of failing to innovate and develop new and enhanced software and e-services products; our dependence on positive perceptions of Patterson's reputation; risks associated with illicit human use of pharmaceutical products we distribute; risks inherent in acquiring and disposing of assets or other businesses and risks inherent in integrating acquired businesses; turnover or loss of key personnel or highly skilled employees; risks associated with information systems, software products and cyber-security attacks; risks inherent in our growing use of AI systems to automate processes and analyze data; adverse impacts of wide-spread public health concerns as we experienced with the COVID-19 pandemic and may experience in the future; risks related to climate change; our ability to comply with restrictive covenants and other limits in our credit agreement; the risk that our governing documents and Minnesota law may discourage takeovers and business combinations; the effects of the highly competitive dental and animal health supply markets in which we compete; the effects of consolidation within the dental and animal health supply markets; risks from the formation or expansion of GPOs, provider networks and buying groups that may place us at a competitive disadvantage; exposure to the risks of the animal production business, including changing consumer demand, the cyclical livestock market, weather conditions, the availability of natural resources and other factors outside our control, and the risks of the companion animal business, including the possibility of disease adversely affecting the pet population; exposure to the risks of the health care industry, including changes in demand due to political, economic and regulatory influences and other factors outside our control; increases in over-the-counter sales and e-commerce options; risks of litigation and government inquiries and investigations, including the diversion of management's attention, the cost of defending against such actions, the possibility of damage awards or settlements, fines or penalties, or equitable remedies (including but not limited to the revocation of or non-renewal of licenses) and inherent uncertainty; failure to comply with health care fraud or other laws and regulations; change and uncertainty in the health care industry; failure to comply with existing or future U.S. or foreign laws and regulations including those governing the distribution of pharmaceuticals and controlled substances; failure to comply with evolving data privacy laws and regulations; tax legislation; risks inherent in international operations, including currency fluctuations; and uncertain macro-economic conditions, including inflationary pressures.

The order in which these factors appear should not be construed to indicate their relative importance or priority. We caution that these factors may not be exhaustive, accordingly, any forward-looking statements contained herein should not be relied upon as a prediction of actual results.

You should carefully consider these and other relevant factors, including those risk factors in Part I, Item 1A, ("Risk Factors") in our most recent Form 10-K and information which may be contained in our other filings with the U.S. Securities and Exchange Commission, or SEC, when reviewing any forward-looking statement.

Investors should understand it is impossible to predict or identify all such factors or risks. As such, you should not consider the foregoing list, or the risks identified in our SEC filings, to be a complete discussion of all potential risks or uncertainties.

Any forward-looking statement made by us in this press release is based only on information currently available to us and speaks only as of the date on which it is made. We do not undertake any obligation to release publicly any revisions to any forward-looking statements, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise.

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