SECURITIES AND EXCHANGE COMMISSION
(Mark One)
|
| |
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended April
25, 201530, 2016
|
| |
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period fromto Commission File No. 0-20572
PATTERSON COMPANIES, INC.
(Exact name of registrant as specified in its charter)
|
| | |
| Minnesota | | 41-0886515 |
(State or other jurisdiction of incorporation or organization)
| | Identification No.)
|
1031 Mendota Heights Road
St. Paul, Minnesota 55120
(Address of principal executive offices including Zip Code)
Registrant’s telephone number, including area code: (651) 686-1600
Securities registered pursuant to Section 12(b) of the Act:
|
| | |
Title of each class | | Name of exchange on which registered |
| Common Stock, par value $.01 | | NASDAQ Global Select Market |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yesx No ¨ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the ActAct. Yes ¨ Nox Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yesx No ¨ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yesx No ¨ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K x¨ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
|
| | | | | | |
| Large accelerated filer | | x | | Accelerated filer | | ¨ |
| | | |
| Non-accelerated filer | | ¨ | | Smaller reporting company | | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x The aggregate market value of voting stock held by non-affiliates of the registrant, computed by reference to the closing sales price as quoted on the NASDAQ Global Select Market on October
25, 2014,31, 2015, was approximately
$4,277,000,000$4,691,000,000 (For purposes of this calculation all of the registrant’s
executive officers
directors and
presidents of operating unitsdirectors are deemed affiliates of the registrant.)
As of June
15, 2015,20, 2016, there were
103,220,95999,098,699 shares of Common Stock of the registrant issued and outstanding.
Documents Incorporated By Reference
Portions of the registrant’s definitive proxy statement to be filed pursuant to Regulation 14A within 120 days after the registrant’s fiscal year-end of April
25, 201530, 2016 are incorporated by reference into Part III.
PART I
Certain information of a non-historical nature contained in Items 1, 2, 3 and 7 of this Form 10-K includes forward-looking statements. Reference is made to “Risk Factors” in Item 1A and “Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Factors that May Affect Future Operating Results”Operations” in Item 7, for a discussion of certain factors that could cause
our Company’s actual operating results to differ materially from those expressed in any forward-looking statements.
Patterson
Companies, Inc. is a value-added
specialty distributor serving
three major markets:North American dental supply;
the U.S. and U.K. veterinary supply; and
The worldwide rehabilitation and assistive products supply market.
Patterson began distributing dental supplies in 1877. The modern history of the business dates to May 1985, when management and certain investors purchased theCanadian dental supply business of a subsidiary of The Beatrice Companies, Inc.and the U.S., Canadian and U.K. animal health supply markets. Patterson became a publicly traded company in October 1992 and is a corporation organized under the laws of the state of Minnesota.
We had historically reported one operating segment, dental supply. In July 2001, the veterinary supply assets of J.A. Webster, Inc. were purchased and became a reportable business segment. Then in September 2003, AbilityOne Products Corp. was acquired, creating a third business segment which serves the rehabilitation supply market.
In June 2004, we changed our corporate name from Patterson Dental Company to Patterson Companies, Inc. (“Patterson” or the “Company”). Patterson retainedoperates through its existing NASDAQ stock symbol – PDCO. The corporate name change was adopted to reflect Patterson’s expanded base of business in the veterinary and rehabilitation supply markets, as well as its traditional base of operations in the dental supply market. Patterson’s operating units include Patterson Dental, Patterson Veterinary and Patterson Medical.
Our three reportable segments, dental supply, veterinary supply and rehabilitation supply, aretwo strategic business units, that offerPatterson Dental and Patterson Animal Health, offering similar products and services to different customer bases. Each business is a market leader with a strong competitive position, serves a fragmented market that offers consolidation opportunities and offers relatively low-cost consumable supplies, making our value-added business proposition highly attractive to customers.
On We believe that we have a strong brand identity as a value-added, full-service distributor with broad product and service offerings, having begun distributing dental supplies in 1877.
Fiscal 2016 was a transformative year for Patterson. In June 16, 2015, we completedmore than doubled the previously announcedsize of our animal health supply business through the acquisition of Animal Health International, Inc., for $1.1 billion in cash. This acquisition added a leading production animal health distribution companysupply business to our pre-existing companion animal supply business, resulting in the United States,renaming of our veterinary supply segment to our animal health supply segment. In August 2015, we completed the disposition of our rehabilitative and assistive products supply business, Patterson Medical, for approximately $1.1 billion$717 million in cash. Animal Health International generated salescash; the results of this business are now presented as discontinued operations. See Notes 4 and earnings before interest, income taxes, depreciation and amortization of $1.5 billion and $68 million, respectively, during the 12 months ended March 2015. This acquisition will more than double the size of Patterson’s veterinary business. The combined unit will offer a range of products and services to customers in the U.S., Canada and the U.K. At the time of the signing of the acquisition agreement with Animal Health International, we also announced the potential sale of Patterson Medical. See Note 195 to the Consolidated Financial Statements for further information about these transactions.
The following table sets forth consolidated net sales (in millions) by segment. Prior period segment results have been restated to conform to the
revised current period presentation in which we present three reportable segments: Dental, Animal Health
International acquisition.Dental Supply
Overview
As Patterson’s largest business, and Corporate.
|
| | | | | | | | | | | |
| | Fiscal Year Ended |
| | April 30, 2016 | | April 25, 2015 | | April 26, 2014 |
| Dental | $ | 2,476 |
| | $ | 2,415 |
| | $ | 2,348 |
|
| Animal Health | 2,862 |
| | 1,457 |
| | 1,203 |
|
| Corporate | 49 |
| | 39 |
| | 34 |
|
| Consolidated net sales | $ | 5,387 |
| | $ | 3,911 |
| | $ | 3,585 |
|
Our strategically located fulfillment centers enable us to better serve our customers and increase our operating efficiency. This infrastructure, together with broad product and service offerings at competitive prices, and a strong commitment to customer service, enables us to be a single source of supply for our customers’ needs. Our infrastructure also allows us to provide convenient ordering and rapid, accurate and complete order fulfillment.
Patterson Dentalbecame publicly traded in October 1992 and is onea corporation organized under the laws of the two largest distributorsstate of dental productsMinnesota. We are headquartered in North America.St. Paul, Minnesota. Our dental business has operations inprincipal executive offices are located at 1031 Mendota Heights Road, St. Paul, Minnesota, and our telephone number is (651) 686-1600. Unless the United Statescontext specifically requires otherwise, the terms the “Company,” “Patterson,” “we,” “us” and Canada.“our” mean Patterson Dental,Companies, Inc., a full-service,Minnesota corporation, and its consolidated subsidiaries.
The Specialty Distribution Markets We Serve
We provide manufacturers with cost effective logistics and high-caliber sales professionals to access a geographically diverse customer base, which is critical to the supply chain for both of the markets we serve. We provide our customers with a vast array of value-added supplier to dentists, dental laboratories, institutions,services, a dedicated and other healthcare professionals, provides consumable products (including x-ray film, restorative materials, hand instrumentshighly skilled sales team, and sterilization products); basic and advanced technology dental equipment; practice management and clinical software; patient education systems; and office forms and stationery. Patterson Dental offers our customers a broad selection of dental products includingthrough a single
channel, thereby helping them efficiently manage their ordering process. Due in part to the inability of office-based customers to store and manage large quantities of supplies in their offices, the distribution of supplies and small equipment to office-based customers has been characterized by frequent, small quantity orders, and a need for rapid, reliable and substantially complete order fulfillment. Supplies and small equipment are generally purchased from more than 105,500 stock keeping units (“SKUs”) of which approximately 5,700 are private-label products sold underone distributor, with one generally serving as the Patterson brand. Patterson primary supplier.
We believe that consolidation within the industry will continue as distributors, particularly those with limited financial, operating and marketing resources, seek to combine with larger companies that can provide growth opportunities. This consolidation also may continue to result in distributors seeking to acquire companies that can enhance their current product and service offerings or provide opportunities to serve a broader customer base.
Dental
also offers customers a full range of related services including dental equipment installation, maintenance and repair, dental office design and equipment financing. We market our dental products and services through more than 1,300 direct sales representatives, of which approximately 250 are equipment specialists.Patterson Dental has over 130 years of experience providing quality products and services to dental professionals. Net sales of this segment have increased from $165.8 million in fiscal 1986 to approximately $2.4 billion in fiscal 2015 and profitability has increased from an operating loss in fiscal 1986 to operating income of $249.6 million in fiscal 2015.
Supply Market
We estimate the dental supply market we serve to be approximately
$7$7.5 billion annually and
that our share of this market,
when direct distribution by manufacturers is
included, to be approximately 33%.
The underlying structure of the dental supplyThis market consists of a sizeable geographically dispersed number of fragmented dental
practices. Customers range in size from sole practitioners to large group practices
and is attractive for our Company’s role as a value-added, full-service distributor.or service organizations. According to the American Dental Association
there are over 191,000 dentists practicing in the United States. According toand the Canadian Dental Association, there are
approximately 21,000 licensedover 195,000 dentists
in Canada. The average general practitioner generated approximately $646,000 in annual revenue in 2013, while the average specialty practitioner produced about $857,000. We believe that most dentists use between 5% and 7% of their annual revenue to purchase consumable supplies usedpracticing in the
daily operations of their practice. This translates into between $32,000U.S. and
$45,000 of supplies purchased by the average practice each year.19,000 dentists practicing in Canada, respectively. We believe the average dental practitioner purchases about 40% of their supplies from their top supplier.
Total expenditures for dental services in the
United StatesU.S. increased from
$31 billion in 1990 to $105 billion in
2010.2010 to $114 billion in 2014. We believe
that the
dental supply market continues to experience growth due to U.S. population growth, the aging population, advances in dentistry, demand for
preventive dentistry and specialty services, the need for increased office productivity, demand for infection control products, and coverage by dental
services, equipment and supplies will continueplans. Demographic trends indicate that our markets are growing, as an aging U.S. population is increasingly using dental services. In the dental industry, there is predicted to be
influenced bya rise in oral health care expenditures as the
following factors: | • | | Demographics. The U.S. population grew from 235 million in 1980 to 320 million in 2014, and is expected to reach 335 million by 2020. The median age of the population is also increasing, and we believe that older dental patients spend more on a per capita basis for dental services.
|
| • | | Dental products and techniques. Technological developments in dental products continue to contribute to advances in dental techniques and procedures, including cosmetic dentistry and dental implants.
|
| • | | Demand for certain dental procedures. Demand is growing for preventive dentistry and specialty services such as periodontic (the treatment of gums), endodontic (root canals), orthodontic (braces), and other dental procedures that enable patients to keep their natural teeth longer and improve their appearance.
|
| • | | Increased dental office productivity. The number of dentists per capita in the U.S. is forecasted to decline over the next two decades. As a result, the number of patients per dental practice is expected to rise. For this reason, dentists are showing an increased willingness to invest in dental equipment and office infrastructure that can strengthen the productivity of their practices.
|
| • | | Demand for infection control products. Greater public awareness as well as regulations and guidelines instituted by OSHA, the American Dental Association and state regulatory authorities have resulted in
|
| increased use of infection control (asepsis) products such as protective clothing, gloves, facemasks, and sterilization equipment to prevent the spread of communicable diseases such as AIDS, hepatitis and herpes.
|
| • | | Coverage by dental plans. An increasing number of dental services are being funded by private dental insurance. In 2009, over 55% of the U.S. population had some form of dental coverage.
|
Strategy
Our objective45 and older segment of the population increases. There is increasing demand for new technologies that allow dentists to remain a leading national distributor of supplies, equipmentincrease productivity, and related servicesthis is being driven in the market while continuing to improve our profitability and enhance our value to customers. To achieve this objective,U.S. by lower insurance reimbursement rates. At the same time, there is an expected increase in dental insurance coverage.
We support dental professionals through the many stock keeping units (“SKUs”) that we
have adopted a strategy of emphasizing ouroffer, as well as through important value-added
full-service capabilities, using technology to enhance customer service, continuing to improve our own operating efficiencies, and growing through internal expansion and acquisitions.Emphasizing Value-Added, Full-Service Capabilities. Patterson Dental is positioned to meet virtually all of the needs of dental practitioners by providing a full range of consumable supplies, equipment and software, and value-added services. We believe that our customers value full service and responsive delivery of quality supplies and equipment. Customers also increasingly expect suppliers to be knowledgeable about products and services, and generally, a superior sales representative can create a special relationship with the practitioner by providing an informational link to the overall industry. Our knowledgeable sales representatives assist customers in the selection and purchase of supplies and equipment. In addition, our high quality sales force allows us to offer broader product lines. Because most dental practices lack a significant degree of back office support, the convenience of our full-service capabilities enables dentists to spend more time with patients and, thus, generate additional revenues.
We meet our customers’ requirements by delivering frequent, small quantity orders rapidly and reliably from our strategically located distribution centers. Equipment specialists, service technicians and technology advisors also support our value-added strategy. Equipment specialists offer consultation on office design, equipment requirements and financing. Our experienced service technicians perform equipment installation, maintenance and repair services, including services on products purchased from others. Technology advisors from our sales branches provide guidance on integrating technology solutions, including practice management software, electronic claims processing, financial services and clinical software, digital radiography, custom hardware and networking into the dental practice.
Using Technology to Enhance Customer Service. As part of Patterson Dental’s commitment to providing superior customer service, we offer our customers easy order placement. We have offered electronic ordering capability to our dental supply segment since 1987, when we first introduced Remote Order Entry (REMOSM). Over the years, Patterson Dental has continued to introduce new order entry systemscontinuing education, all designed to meethelp maximize a practitioner’s efficiency.
Animal Health Supply Market
We estimate the
varying needsanimal health supply market we serve to be approximately $14 billion annually and our share of
our customers. We believe that computerized order entry systems help establish relationships with new customers and increase loyalty among existing customersthis market, when direct distribution by
permitting customersmanufacturers is included, to
place orders from their offices directly to Patterson Dental 24 hours a day, seven days a week.Today we offer three convenient ordering systemsbe approximately 23%. Similar to the dental supply segment, eMAGINE®, PDXpress®market, the animal health supply market is fragmented andwww.pattersondental.com, diverse. The animal health market is a mix of the production animal market, which we re-launched in fiscal 2012 to provide our customers with better search capabilities, easier access to their order history, customized purchase reports,primarily consists of beef and fingertip access to Patterson Advantage, the segment’s customer loyalty program. Customers, as well as our sales force, use these systems, although the predominant platform today is www.pattersondental.com with minimal usage of PDXpress. Over the years, the number of orders transmitted electronically has grown steadily to approximately 78% of our consumable dental product volume or $1.0 billion in fiscal year 2015. In addition to enhancing customer service by offering electronic order entry systems to our customers, these systems enable our sales representatives to spend more time with existing customersdairy cattle, poultry and to call on additional customers.
The goal of Patterson Dental’s internet strategy is to distribute information and service related products over the internet to enhance customers’ practices and to increase sales force productivity. Our internet environment
includes order entry, customer support for their digital systems and our proprietary products, customer-loyalty program reports and services, access to “Patterson Today” articles and manufacturers’ product information. Additionally, Patterson Dental utilizes a tool, InfoSource®, to provide real time customer and sales information to our sales force, managers and vendors via the internet.
Our proprietary practice management and clinical software, EAGLESOFT®, is developed and maintained by our Patterson Technology Center (PTC). We believe the PTC differentiates Patterson Dental from our competition by positioning Patterson Dental as the only company providing a single-source solution for the high growth area of digital components. EAGLESOFT® has a current installation base of approximately 30,000 users. Among our many specialized capabilities, the PTC, in conjunction with specialists from the sales branch, provides system configuration, as well as the seamless integration of all digital operatory components with clinical software, including our EAGLESOFT® products. This integration creates an electronic patient database that combines the patient’s front office record, clinical x-ray, intra-oral camera images, CEREC®swine, and other digital equipment records. Patterson Dental offers EAGLESOFT® practice management software at no cost tofood-producing animals, and the companion animal market, which primarily consists of dogs, cats and horses. Our production animal supply customers with a subscription to support services. The local sales branch, in conjunction with the PTC, networks the digital record system throughout the entire office, offers all required custom computer hardware for the system,include large animal veterinarians, beef producers (cow/calf, stocker and provides ongoing customer training. The PTC has a contact center that troubleshoots customer issuesfeedlots), dairy producers, poultry producers, swine producers and arranges for local service when needed.
Software and digital radiography customers also have accessretail customers. According to the PTC’s support capabilities. The PTC provides support for Patterson’s proprietary products as well as select branded product, such as Sirona and Schick. In addition to troubleshooting problems through the PTC’s support center, customers can access various service capabilities offered by the PTC including electronic claims and statement processing and system back-up capabilities.
Continuing to Improve Operating Efficiencies. Patterson Dental continues to implement programs designed to improve our operating efficiencies and allow for continued sales growth over time. These programs include a wide variety of initiatives from our continuing investment in management information systems to consolidation of distribution centers and sales branches. More recent initiatives include upgrading our order entry and order management systems.
Patterson Dental has improved operating efficiencies by converting our communications architecture to faster, higher capacity data lines that combine voice and data transmissions. We have developed a new field management tool for our technical service operations, improving our ability to coordinate the actions of service technicians and enhancing customer service while reducing the overall cost of operations.
An integral part of our shared services concept is the consolidation and leveraging of distribution centers between Patterson’s segments. As of April 2015, eight distribution centers are shared between two or all three of our operating units. In addition, we have established shared sales branch offices in several locations between multiple segments. Because of these and other efforts, we expect to continue to improve our operating expense leverage and efficiencies going forward.
Growing Through Internal Expansion and Acquisitions. We intend to continue to grow by hiring established sales representatives, hiring and training skilled sales professionals as territory sales representatives, and acquiring other distributors in order to enter new, or more deeply penetrate existing, geographic markets and expand our customer base. We believe that Patterson Dental is well positioned to take advantage of expected continued consolidation in the dental distribution market. Over the past 25 years, Patterson has made a number of acquisitions, including the following:
Dental Distribution Acquisitions
Since 1987, Patterson has acquired over 30 dental products distributors in the United States and Canada. These acquisitions have included the third largest dental dealer in the United States and the
| second largest dental dealer in Canada, as well as regional and local dental dealers throughout North America, including Holt Dental Supply in fiscal 2015. As a result of these acquisitions, along with internal expansion, we are now one of the two largest full service dental products distributors in both the United States and Canada.
|
Printed Office Products Acquisitions
In 1996, we acquired the Colwell Systems division of Deluxe Corporation. Colwell Systems, now known as Patterson Office Supplies, produces and sells a variety of printed office products used in medical, dental and veterinary offices, as well as other clinical based settings.
Software Acquisitions
| • | | In 1997, Patterson Dental acquired EagleSoft, Inc., a developer and marketer of Windows®-based practice management and clinical software for dental offices. EagleSoft’s operations evolved to become the Patterson Technology Center, which is located in Effingham, Illinois. In 2001, Patterson purchased Modern Practice Technologies, a company that provided custom computing solutions to the dental industry. This acquisition helped us to position ourselves to provide all of the custom hardware and networking required for interfacing the entire dental office.
|
In 2004, Patterson Dental acquired CAESY Education Systems, Inc., the leading provider of electronic patient education services to dental practices in North America. Headquartered in Vancouver, Washington, CAESY provides dental practices with a range of communications media that educate patients about professional dental care, procedures and treatment alternatives with the goal of facilitating patient decisions about dental services and increasing the productivity of the dental professional. Educational materials are communicated through CD/DVD media, software-as-a-service, computer programs and the dentist’s web site. These materials can be used within the dental waiting room, at chair side and in the patient’s home.
In 2008, Patterson Dental acquired Dolphin Imaging Systems, LLC and Dolphin Practice Management, LLC, the leading providers of 3D imaging and practice management software for specialized dental practitioners, including orthodontists, oral maxillofacial surgeons and dental radiologists. Dolphin’s imaging software maximizes the benefit of cone beam and other digital photography and radiography systems. We believeAmerican Veterinary Medical Association, there are no major competitors for Dolphin’s full range of products.
Products and Services
The following table sets forth the percentage of total sales by the principal categories of products and services offered to our dental segment customers:
| | | | | | | | | | | | |
| | | Fiscal Year Ended | |
| | | April 25,
2015 | | | April 26,
2014 | | | April 27,
2013 | |
Consumable and printed products | | | 55 | % | | | 54 | % | | | 53 | % |
Equipment and software | | | 34 | | | | 35 | | | | 36 | |
Other (1) | | | 11 | | | | 11 | | | | 11 | |
| | | | | | | | | | | | |
| | | 100 | % | | | 100 | % | | | 100 | % |
| | | | | | | | | | | | |
(1) | Consists of other value-added products and services including technical service and software maintenance. |
Consumable and Printed Products
Dental Supplies. We offer a broad product line of consumable dental supplies such as x-ray film and solutions; impression materials; restorative materials (composites and alloys); high and low-speed hand pieces;
hand instruments; sterilization products; anesthetics; infection control products such as protective clothing, gloves and facemasks; paper, cotton and other disposable products; toothbrushes and a full line of dental accessories including hand instruments, burs, and diamonds. In addition to representing a wide array of branded products from numerous manufacturers, we also market our ownmore than 66,000 veterinarians in private label line of dental supplies including anesthetics, instruments, preventive and restorative products, and cotton and paper products. Our private label line complements the branded products for customers seeking a lower cost alternative on products that have become a commodity in the market. Compared to most name brand supplies, the private label line provides lower prices for our customers and higher gross margins for Patterson.
Printed Office Products. Patterson Dental, through Patterson Office Supplies, provides a variety of printed office products, office filing supplies, and practice management systems to office-based healthcare providers including dental, veterinary and medical offices. Products include custom printed products, insurance and billing forms, stationery, envelopes, business cards, labels, file folders, appointment books and other stock office supply products.
These office products are sold through our sales force as well as direct mail catalogs distributed to over 100,000 customers several times per year. A staff of telemarketing personnel located in Champaign, Illinois supports both channels, receiving orders by telephone, through the mail or electronically from the dental, veterinary and medical distribution order processing system.
Equipment and Software
Dental Equipment. Patterson Dental is the largest supplier of dental equipment in the U.S. and Canada. Furthermore, there are approximately 20,000 veterinarians in the U.K. practicing in veterinary outlets; however, we believe there has been a shift in the U.K. market toward consolidation of veterinary practices. National Veterinary Services Limited, our veterinary products distributor in the U.K., has the highest percentage of buying groups and corporations as customers compared to its competitors. The average purchase of consumables in the animal health market is noticeably higher than that of the dental practitioner due predominantly to pharmaceutical products.
The animal health market, impacted by growing companion pet ownership and care, as well as increased focus on safety and efficiency in livestock production, provides growth opportunities for us. We offersupport our animal health customers through the distribution of biologicals, pharmaceuticals, parasiticides, supplies and equipment and by actively engaging in the development, sale and distribution of inventory, accounting and health management systems. Within the companion animal market, we anticipate increasing demand for veterinary services due to the following factors: the increasing number of households with companion animals, increased expenditures on animal health and preventative care, an aging pet population, advancements in animal health products and diagnostic testing, and extensive marketing programs sponsored by companion animal nutrition and pharmaceutical companies.
Product sales in the production animal market are impacted by volatility in commodity prices such as milk, grains, livestock and poultry. Changes in weather patterns also influence how long cattle will graze and consequently the number of days
an animal is on feed during a
wide rangefinishing phase. In addition, changes in the general economy can shift the number of
dental equipmentanimals treated, the timing of when animals are treated, to what extent they are treated and with which products
including radiography equipment, dental chairs, dental hand piece control units, diagnostic equipment, sterilizers, dental lights and compressors. We also distribute newer technology equipment that provides our customers with toolsthey are treated. Historically, sales in this market have been largely driven by spending on animal health products to improve productivity,
weight gain and
patient satisfaction. Examples of such innovative and higher productivity products include the CEREC® family of products, a chair-side restoration system; digital imaging products (including intra-oral, panoramic and 3-D or cone beam x-rays); and inter-oral cameras.Software. Patterson Dental develops and markets our own proprietary lines (EagleSoft® and Dolphin) of practice management and clinical software for dental professionals, including software for scheduling, billing, charting and capture/storage/retrieval of digital images. Patterson Dental also sells software products developed by third parties, including SIDEXIS® by Sirona and Dimax2 by Planmeca. These value-added products are designed to help achieve office productivity improvements, which translate into higher profitability for the customer.
Hardware. We offer our dental customers custom hardware and networking solutions required for integrating the entire dental office, which marks another step in our overall strategy of providing customers with the convenience and cost-effectiveness of a virtually complete range of products and value-added services.
Patient Education Services. The CAESY® education systems line of products, now available as software-as-a-service in addition to DVD format, offers patient education products and services. These communication tools are designed to educate patients in an efficient, cost-effective manner.
Other
Software Services. Patterson offers a variety of services to complement our software products, such as service agreements, software training, back-up services, electronic claims processing and billing statement processing. These services provide value to customers by allowing them to keep their software products current or receive payments more rapidly while obtaining greater productivity.
Equipment Installation, Repair and Maintenance. To keep their practices running efficiently, dentists require reliable performance from their equipment. All major equipment sold by Patterson includes installation and our 90-day labor warranty at no additional charge. Patterson also provides complete repair and maintenance services for all dental equipment, whether or not purchased from Patterson, including our 24-hour hand piece repair service. In addition to service technicians, who provide installation and repair services on basic dental equipment, we have also invested in personnel who specialize in installing and troubleshooting issues with technology solutions such as practice management software, digital imaging products, CAD/CAM, hardware and networking. The goal of this group, which is comprised of both local service technicians and the staff at the PTC, is to assist customers in integrating newer technology into their dental practices. The PTC helps our customers minimize costly downtime by offering a single point of contact for post-sale technology related issues.
Dental Office Design. Patterson provides dental office layout and design services using a computer-aided design (CAD) program. Equipment specialists can create original or revise existing dental office designs in a fraction of the time required to produce conventional drawings. Customers purchasing major equipment items receive dental office design services at no additional charge.
Equipment Financing. Patterson Dental provides a variety of options to fulfill our customers’ financing needs. For qualified purchasers of equipment, we will arrange customer financing through Patterson or a third party. For non-equipment related needs, such as for working capital or real estate, customers are also referred to a third party. These alternatives allow us to offer our customers convenience while still meeting their diverse financing needs. In fiscal 2015, we originated approximately $379.6 million of equipment finance contracts in the United States. Patterson Dental, or our third party vendor, financed approximately 47% of the equipment purchased by our customers during fiscal 2015.
Since 1998, Patterson Dental has maintained one or more finance referral agreements with outside finance companies to provide a more extensive selection of finance opportunities to our customers. This might include financing for practice transition transactions, working capital, leasing, real estate and long-term capital. Wells Fargo Practice Finance, a division of Wells Fargo Bank N.A., provides this service currently. Patterson receives referral fees under this agreement, and Wells Fargo extends credit and services the accounts.
To fund the financing that is originated by us, Patterson has created a special purpose entity (“SPE”), PDC Funding Company, LLC, a wholly-owned and fully consolidated subsidiary, and entered into a Receivables Purchase Agreement in order to participate in a commercial paper conduit. We transfer finance contracts we originate to the SPE. In turn, the SPE sells the contracts to the commercial paper conduit. As of April 25, 2015, the maximum outstanding capacity of this arrangement at any one time is $500 million.
A second SPE, PDC Funding Company II, LLC, sells contracts through a Contract Purchase Agreement to a bank. This agreement operates similarly to the Receivables Purchase Agreement described above, except that the capacity is $100 million.
The SPEs do not issue debt. There is no recourse to Patterson for contracts purchased by either the commercial paper conduit or the bank, but there is a deferred purchase price equal to approximately 13% of the principal of these contracts. Patterson services the customer contracts under both of these arrangements in exchange for a fee that approximates our cost for providing the service.
Sales and Marketing
During fiscal 2015, Patterson Dental sold products or services to approximately 120,000 customers in the U.S. and Canada who made one or more purchases during the year. Patterson Dental’s customers include dentists, laboratories, institutions and other healthcare professionals. No single customer accounted for more than 3% of sales during fiscal 2015, and Patterson Dental is not dependent on any single customer or geographic group of customers. Our sales and marketing efforts are designed to establish and improve customer relationships through personal interaction with our sales representatives and frequent direct marketing contact, which underscores our value-added approach.
Patterson Dental has over 80 local offices throughout the U.S. and Canada so that we can provide a presence in the market and decision making near the customer. These offices, or sales branches, are staffed with a complete complement of Patterson Dental capabilities, including sales, customer service and technical service personnel,disease prevention, as well as a local manager who has broad decision making authority with regard to customer related transactions and issues.
A primary component of Patterson Dental’s value-added approachgrowing focus on food safety.
Competition
Our industry is
our sales force. Due to the fragmented nature of the dental supply market, we believe that a large sales force is necessary to reach potential customers and to provide full service. Sales representatives provide an informational link to the overall industry; assist practitioners in selecting and purchasing products and help customers efficiently manage their supply inventories. Each sales representative works within an assigned sales territory under the supervision of a location (branch) manager. Sales representatives are all Patterson employees and are generally compensated on a commission basis, with some, less experienced, representatives receiving a base salary and commission.To assist our sales representatives, Patterson Dental publishes a variety of catalogs and fliers containing product and service information. Dental customers receive a full-line product catalog containing approximately 37,000 inventoried items. The catalog includes pictures of products, detailed descriptions and specifications of products and is used by practitioners as a reference source. Selected consumable supplies, new products, specially priced items and high demand items such as infection control products, are promoted through merchandise fliers printed and distributed bi-monthly. In addition, dental equipment sold by Patterson is featured in our tri-yearly publication,Patterson Today, which also includes articles on dental office design, trends in dental practice, products and services offered by Patterson Dental and information on equipment maintenance.
To enhance the total value we bring to our customers, Patterson Dental offers a value-added benefit program for our preferred customers. The PATTERSON ADVANTAGESM program enables members to earn “Advantage Dollars” which can be applied toward future purchases of equipment and technology products. Patterson Advantage also entitles our best customers to priority technical services, automated supply management summary reports, educational materials and a variety of exclusive discount offers.
Distribution
Patterson Dental believes that responsive delivery of quality supplies and equipment is key to customer satisfaction. We ship dental consumable supplies from eight strategically located distribution centers in the U.S. and two in Canada. Orders for consumable dental supplies can be placed by telephone or electronically 24 hours a day, seven days a week. Printed office products are shipped from our manufacturing and distribution facility in central Illinois.
All orders are routed through our centralized computer ordering, shipping and inventory management systems, which are linked to each of our strategically located distribution centers. If an item is not available in the distribution center nearest to the customer, the computer system automatically directs fulfillment of the item from another center. Rapid and accurate order fulfillment is another principal component of our value-added approach. We estimate that 98% of Patterson Dental’s consumable goods orders are shipped to the customer on time, which is generally within 24 hours.
In order to assure the availability of Patterson Dental’s broad product lines for prompt delivery to customers, we must maintain sufficient inventories at our distribution centers. Purchasing of consumables and standard equipment is centralized, and our purchasing department uses a real-time perpetual inventory system to manage inventory levels. Our inventory consists mostly of consumable supply items. By utilizing computerized inventory management and ordering systems, we are able to accurately predict inventory turns in order to minimize inventory levels for each item.
Patterson Dental’s more than 80 dental sales offices are generally configured with display areas where the latest dental equipment can be demonstrated. Dental equipment is generally custom ordered and is staged at our sales branches before delivery to dental offices for installation.
Sources of Supply
Effective purchasing is a key strategy Patterson Dental has adopted in order to achieve our objective of continuing to improve profitability. Utilizing electronic data interchange allows us to improve efficiencies and reduce administrative costs.
Patterson Dental obtains products from more than 800 vendors. In June 2012 we entered into an exclusive distribution agreement with Sirona Dental Systems, Inc., the manufacturer of the CEREC® dental restorative systems and Schick® digital x-rays, in addition to sophisticated panoramic and cone beam radiography products. We served as the only national dealer for A-dec equipment, including chairs, units and cabinetry, for substantially all of fiscal 2015. A-dec is the largest manufacturer of dental equipment in the U.S.
While Patterson Dental makes purchases from many suppliers, and there is generally more than one source of supply for most of the categories of products we sell, the concentration of business with key suppliers is considerable. Our top ten supply vendors accounted for approximately 61% and 60% of the cost of dental products sold in fiscal 2015 and fiscal 2014. Of these ten, the top two vendors accounted for 18% and 8% for fiscal 2015 and 17% and 8% for fiscal 2014 cost of sales, respectively.
Competition
The highly competitive U.S. dental products distribution industrycompetitive. It consists principally of national, regional and local full-service distributors, mail-order distributors and, mail-order companies. The dental supply market is extremely fragmented.increasingly, Internet-based businesses. Most of the products we sell are available to customers from a number of suppliers. In addition, our competitors could obtain exclusive rights from manufacturers to Patterson Dental and one other national, full-service firm, Henry Schein Dental, a unit of Henry Schein, Inc., there are at least 15 full-service distributors that operate on a regional level, and hundreds of small local distributors. Also, somemarket particular products. Some manufacturers also sell directly to end users.
end-users, thereby eliminating or reducing our role and that of other distributors.
We
approach our markets by emphasizingcompete with other distributors, as well as several manufacturers, of dental and
delivering aanimal health products, primarily on the basis of price, breadth of product line, customer service and value-added
model to the practitioner.products and services. To differentiate ourselves from our competition we deploy a strategy of premium customer service with multiple value-added components, a highly qualified and motivated sales force, highly-trained and experienced service technicians, an extensive breadth and mix of products and services, technology solutions allowing customers to easily access our inventory, accurate and timely delivery of product, strategic location of sales offices and
distributionfulfillment centers, and competitive pricing.
Patterson Dental also experiences competition in Canada in
In the U.S. and Canadian dental supply market. The principal competitor is a national, full-service dental distributor,market, we compete against Henry Schein, Inc., Benco Dental Supply Company, at least 15 full-service distributors that operate on a unitregional level, and hundreds of small local distributors. Also, as noted above, some manufacturers sell directly to end users. With regard to our dental practice management software, we compete against numerous companies, including Carestream Health, Inc. and Henry Schein, Inc.
In the U.S. and Canadian animal health supply market, our primary competitors are AmerisourceBergen and Henry Schein, Inc. We believealso compete against a number of regional and local animal health distributors, as well as a number of manufacturers, including pharmaceutical companies that sell directly to production animal operators, animal health product retailers and veterinarians. To a lesser extent, we also compete with mail order distributors and buying groups. We face significant competition in the animal health supply market in the U.K., where we compete on the basis of price and customer service with several large competitors, including Henry Schein, Inc. and AmerisourceBergen. We also compete directly with pharmaceutical companies who sell certain products or services directly to the customer. In the animal health practice management market, our primary competitors are IDEXX Laboratories, Inc. and Henry Schein, Inc.
Successful distributors are increasingly providing value-added services in Canada on essentiallyaddition to the same basis asproducts they have traditionally provided. We believe that to remain competitive we must continue to add value to the distribution channel, while removing unnecessary costs associated with product movement. Significant price reductions by our competitors could result in a similar reduction in our prices. Any of these competitive pressures may materially adversely affect our operating results.
Competitive Strengths
We have more than 130 years of experience in distributing products resulting in strong awareness of the Patterson brand. Although further information regarding these competitive strengths is set forth below in the
United States.discussion of our two strategic business units, our competitive strengths include:
Veterinary SupplyBroad product and service offerings at competitive pricesOverview
Patterson Veterinary. We offer over 190,000 SKUs to our customers, including many proprietary branded products. We believe that our proprietary branded products and our competitive pricing strategy have generated a loyal customer base that is a leading distributor of veterinary supplies primarilyconfident in our brands. Of the SKUs offered, approximately 90,000 are offered to companion-pet (dogs, catsour dental customers and other common household pets), equine and largeapproximately 100,000 are offered to our animal veterinarians and veterinary clinics, public and private institutions, and shelters across the United States and in the United Kingdom (U.K.) with the purchase of National Veterinary Services Limited (NVS) in fiscal 2014. Patterson Veterinary, including NVS, has developed a strong brand identity as a value-added, full-service distributor with a comprehensive offering of pharmaceuticals, vaccines, parasiticides, diagnostics, prescription and non-prescription diets, nutritionals, consumable supplies,health customers. Our product offerings include consumables, equipment and software. Patterson Veterinary’s product offering, totaling more than 56,000 items, is soldOur service offerings include software and design services, repair and maintenance, and equipment financing.
Focus on customer relationships and exceptional customer service. Our sales and marketing efforts are designed to establish and solidify customer relationships through personal visits by approximately 230 field sales representatives.Netrepresentatives, interaction via phone with sales representatives, web-based activities including e-commerce and frequent direct marketing, emphasizing our broad product lines, including exclusive distribution agreements, competitive prices and ease of order placement. We focus on providing our customers with exceptional order fulfillment and a streamlined ordering process.
Cost-effective purchasing and efficient distribution. We believe that cost-effective purchasing is a key element to maintaining and enhancing our position as a competitive-pricing provider of dental and animal health products. We distribute our products from strategically located fulfillment centers. We strive to maintain optimal inventory levels in order to satisfy customer demand for prompt and complete order fulfillment.
Business Strategy
Our objective is to continue to expand as a leading value-added distributor of dental and animal health products and services. To accomplish this, we will apply our competitive strengths in executing the following strategies:
Emphasizing our value-added, full-service capabilities. We are positioned to meet virtually all of the needs of dental practitioners, veterinarians, production animal operators and animal health product retailers by providing a broad range of consumable supplies, technology, equipment and software and value-added services. We believe our knowledgeable sales representatives can create special relationships with customers by providing an informational link to the overall industry. Our value-added strategy is further supported by our equipment specialists who offer consultation on design, equipment requirements and financing, our service technicians who perform equipment installation, maintenance and repair services, our business development professionals who provide business tools and educational programs to our customers, and our technology advisors who provide guidance on integrating technology solutions.
Using technology to enhance customer service. As part of our commitment to providing superior customer service, we offer our customers easy order placement. Although we offer computerized order entry systems that we believe help establish relationships with new customers and increase loyalty among existing customers, predominant platforms for ordering today include www.pattersondental.com, www.pattersonvet.com and www.animalhealthinternational.com. The use of these methods of ordering enables our sales representatives to spend more time with existing and prospective customers. Our Internet environment includes order entry, customer support for digital and our proprietary products, customer-loyalty program reports and services, and access to articles and manufacturers’ product information. We also provide real-time customer and sales information to our sales force, managers and vendors via the Internet. In addition, we believe that the Patterson Veterinary in fiscal 2015 were $1.5 billion and operating income totaled $56.6 million.Technology Center (the “PTC”) differentiates Patterson from our competition by positioning Patterson as the only single-source solution for digital components. In addition to our core business of distributing veterinary products, Patterson Veterinary’s U.S. operation has a significant agency commission business with several pharmaceutical manufacturers. Undertrouble-shooting through the agencyrelationships, Patterson Veterinary receives orders for products fromPTC’s support center, customers transmits these orders to vendors who then pick, pack, and ship the products. These vendors then invoice and collect payment from our customers. Patterson Veterinary receives a commission payment for soliciting the order and for providing other customercan access various service activities. The agency commissions that Patterson Veterinary earns range from 2% to 7%, a portion of which is shared with the field sales and customer service representatives. Patterson Veterinary’s agency commissions accounted for less than 1% of our net sales in fiscal 2015.
U.S. Market
We estimate the market for pharmaceuticals and supplies sold to companion animal and equine veterinarians through distribution is approximately $3.4 billion on an annual basis. Based upon this estimated market size, we believe our share of this market is approximately 21%. Similar to the dental supply market, the veterinary supply market is fragmented and geographically diverse. As of December 31, 2014, according to the American Veterinary Medical Association, or AVMA, there were more than 65,000 veterinarians in private practice nationwide specializing in small animals, predominately companion pets. The average private veterinary practice generates approximately $1,000,000 of annual revenue. These practices purchase between $130,000 and $150,000 of supplies each year, and similar to the dental practitioner, tend not to maintain a large supply of inventory on hand. The typical veterinary practice purchases approximately 80% of its supplies from its top two suppliers. The average purchase of consumablescapabilities offered by the veterinary practice is noticeably higher than thatPTC, including electronic claims and statement processing and system back-up capabilities.
Continuing to improve operating efficiencies. We continue to implement programs designed to improve our operating efficiencies and allow for continued sales growth. This strategy includes our continuing investment in management information systems and consolidation and leveraging of the dental practitioner due predominately to pharmaceutical products, which veterinarians both administerfulfillment centers and dispense.Historically, the demand for veterinary servicessales branches between our operating segments. In addition, we have established shared sales branch offices in the U.S. has grown significantly faster than growth in the overall economy. More recently, the market growth has slowed as a result of a decrease in consumer spending. However, we anticipate increasing demand for veterinary services due to the following favorable factors:
| • | | Number of households with companion animals. The number of households with companion animals is steadily expanding which increases the demand for veterinary services. According to the AVMA 2012 U.S. Pet Ownership & Demographics Sourcebook, the percentages of U.S. households owning dogs, cats or horses are 36.5%, 30.4%, and 1.5%, respectively.
|
| • | | Veterinary expenditures per household. The amount pet owners are willing to spend caring for their pets is increasing substantially. The American Pet Products Association estimates that pet owners will spend $60.5 billion in 2015 to care for the American pet population, a significant increase compared to $41.2 billion spent in 2007.
|
| • | | Veterinary products and techniques. Many new therapeutic and preventive products are being developed for the companion animal market. Technological developments have resulted in new innovative veterinary products and advances in veterinary services.
|
several locations.
U.K. MarketWe estimate the U.K. market for pharmaceuticals and supplies sold to companion, equine and large animal veterinarians through distribution is approximately £1.0 billion. Based upon this estimated market size, we believe our share of this market overall is approximately 42%. The fastest growing segment is companion animal, which represents approximately 66% of the market, with large animal and equine segments representing 25% and 9%, respectively. There are approximately 20,000 veterinarians in the U.K. practicing in veterinary outlets. Customers in this market are classified as independent practices, members of buying groups, corporations, and charities. Similar to the U.S. markets, independent practices are typically small, privately-held businesses that place at least one order per week to avoid storing and managing large volumes of supplies. However, there has been a shift in the U.K. market towards consolidation of veterinary practices either through outright purchases by corporations or by joint venture whereby the practitioner continues to work as a salaried member of the practice.
U.S. Operations
Strategy
Patterson Veterinary’s objective is to build a leading national position in the companion animal veterinary marketGrowing through internal expansion and acquisitions while continuing to improve our profitability and enhance our value to customers. Our key strategies and priorities for accomplishing these objectives include growing through internal expansion and acquisitions, emphasizing our value-added full-service capabilities, continuing to improve operating efficiencies, and expanding our service offerings.
Growing Through Internal Expansion and Acquisitions.. We intend to continue to grow by opening additional sales offices, hiring established sales representatives, hiring and training skilled sales professionals, opening additional sales offices as territory sales representatives,needed, and acquiring other distributors in order to enter new, or more deeply penetrate existing, geographic markets, gain access to additional product lines, and expand our customer base. We believe that Patterson Veterinary isboth of our operating segments are well positioned to take advantage of expected continued consolidation in our markets.
Dental Supply Segment - Products, Services and Sources of Supply
Patterson Dental, one of the
veterinary distribution market. Patterson Veterinarytwo largest distributors of dental products in North America, has
made a number of acquisitions, including the following:Veterinary Distribution Acquisitions
Since 2004, Patterson Veterinary has acquired several veterinary distributors in the United States. These acquisitions include two regional distributors, ProVet, which was the companion animal veterinary supply division of Lextron, Inc., and Columbus Serum Company, as well as Milburn Distributions, Inc., the largest distributor specializingoperations in the U.S. equine veterinary supply market, and selected localCanada. As a full-service, value-added supplier to over 120,000 dentists, dental laboratories, institutions, and specialty distributors. In 2011,other healthcare professionals, Patterson Veterinary acquired American Veterinary Supply Corporation, a full service distributor on Long Island, New York with annualized sales of approximately $25 million that served approximately 2,000 veterinary practicesDental provides consumable products (including infection control, restorative materials, hand instruments and hospitals in the New York metropolitan area.
In 2010, Patterson Veterinary made a minority equity investment in Strategic Pharmaceutical Solutions, Inc. dba VetSource, a leading North American provider of integrated specialty pharmacy distribution, including home delivery capabilities.
In December 2012, Patterson Veterinary acquired the assets of Universal Vaporizer Support (UVS) based in Foster City, California with annual sales of approximately $3 million. UVS provides cleaningsterilization products); basic and calibration services for a variety of anesthetic vaporizers used in veterinary medicine.
Software Acquisitions
| • | | In 2005, Patterson Veterinary acquired Intra Corp., one of the nation’s leading developers of veterinary practice management software that is marketed under the INTRAVET® brand name. INTRAVET® has more than 1,600 software installations nationwide.
|
| • | | In 2008, Patterson Veterinary acquired Odyssey Veterinary Software, LLC, a developer and marketer of DIAGNOSTIC IMAGING ATLAS® (“DIA®”) software. At that time, DIA encompassed over 2,000 3D clinical animations and images, which enable the veterinarian to more fully explain and illustrate the pet’s diagnosis and recommend treatment to their clients.
|
In 2011, Patterson Veterinary acquired ePet Records, LLC. Rebranded as ePETHEALTH™, thisadvanced technology dental equipment; exclusive, innovative communication platform provides practitioners with a secure internet portal for their clients to access 24/7 for their pets’ medical information plus descriptive, easy-to-understand resources and educational materials with 3D graphics. Through ePETHEALTH™, veterinarians can also send their clients automated electronic health service and appointment reminders, eNewsletters and health education articles and videos.
Emphasizing Value-Added, Full-Service Capabilities. Patterson Veterinary believes that veterinary customers value full service and responsive delivery of product, in addition to competitive prices. Customers also
increasingly expect suppliers to be knowledgeable about products and services, and, generally, a superior sales representative can create a special relationship with the practitioner by providing an informational link to the overall industry. Patterson Veterinary’s knowledgeable sales representatives assist customers in the selection and purchasing of supplies. Most veterinarians are independent, or small unit based, practitioners who are unable to store and manage large volumes of supplies in their offices. We meet our customer’s requirements by delivering frequent, small quantity orders rapidly and reliably from strategically located distribution centers.
Equipment specialists, technology specialists and service technicians also support our value-added strategy. Equipment specialists offer consultation on office design, equipment requirements and financing. Technology specialists provide guidance on integrating technology solutions, including practice management software clientand e-commerce solutions; patient education systems; and communicationoffice forms and stationery. Patterson Dental offers customers more than 90,000 SKUs of which approximately 5,000 are private-label products sold under the Patterson brand. Patterson Dental also offers customers a range of related services including software and our home delivery service offering. Our experienced service technicians perform equipment installation,design services, maintenance and repair, services, including service on products orand equipment not purchased through Patterson Veterinary.
Continuing to Improve Operating Efficiencies. Patterson Veterinary continues to implement programs designed to improve ourfinancing. Net sales of this segment were $2.5 billion in fiscal 2016 and operating efficiencies and allowincome from this segment was $312 million for continued sales growth over time. These programs include a wide variety of initiatives from our continuing investment in management information systems to consolidation of distribution centers and sales branches.
In January 2013, Patterson Veterinary launched its’ newly designed website www.pattersonvet.com with upgraded features from the depth of information available to the ease and efficiency of navigating the site as well as enhanced search capabilities including descriptions with multiple images and product details to assist with product research and purchasing decisions. In fiscal 2015, approximately 38% of the consumable sales were ordered through both our website and eMagine electronic ordering platform.
In 2011, Patterson Veterinary implemented a centralized return processing center located in Columbus, Ohio. This initiative has allowed us to more efficiently handle customer product returns, improve the customer’s experience as well as meet vendor return requirements. As a result of implementing the centralized return processing center, approximately 87% of returns are credited back to the customer within 24 hours of receipt. Centralizing this process has also lead to both operational efficiencies as well as a reduction in shipping costs associated with product returns.
same period.
Expanding our Services. Patterson Veterinary continuously seeks to broaden our service offerings to maximize sales opportunities within our existing customer base while strengthening and enhancing practice economics and pet health.Technical Service. Patterson Veterinary offers onsite preventative maintenance and repair services in most major markets across the United States covering a wide range of equipment. Our experienced service technicians perform equipment installation, maintenance and repair services including services on products not purchased through Patterson Veterinary.
ePetHealth. A leading suite of communication and educational tools designed to help the clinic increase compliance and pet-owner loyalty to the practice through clinic eMarketing tools, health service reminders, online medical records, drug home delivery and award winning DIA videos and content.
DIA. A premier client education software for companion animal and equine practices, provides over 3,000 illustrations, animations, clinical images, radiographs and other diagnostic images that cover a wide range of medical conditions. Additionally, DIA Reception provides high definition footage and animations to better explain common pet health issues and conditions to pet owners.
VetSource. A leading professional pharmacy providing home delivery service of medications to pet owners, which improves client compliance, retains drug revenues within the veterinary practice, and optimizes inventory investments.
Patterson Veterinary University. Patterson Veterinary University (PVU) offers exclusive business courses for veterinarians, hospital managers, technicians, receptionists, and veterinary students. Veterinary students can take advantage of the two credit course Entrepreneurship for Veterinarians during their senior year in veterinary school. PVU – Management offers four in-depth courses on human resources, inventory management, marketing and finance. The PVU – Communication and Customer Service course for receptionists and technicians helps create a unified health care team within a veterinary hospital. The newest course PVU – Executive: Next Level Practice Ownership is designed to help guide veterinary practice owners from where they are today to where they want to be in the future by providing practice owners information that helps expand their current hospital performance and fulfill their practice dreams.
Anesthesia Vaporizer Service. Patient safety is top priority with manufacturer-trained service technicians who provide fast, reliable service, repair and calibration for a variety of anesthetic vaporizers used in veterinary medicine.
National Handpiece Repair. In February 2012, we launched Patterson’s Veterinary dental handpiece repair initiative utilizing Patterson Dental’s National Repair Center. Practitioners can now have both their high-speed and slow-speed handpieces cleaned, repaired, and returned within 24 hours from receipt.
Anesthesia Technical Support Hotline. Using our dedicated hotline, with one phone call customers can obtain answers and detail support for their anesthesia and monitoring equipment.
Products and Services
The following table sets forth the percentage of total sales by the principal categories of products and services offered byto our U.S. operationsdental segment customers:
|
| | | | | | | | |
| | Fiscal Year Ended |
| | April 30, 2016 | | April 25, 2015 | | April 26, 2014 |
| Consumable | 56 | % | | 55 | % | | 55 | % |
| Equipment and software | 33 |
| | 34 |
| | 34 |
|
Other (1) | 11 |
| | 11 |
| | 11 |
|
| | 100 | % | | 100 | % | | 100 | % |
| |
| (1) | Consists of other value-added services, including software and design service, maintenance and repair, and equipment financing. |
Patterson Dental obtains products from more than 800 vendors. Although our relationships with most vendors are non-exclusive, we do obtain certain products on an exclusive basis. For example, we have an exclusive distribution agreement with an entity now known as Dentsply Sirona, Inc., the manufacturer of the CEREC® dental restorative systems and Schick® digital x-rays, in addition to veterinary segment customers: | | | | | | | | | | | | |
| | | Fiscal Year Ended | |
| | | April 25,
2015 | | | April 26,
2014 | | | April 27,
2013 | |
Consumable and printed products | | | 93 | % | | | 94 | % | | | 93 | % |
Equipment and software | | | 6 | | | | 4 | | | | 5 | |
Other | | | 1 | | | | 2 | | | | 2 | |
| | | | | | | | | | | | |
| | | 100 | % | | | 100 | % | | | 100 | % |
| | | | | | | | | | | | |
Consumablepanoramic and Printedcone beam radiography products. While Patterson Dental makes purchases from many suppliers, and there is generally more than one source of supply for most of the categories of products we sell, the concentration of business with key suppliers is considerable. Our top ten supply vendors accounted for approximately 57% and 61% of the cost of dental products sold in fiscal 2016 and fiscal 2015. Of these ten, the top two vendors accounted for 25% and 7% for fiscal 2016 and 18% and 8% for fiscal 2015 cost of sales, respectively.
Animal Health Supply Segment - Products,
Services and Sources of Supply
Patterson
Veterinary offers ourAnimal Health is a leading distributor of animal health products in the U.S., Canada and the U.K. We sell more than 100,000 SKUs sourced from over 3,400 manufacturers to over 50,000 customers
a broad selection of veterinaryin the highly fragmented animal health supply
products includingmarket. Products we distribute include pharmaceuticals, vaccines, parasiticides, diagnostics,
veterinary pet foods, nutritionalprescription and non-prescription diets, nutritionals, consumable supplies, equipment and software. We offer a private label portfolio of products
to veterinarians, producers, and
consumable supplies. Our pharmaceutical products typically include anesthetics, analgesics, antibiotics,retailers through our Aspen, First Companion and
ophthalmics. Our biological products are primarily comprised of vaccines and injectibles. Our parasiticides are used for control of external parasites (fleas, ticks, flies, mosquitoes) and internal parasites. Our diagnostics product category includes consumable in-clinic tests for detecting heartworm, lyme disease, feline leukemia and parvovirus, as well as consumable products for measuring blood chemistry, electrolyte balance and cell counts. Veterinary pet foods consist of both specialty diets and premium pet foods. Nutritional products are comprised of dietary supplements, vitamins, dental chews and specialty treats. Consumable supplies include lab supplies, various types and sizes of paper goods, needles and syringes, instruments, gauze and wound dressings, sutures, latex gloves, orthopedic and casting products. Many of the office supply products sold by Patterson Office Supplies are also offered to the veterinary supply market.Equipment and Software
Veterinary Equipment. Patterson Veterinary sells equipment for hospital, laboratory and general surgical use within the veterinary practice.brands. We also offer innovative, quality equipment that differentiates Patterson Veterinaryprovide a range of value-added services to our animal health customers. Within our companion animal market, our principal customers are companion-pet and equine veterinarians, veterinary clinics, public and private institutions, and shelters. In our production animal market, our principal customers are large animal veterinarians, production animal operators and animal health product retailers. Net sales of this segment were $2.9 billion in fiscal 2016 and operating income from this segment was $94 million for the competition including anesthesia machines, surgical monitors, diagnostic equipment, ultrasound, dental power units, cages, lights, digital x-ray systems and x-ray machines.
Practice Management Software. Patterson Veterinary develops and markets our own proprietary linesame period.
The following table sets forth the percentage of
practice management software, INTRAVET®, for veterinary professionals, including software for scheduling, billing, charting and capture/storage/retrievaltotal sales by the principal categories of
digital images.Client Education Software. Patterson Veterinary also develops and markets our own proprietary client education software, DIA®, for veterinary professionals. DIA encompasses over 3,000 3D clinical animations and images, enabling veterinarians to more fully explain and illustrate a pet’s diagnosis and treatment recommendations to their clients.
Client Communication Portal. Patterson Veterinary develops and markets our own innovative web-based client communication platform, ePetHealth, providing practitioners a suite of client offerings such as online medical records, eMarketing tools, client education resources, and a home delivery portal.
Other
Other products and services include commissions earned on agencyoffered to animal health segment customers:
|
| | | | | | | | |
| | Fiscal Year Ended |
| | April 30, 2016 | | April 25, 2015 | | April 26, 2014 |
| Consumable | 97 | % | | 95 | % | | 94 | % |
| Equipment and software | 2 |
| | 3 |
| | 4 |
|
| Other | 1 |
| | 2 |
| | 2 |
|
| | 100 | % | | 100 | % | | 100 | % |
Patterson Animal Health obtains products from nearly 2,600 vendors in the U.S. and Canada and nearly 900 vendors in the U.K. While Patterson Animal Health makes purchases from many vendors and there is generally more than one source of supply for most of the categories of products, the concentration of business with key vendors is considerable. In fiscal 2016 and 2015, Patterson Animal Health’s top 10 animal health supply manufacturers comprised approximately 70% of the total cost of animal health supply sales,
equipment repair revenues, software maintenance contract revenue, PVU revenue and
freight recovery on shipments to customers.the single largest supplier comprised 17% of the total cost of animal health supply sales.
Sales, Marketing and Distribution
During fiscal
2015, Patterson Veterinary2016, we sold products or services to over
21,000170,000 customers
in the U.S. who made one or more purchases during the year. Our customers include
veterinarians,dentists, laboratories, institutions,
andother healthcare professionals, veterinarians, other animal health
professionals.professionals, production animal operators and animal health product retailers. No single customer accounted for more than
1%10% of sales during fiscal
2015,2016, and
Patterson Veterinary iswe are not dependent on any single customer or geographic group of customers.
Our sales and marketing efforts are designed to establish and improve customer relationships through personal interaction with our field sales and customer service representatives and frequent direct marketing contact, which underscores our value-added approach.Patterson Veterinary currently has 19 local
We have offices throughout the U.S.
and Canada so that we can provide a presence in the market and
decision makingdecision-making near the customer.
Patterson Animal Health also has a central office in the U.K. These offices, or
sales branches, are staffed with a complete complement of
Patterson Veterinary’sour capabilities, including sales, customer service and technical service personnel, as well as a local manager who has broad
decision makingdecision-making authority with regard to
customer relatedcustomer-related transactions and issues.
Field Sales Representatives.
A primary component of
Patterson Veterinary’sour value-added approach is our sales force. Due to the fragmented nature of the
veterinary supply market,markets we serve, we believe that a large sales force is necessary to reach potential customers and to provide full service. Sales representatives provide an informational link to the overall
industry;industry, assist practitioners in selecting and purchasing products and help customers efficiently manage their supply inventories.
EachOur need for a large dedicated sales
representative works within an assigned sales territory underforce in the
supervisionU.K. is reduced due to the presence of
a location (branch) manager. Sales representatives are all Patterson Veterinary employeesbuying groups and
are generally compensated on a commission basis, with some, less experienced, representatives receiving a base salary and commission.Customer Service Representatives. We support our field sales representatives and direct marketing efforts withcorporate customers as well as the significant number of orders placed electronically in the U.K.
In the U.S., customer service representatives in
eight call centers
covering the United States. As of April 25, 2015, wehad 115 customer service representatives. Customer service representatives work in tandem with our field sales representatives, providing a dual coverage approach for individual customers. In addition to processing orders, customer service representatives are responsible for assisting customers with ordering, informing customers of monthly promotions, and responding to general inquiries. CustomerIn the U.K., our customer service representatives utilize our customized order entry system to processteam is primarily responsible for handling customer orders, access pricing, determine product availability, provide promotional information about products, research customer preferences,inquiries and review order histories.
resolving issues.
Direct Marketing.To assist our sales representatives, Patterson Veterinary publishescustomers with their purchasing decisions, we provide a catalog containing product and service information. Patterson Veterinary customers receive a full-line product catalog containing over 14,500 inventoried items. The catalog includes pictures of products, detailed descriptions and specificationsmulti-touch point shopping experience. From print to digital, this seamless experience is inclusive of products and is used by practitionersservices information. Patterson offers online and in-print showcases of our expansive merchandise and equipment offerings, including digital imaging and computer-aided design and computer-aided manufacturing ("CAD/CAM") technologies, hand-held and similar instruments, sundries, office design, e-services, repair and support assistance, as a reference source.well as financial services. We also promote selected consumableselect products our value-added program and services new products, specially priced items and high demand items through our monthly magazine,Insight., in the U.S. and Canada, and our quarterly magazine, The Cube, in the U.K. Additional direct marketing tools that we utilize include equipment catalogs, customer loyalty programs, specific product and vendor programs, flyers, faxes, eNewsletters, social media, and other promotional materials. In order to extend our customer reach and enhance customer interaction, we also participateparticipation in national, regional and local trade shows.E-Commerce Platform. Patterson Veterinary’s website allows customers the ability to order items 24 hours a day, seven days a week. The website also incorporates value-added functions that permit customers to check their invoice, payment and credit history, make a payment, build a “shopping list” of frequently purchased items and track their order status.
Distribution. Patterson Veterinary believes
We believe that responsive delivery of quality supplies and equipment is key to customer satisfaction. We ship
veterinary consumable supplies from
11our strategically located
distributionfulfillment centers in the
United States.U.S. and Canada. In the U.K., orders are accepted in a centralized fulfillment center and shipped nationwide to one of our depots located throughout the country at which pre-packed orders are sorted by route for delivery to customers. Orders for
veterinary consumable supplies can be placed through our
field sales
force,representatives, customer service representatives or electronically 24 hours a day, seven days a week.
Printed office products are shipped from Patterson’s manufacturing and distribution facility in central Illinois.All orders are routed through our centralized computer ordering, shipping and inventory management systems, which are linked to each of our strategically located distribution centers. If an item is not available in the distribution center nearest to the customer, the computer system automatically directs fulfillment of the item from another center. Rapid and accurate order fulfillment is another principal component of our value-added approach. We estimate that 97% of Patterson Veterinary’s consumable orders are received by the customer the next business day.
In order to assure the availability of
Patterson Veterinary’sour broad product lines for prompt delivery to customers, we must maintain sufficient inventories at our
distributionfulfillment centers. Purchasing of consumables and standard equipment is centralized, and our purchasing department uses a real-time perpetual inventory system to manage inventory levels. Our inventory consists mostly of consumable supply items and pharmaceutical products.
By utilizing computerized inventory management and ordering systems, we are able to accurately predict inventory turnsAdditionally, in
order to minimize inventory levels for each item.Sources of Supply
Patterson Veterinary U.S. operations obtain products from nearly 650 vendors. While Patterson Veterinary makes purchases from many vendors and there is generally more than one source of supply for most of the categories of products, the concentration of business with key vendors is considerable. In fiscal 2015 and 2014, Patterson Veterinary’s top 10 veterinary supply manufacturers comprised 65% and 68%, and the single largest supplier comprised 14% and 17%, of the total cost of veterinary supply sales, respectively.
There are two major types of arrangements that account for the flow of transactions between us and our customers. Traditional “buy/sell” transactions, which account for the vast majority of our business, involve direct
purchases of products by us from vendors, which we manage and store in our distribution centers. A customer then places an order with us, and the orders are then picked, packed, shipped and billed by us to our customer.
We also process orders from our customers under “agency agreements” withthis competitive market, some of our vendors, primarily for certain seasonal pharmaceutical products. Under this model, when we receive orders for products from the customer, we transmit the ordercontracts contain minimum purchase commitments to maintain exclusivity.
Geographic Information
For information on revenues and long-lived assets of our dental and animal health segments by geographic area, see Note 14 to the vendor who then picks, packs,Consolidated Financial Statements.
Discontinued Operations
In August 2015, we sold Patterson Medical Holdings, Inc., our wholly owned subsidiary responsible for our rehabilitation supply business known as Patterson Medical, for $717 million in cash to Madison Dearborn Partners. For a limited period of time following the disposition, Patterson will continue to provide certain transition services to Patterson Medical, as owned by Madison Dearborn Partners, pursuant to a transition services agreement. See Note 5 to the Consolidated Financial Statements for additional information.
Seasonality
Our business in general is not seasonal; however, there are some products that typically sell more often during the winter or summer season. In any given month, unusual weather patterns (e.g., unusually hot or cold weather) could impact the sales volumes of these products, either positively or negatively.
Governmental Regulation
Operating, Security and shipsLicensure Standards
Our dental and animal health supply businesses involve the products. distribution of pharmaceuticals and medical devices, and in this regard we are subject to various local, state, federal and foreign governmental laws and regulations applicable to the distribution of pharmaceuticals and medical devices. Among the U.S. federal laws applicable to us are the Controlled Substances Act, the Federal Food, Drug, and Cosmetic Act, as amended, and Section 361 of the Public Health Service Act. We are also subject to comparable foreign regulations.
The vendor then invoicesFederal Food, Drug, and collects payment from our customer. We receiveCosmetic Act (“FDC Act”) and similar foreign laws generally regulate the introduction, manufacture, advertising, labeling, packaging, storage, handling, reporting, marketing and distribution of, and record keeping for, pharmaceuticals and medical devices shipped in interstate commerce, and states may similarly regulate such activities within the state. Section 361 of the Public Health Service Act, which provides authority to prevent the spread of communicable diseases, serves as the legal basis for the U.S. Food and Drug Administration’s (“FDA”) regulation of human cells, tissues and cellular and tissue-based products, also known as “HCT/P products.”
The federal Drug Quality and Security Act of 2013 brought about significant changes with respect to pharmaceutical supply chain requirements and pre-empts state law. Title II of this measure, known as the Drug Supply Chain Security Act (“DSCSA”), will be phased in over 10 years, and is intended to build a
commission payment for soliciting the ordernational electronic, interoperable system to identify and
for providing other customer service activities.Competition
The distribution and manufacture of veterinary productstrace certain prescription drugs as they are distributed in the U.S. is highly competitive. In additionThe law’s track and trace requirements applicable to two other national, full-service firms, Henry Schein Animal Health, Inc.manufacturers, wholesalers, repackagers and MWI Veterinary Supply, Inc. (acquired by AmerisourceBergendispensers (e.g., pharmacies) of prescription drugs began to take effect in February 2015), Patterson Veterinary competesJanuary 2015. The DSCSA product tracing requirements replace the former FDA drug pedigree requirements and pre-empt state requirements that are inconsistent with, several full-service distributors that operate on a regional level and numerous smaller local and specialty distributors, including Idexx Laboratories, and to lesser extent, mail order distributorsmore stringent than, or buying groups. Patterson Veterinary also competes directly with pharmaceutical companies who sell certain products directly to the customer.
Patterson Veterinary approaches its markets by emphasizing and delivering a value-added model to the practitioner. To differentiate ourselves from our competition we deploy a strategy of premium customer service, a highly qualified and motivated sales force, an extensive breadth and mix of products and services, accurate and timely delivery of product, strategic location of sales offices and competitive pricing.
U.K. Operations
Strategy
In August 2013, we completed the acquisition of all the outstanding stock of National Veterinary Services Limited (“NVS”) from Dechra Pharmaceuticals, PLC (“NVS Acquisition”). Headquartered in Stoke-on-Trent, NVS is the largest veterinary products distributor in the U.K. serving the companion, equine and large animal markets. Total cash consideration paid for NVS was £91.2 million (approximately $142.7 million). NVS’s objective is to grow its presence in the U.K. and Europe, to further develop a leading position in the veterinary market through acquisitions, while continuing to improve our profitability and enhance our value to customers. Our key strategies and priorities for accomplishing these objectives include growing through acquisitions, emphasizing our value-added full-service capabilities, continuing to improve operating efficiencies, and expanding our service offerings. In April 2015, NVS acquired both Abbey Veterinary Services and C.A.P.L. Limited, which provide laboratory services in the U.K. with combined annual revenues of £1.7 million.
NVS has a great opportunity to harness the investments from key initiatives launched by Patterson Veterinary in the U.S. Such initiatives include ePet Health, DIA, technical services and supply of equipment in addition to, the recently launched instrumentsDSCSA requirements. Also in January 2015, the DSCSA required manufacturers and orthopedicwholesale distributors to have systems in place by which they can identify whether a product line. NVSin their possession or control is a “suspect” or “illegitimate” product, and handle it accordingly.
The DSCSA also seeksestablishes certain requirements for the licensing and operation of prescription drug wholesalers and third party logistics providers (“3PLs”), and includes the creation of national wholesaler and 3PL licenses in cases where states do not license such entities. The DSCSA requires that wholesalers and 3PLs distribute drugs in accordance with certain standards regarding the recordkeeping, storage and handling of prescription drugs. Beginning January 1, 2015, the DSCSA required wholesalers and 3PLs to capitalizesubmit annual reports to the FDA, which include information regarding each state where the wholesaler or 3PL is licensed, the name and address of each facility and contact information. According to FDA guidance, states are pre-empted from imposing any licensing requirements that are inconsistent with, less stringent than, directly related to, or covered by the standards established by federal law in this area. Current state licensing requirements will likely remain in effect until the FDA issues new regulations as directed by the DSCSA.
The Food and Drug Administration Amendments Act of 2007 (“FDAAA”) and the Food and Drug Administration Safety and Innovation Act of 2012 (“FDASIA”) amended the FDC Act to require the FDA to promulgate regulations to implement a Unique Device Identification System. The FDA issued a final rule in September 2013 implementing the Unique Device Identification System, requiring the labels of most medical devices to bear a unique device identifier (“UDI”), and prescribing the content and format of the UDI. The rule also requires the submission of certain information concerning UDI-labeled devices to an FDA database, the Global Unique Device Identification Database (“GUDID”). Additional FDA UDI guidance has subsequently been issued, and the FDA’s UDI regulations are being phased in over seven years from the rule’s promulgation in September 2013, beginning with the highest-risk devices (i.e., Class III medical devices) and ending with the lowest-risk devices. For the lowest-risk, Class I medical devices, a Universal Product Code may take the place of a UDI on the content developed by Patterson Veterinary Universitydevice’s label.
The FDA’s UDI regulations require certain entities, referred to offer continuing professional educationas “labelers,” to practicesdevelop and include UDIs on the labels of medical devices, and to directly mark certain devices with UDIs. Labelers are entities that cause a device’s label to be applied or modified, without any subsequent replacement or modification. Typically, these entities are device manufacturers, specification developers, single-use device reprocessors, convenience kit assemblers, repackagers and relabelers.
Violations of the UDI regulations, including failure to include a UDI on a device’s label after the effective date for the device type, result in the U.K.misbranding of the device. The followingFDC Act makes it unlawful to introduce or deliver for introduction into interstate commerce a misbranded device. It is also unlawful to cause a device to become misbranded.
Under the Controlled Substances Act, as a distributor of controlled substances, we are required to obtain and renew annually registrations for our facilities from the U.S. Drug Enforcement Administration (“DEA”) permitting us to handle controlled
substances. We are also subject to other statutory and regulatory requirements relating to the storage, sale, marketing, handling and distribution of such drugs, in accordance with the Controlled Substances Act and its implementing regulations, and these requirements have been subject to heightened enforcement activity in recent times. We are subject to inspection by the DEA.
Certain of our businesses are also required to register for permits and/or licenses with, and comply with operating and security standards of, the DEA, the FDA, the U.S. Department of Health and Human Services, and various state boards of pharmacy, state health departments and/or comparable state agencies as well as comparable foreign agencies, and certain accrediting bodies depending on the type of operations and location of product distribution, manufacturing or sale. These businesses include those that distribute, manufacture and/or repackage prescription pharmaceuticals and/or medical devices and/or HCT/P products, or own pharmacy operations, or install, maintain or repair equipment. In addition, Section 301 of the National Organ Transplant Act, and a number of
value added services offered todaycomparable state laws, impose civil and/or criminal penalties for the transfer of certain human tissue (for example, human bone products) for valuable consideration, while generally permitting payments for the reasonable costs incurred in
additionprocuring, processing, storing and distributing that tissue. We are also subject to
foreign government regulation of such products. The DEA, the
nationalFDA and state regulatory authorities have broad inspection and enforcement powers, including the ability to suspend or limit the distribution
network discussed later under sales, marketing and distribution:Laboratory Services. Offer veterinary diagnostic laboratory services to veterinarians including pathology, hematology, chemistry, and microbiology. Samples are accepted from a wide range of species including dogs, cats, horses, birds, reptiles, fish, farm and zoo animals. One ofproducts by our fulfillment centers, seize or order the key objectives is to improve market share position by competing on service, utilizing NVS’s unique distribution network. Veterinary diagnostic laboratory services are approximately 2% of total net sales.
Indicies. Provide multi-practice customers with practice benchmarks, two years of purchase history, and group practice data consolidation to help them better manage their network of practices.
Order Platforms. Direct electronic data interchange and interactive website ordering platforms comprise 75% of customer orders containing 90% of total ordered lines.
Vetcom. Offer a windows-based practice management software package that includes an ordering platform.
Products and Services
The following table sets forth the percentage of total sales by the principal categoriesrecall of products and impose significant criminal, civil and administrative sanctions for violations of these laws and regulations. Foreign regulations subject us to similar foreign powers. Furthermore, compliance with legal requirements has required and may in the future require us to institute voluntary recalls of products we sell, which could result in financial losses and potential reputational harm. Our customers are also subject to significant federal, state, local and foreign governmental regulation.
Certain of our businesses are subject to various additional federal, state, local and foreign laws and regulations, including with respect to the sale, transportation, storage, handling and disposal of hazardous or potentially hazardous substances, and safe working conditions. There have also been increasing efforts by various levels of government globally to regulate the pharmaceutical distribution system in order to prevent the introduction of counterfeit, adulterated or misbranded pharmaceuticals into the distribution system.
Certain of our businesses also maintain contracts with governmental agencies and are subject to certain regulatory requirements specific to government contractors.
Health Care Fraud
Certain of our businesses are subject to federal and state (and similar foreign) health care fraud and abuse, referral and reimbursement laws and regulations with respect to their operations. Some of these laws, referred to as “false claims laws,” prohibit the submission or causing the submission of false or fraudulent claims for reimbursement to federal, state and other health care payers and programs. Other laws, referred to as “anti-kickback laws,” prohibit soliciting, offering, receiving or paying remuneration in order to induce the referral of a patient or ordering, purchasing, leasing or arranging for or recommending ordering, purchasing or leasing, of items or services offeredthat are paid for by federal, state and other health care payers and programs.
Failure to comply with fraud and abuse laws and regulations could result in significant civil and criminal penalties and costs, including the loss of licenses and the ability to participate in federal and state health care programs, and could have a material adverse effect on our
U.K.business. Also, these measures may be interpreted or applied by a prosecutorial, regulatory or judicial authority in a manner that could require us to make changes in our operations
or incur substantial defense and settlement expenses. Even unsuccessful challenges by regulatory authorities or private relators could result in reputational harm and the incurring of substantial costs. In addition, many of these laws are vague or indefinite and have not been interpreted by the courts, and have been subject to
veterinary segment customers: | | | | | | | | |
| | | Fiscal Year Ended | |
| | | April 25,
2015 | | | April 26,
2014 | |
Consumable and printed products | | | 97 | % | | | 96 | % |
Equipment and software | | | 1 | | | | 1 | |
Other | | | 2 | | | | 3 | |
| | | | | | | | |
| | | 100 | % | | | 100 | % |
| | | | | | | | |
Consumablefrequent modification and Printed Products
NVS offers our customers a broad selectionvaried interpretation by prosecutorial and regulatory authorities, increasing the risk of veterinary supply products including pharmaceuticals, vaccines, parasiticides, diagnostics, veterinary pet foods, nutritional products and consumable supplies. Our pharmaceutical products typically include anesthetics, analgesics, antibiotics, and ophthalmics. Our biological products are primarily comprised of vaccines and injectibles. Our parasiticides are used for control of external parasites (fleas, ticks, flies, mosquitoes) and internal parasites. Our diagnostics product category includes consumable in-clinic tests for detecting heartworm, lyme disease, feline leukemia and parvovirus, as well as consumable products for measuring blood chemistry, electrolyte balance and cell counts. Veterinary pet foods consist of both specialty diets and premium pet foods. Nutritional products are comprised of dietary supplements, vitamins, dental chews and specialty treats. Consumable supplies include lab supplies, various types and sizes of paper goods, needles and syringes, instruments, gauze and wound dressings, sutures, latex gloves, orthopedic and casting products.
Other
Laboratory services. NVS offers veterinary diagnostic laboratory services to veterinarians including pathology, hematology, chemistry, and microbiology. Samples are accepted from a wide range of species including dogs, cats, horses, birds, reptiles, fish, farm and zoo animals.
Sales, Marketing and Distribution
NVS has more than 1,000 customers and is well positioned to service all segmentsnoncompliance.
Health Care Reform
The U.S. Health Care Reform Law adopted through the March 2010 enactment of the veterinary market through its’ salesPatient Protection and marketing team, national distribution network,Affordable Care Act and the Health Care and Education Reconciliation Act increased federal oversight of private health insurance plans and included a fully integrated computer system. NVSnumber of provisions designed to reduce Medicare expenditures and the cost of health care generally, to reduce fraud and abuse, and to provide access to increased health coverage.
A Health Care Reform Law provision, generally referred to as the Physician Payment Sunshine Act or Open Payments Program, has imposed reporting and disclosure requirements for drug and device manufacturers with regard to payments or other transfers of value made to certain practitioners (including physicians, dentists and teaching hospitals), and for such manufacturers and for group purchasing organizations, with regard to certain ownership interests held by physicians in the highest percentage of buying groupsreporting entity. On February 1, 2013, the Centers for Medicare and corporations comparedMedicaid Services (“CMS”) released the final rule to its’ competitors.implement the Physician Payment Sunshine Act. Under this rule, data collection activities began on August 1, 2013, and as required under the Physician
Payment Sunshine Act, CMS publishes information from these reports on a publicly available website, including amounts transferred and physician, dentist and teaching hospital identities.
Under the Physician Payment Sunshine Act we are required to collect and report detailed information regarding certain financial relationships we have with physicians, dentists and teaching hospitals. The corporate relationship with these large customers is managedPhysician Payment Sunshine Act pre-empts similar state reporting laws, although we or our subsidiaries may also be required to report under certain state transparency laws that address circumstances not covered by the senior management team. The relationships with individual practices (regardlessPhysician Payment Sunshine Act, and some of whether they are corporately-owned or independent) are serviced by the field sales representatives, the customer service team and the depot delivery drivers. With buying groups and corporations representing a large percentage of revenuesthese state laws, as well as the factfederal law, can be ambiguous. We are also subject to foreign regulations requiring transparency of certain interactions between suppliers and their customers. Our compliance with these rules imposes additional costs on us.
Regulated Software; Electronic Health Records
The FDA has become increasingly active in addressing the regulation of medical device software, and has developed and continues to develop policies on regulating clinical decision support tools and other types of software as medical devices. Certain of our businesses involve the development and sale of software and related products to support physician and dental practice management, and it is possible that 90%the FDA or foreign government authorities could determine that one or more of orders being placedour products is a medical device, which could subject us or one or more of our businesses to substantial additional requirements with respect to these products.
In addition, our businesses that involve physician and dental practice management products include electronic information technology systems that store and process personal health, clinical, financial and other sensitive information of individuals. These information technology systems may be vulnerable to breakdown, wrongful intrusions, data breaches and malicious attack, which could require us to expend significant resources to eliminate these problems and address related security concerns, and could involve claims against us by
customersprivate parties and/or governmental agencies. For example, we are
entered electronically either throughdirectly or indirectly subject to numerous and evolving federal, state, local and foreign laws and regulations that protect the
NVS web based ordering platform or viaprivacy and security of such information, such as the
website,privacy and security provisions of the
need for a large dedicated field sales team is greatly reduced. There are currently 11 field sales representatives who are responsible for calling on 300-350 customers each.This is an operations-driven business, which meansfederal Health Insurance Portability and Accountability Act of 1996, as amended, and implementing regulations (“HIPAA”). HIPAA requires, among other things, the burdenimplementation of maintaining a high level of service with the customer rests with the customer service teamvarious recordkeeping, operational, notice and the delivery drivers. Both are highly valued by the customerother practices intended to safeguard that information, limit its use to allowed purposes and work closely together to meet customer expectations. NVS maintains a national distribution network, which serves as a competitive advantage. NVS offers next day business delivery on a nationwide basisnotify individuals in the U.K. Orders are accepted until 8:00 pm in their centralized distribution centerevent of privacy and shipped nationwide overnight to one of 10 depots located throughout the country. The depots are essentially small staging warehouses where pre-packed orders are sorted by route for delivery to the customer. A fleet of company owned, fully cold chain compliant vehicles, at each depot, delivers the product to the customer the next business day making the driver of these vehicles an important contact point and part of the sales team. We estimate that 99% of NVS’s consumable orders are received by the customer the next business day. NVS also utilizes this distribution network to collect the customer laboratory service samples for onward shipment to the laboratories for analysis. Lab results are available electronically to the veterinarian.
With 90% of order lines being entered electronically by the customer either through their direct ordering platform or via their website, the customer service team is primarily responsible for handling customer inquiries and resolving issues.
Direct Marketing. To assist our sales representatives, NVS publishes a catalog containing product and service information. NVS customers receive a full-line product catalog containing over 16,000 inventoried items. The catalog includes descriptions and specifications of products and is used by practitioners as a reference source. security breaches.
We also
promote our specials service where we will procure non-stock items for individual customers. In addition we promote our value-addedsell products and services
newthat health care providers, such as physicians and dentists, use to store and manage patient medical or dental records. These customers are subject to laws and regulations, such as HIPAA, which require that they protect the privacy and security of those records, and our products
specially priced itemsmay be used as part of these customers’ comprehensive data security programs, including in connection with their efforts to comply with applicable privacy and
high demand items throughsecurity laws. Perceived or actual security vulnerabilities in our
quarterly magazine,The Cube. Additional direct marketing tools that we utilize include specialist catalogs, customer loyalty programs, specific product and vendor programs, flyers, faxes, eNewsletters, social media, and other promotional materials. In order to extend our customer reach and enhance customer interaction, we also participate in national, regional and local trade shows and specialist veterinary events including supporting continued professional development for veterinarians and nurses.Sources of Supply
NVS obtains products from nearly 400 vendors. While NVS makes purchases from many vendors and there is generally more than one source of supply for most of the categories of products, the concentration of business with key vendors is considerable. In fiscal 2015 and 2014, the top 10 veterinary supply manufacturers comprised 77% in both years, and the single largest supplier comprised 17% and 16%, of the total cost of veterinary supply sales, respectively.
Competition
Beyond NVS, which has national coverage, veterinary distribution in the U.K. market is concentrated primarily with two other major distributors; Henry Schein Animal Health, Inc. based in Scotland and MWI Veterinary Supply, Inc. (acquired by AmerisourceBergen in February 2015) based in Somerset, with coverage mainly in southern England. We also compete directly with pharmaceutical companies who sell certain products or services, directlyor the perceived or actual failure by us or our customers who use our products to comply with applicable legal requirements, may not only cause us significant reputational harm, but may also lead to claims against us by our customers and/or governmental agencies and involve substantial fines, penalties and other liabilities and expenses and costs for remediation.
International Transactions
In addition, U.S. and foreign import and export laws and regulations require us to abide by certain standards relating to the
customer.Rehabilitation Supply
Overview
Patterson Medical is headquartered in Warrenville, Illinois,importation and is a value-added distributorexportation of rehabilitation medical suppliesproducts. We also are subject to certain laws and equipment. We believe Patterson Medical offersregulations concerning the most comprehensive range of distributed and self-manufactured rehabilitation products to health care professionals globally. Our mission is to provide health care professionals and their patients with access to products that improve peoples’ lives by helping
them to attain their highest achievable level of independence, safety and comfort. We operate as Patterson Medical globally, and are transitioning our acquired catalog brands such as Sammons Preston, Homecraft, and Ausmedic into product brands. Patterson Medical still operates as Medco Sports Medicine in the North American sports medicine market.
Patterson Medical serves as the gateway through which over 30,000 rehabilitation products originating from more than 1,500 suppliers and manufacturers are sold to a diverse customer base with an emphasis on physical therapists (“PTs”) and occupational therapists (“OTs”). We offer our customers a “one-stop shop” through what we believe to be the most comprehensive catalogs in the industry, the largest direct sales force and a highly efficient customer service and distribution operations. Major channels of distribution are acute care hospitals, long-term care facilities, rehabilitation clinics, dealers and schools.
Patterson Medical offers a wide range of differentiated, non-invasive products and expertise to users and their health care providers, while focusing on niches, worldwide, where our capabilities, reputation and customer partnerships can result in a competitive advantage. Patterson Medical’s goal is to become our customers’ first choice for rehabilitation supplies and equipment in eachconduct of our chosen markets.
Patterson Medical is highly diversified with no single product, customer or purchasing group representing a significant percentage of total revenue. In addition, given the relatively small average order size (approximately $225), our products often do not represent a major expense category for our customers.
Patterson Medical has been pursuing a strategy of organic growth, complemented by strategic acquisitions in its domestic and international markets. This has included building and buying sales offices in the U.S., and buying and integrating distributors in the U.K., France, Australia and New Zealand. Patterson Medical also uses a robust international dealer network to service customers in countries where we do not have an established direct presence. Approximately 80% of Patterson Medical’s revenue originates in North America.
Patterson Medical manufactures or has exclusively manufactured for us products representing approximately 35% of its total revenue. These products carry the Patterson Medical brand, or one of the many brands added through acquisition. Patterson Medical owns manufacturing facilities in the U.S., Australia, and Thailand, and has a China sourcing office. Patterson Medical is a distributor for the other 65% of its product offering, carrying the top brands in the rehabilitation industry. One of Patterson Medical’s strengths is our trading relationship with the top manufacturers of rehabilitation products inforeign operations, including the U.S. and abroad.
We believe the rehabilitation medical supply and assistive product industry is approximately $5.6 billion worldwide and is expected to grow faster than the overall economy over the next several years. Industry growth is driven by strong growth in the physical and occupational therapy markets and favorable demographic trends associated with the aging of the baby-boom generation. We do not participate in all product segments, so Patterson Medical’s addressable market (defined as the collective market for products sold by Patterson Medical) is approximately $3.4 billion worldwide. We believe that Patterson Medical has an industry leading market share of approximately 15% in a highly fragmented rehabilitation and assistive products market.
We believe that the demand for rehabilitation products will continue to be influenced by the following factors:
| • | | Favorable Demographics. Favorable demographic trends such as extended life expectancy, active lifestyles and a general willingness to spend discretionary income on health care and well-being, is expected to contribute to increased demand for products distributed by Patterson Medical. Specifically, the aging baby-boomer population, together with their increased disposable income and desire for independence, will fuel product purchases to assist with the frailties associated with old age and provide sustained sales growth.
|
The U.S. Census Bureau has projected the 85 and older population in the U.S. to increase significantly, from less than 6 million in 2011 to 14 million by 2040 and 19 million by 2050. The 65 to 84 year old
population is expected to more than double between 2011 and 2040. Current trends indicate that these age groups represent the majority of home and community-based health care patients.
The aging of the population is a revenue growth driver because approximately 10% of people over the age of 65 and approximately 50% of people over the age of 85 need assistance with everyday activities. Patterson Medical believes we are well positioned to benefit from this trend by providing aids to daily living, namely dressing devices; toileting, dining, bathing aids; and grooming devices, all of which promote greater patient independence, improved patient responsibility and improved responsiveness to treatment.
| • | | Increasing Number of PTs and OTs, Patterson Medical’s Primary User Groups. According to the U.S. Department of Labor Bureau of Labor Statistics (BLS), there were approximately 199,000 PTs and 109,000 OTs in the U.S. in 2010. Approximately 60% of PTs were employed in either hospitals or offices of physical therapists. The remaining 40% of PTs was employed in home health agencies, outpatient rehabilitation clinics, physician offices and nursing homes. The majority of OTs work in hospitals, including many in rehabilitation and psychiatric hospitals. The remaining OTs work in outpatient occupational therapy offices and clinics, schools, home health agencies, nursing homes, community mental health centers, adult day care programs, job training services and residential care facilities. The demand for PTs and OTs is expected to remain strong. The BLS estimates a growth of 33.5% for OTs between 2010 and 2020, and a growth of 39% for PTs in that same time period. Both professions are expected to grow much faster than average.
|
| • | | Increasing Frequency of Reconstructive and Implant Surgery. Another important driver of the growth in the PT market is the growing need for rehabilitation products resulting from the increasing frequency of reconstructive implant procedures, including hip and knee replacements. The worldwide reconstructive implant market is currently in excess of $5.0 billion and expected to grow between 7% and 8% annually. This growth trajectory is largely driven by favorable demographics, as patient populations are expanding at both ends of the age spectrum. Among seniors, more active lifestyles and longer life expectancies are responsible for the increasing frequency of reconstructive implants. We believe Patterson Medical is well positioned to benefit from the growth in reconstructive implants, by providing physical therapy and exercise products that help patients return to a normal level of function.
|
| • | | Volatility in Funding and Regulation. The demographic growth in aged population both in the U.S. and abroad will continue to pose funding challenges for governments. Whether private pay, Medicare, Medicaid or some other funding mechanism, the population need has been outpacing available funds. This has resulted in governments changing funding methods, allocations, and rules to try to better match supply with demand. Although we do not directly participate in third party reimbursed (patient specific) product, the pressure on healthcare providers can have a pass through effect. Patterson Medical has pursued a diversified strategy so we do not rely too heavily on any one product category.
|
International Operations
Patterson Medical’s Europe, Middle East and Asia (EMEA) operations are based inForeign Corrupt Practices Act, the U.K. and are made up of Patterson Medical Limited in the U.K. and Patterson Medical France and Sacedi in France. Patterson Medical’s Australia and New Zealand operations (ANZ) are based in Australia. Our international domestic operations broadly reflect the same business model as used in the North American market. In the U.K., France, Australia and New Zealand, operations include sales and marketing, customer service, distribution, purchasing and administration. Outside of these countries, Patterson Medical uses a network of over 200 distributors to reach its customers.
Patterson Medical is a leading supplier of aids to daily living (“ADL”) and rehabilitation products in the U.K., and a significant player in the international markets. Having developed and designed many proprietary products, we are the prime source for numerous established and market leading ADL brands, including products
sold under the names Homecraft, Days, and Physiomed. The Patterson catalog offers a broad line of ADL, therapy, rehabilitation and pediatric products containing over 10,000 items and is circulated to PTs, OTs, loan equipment stores and private clinics, trade outlets and the general public.
Patterson’s central sales and marketing strategy is to provide a “one-stop shop” proposition to hospitals, local government and trade customers (dealers) throughout the U.K. Customers are reached through a combination of mail order, a 54 person sales force, telemarketing and in-market promotional and exhibition activity.
In 2009, Patterson acquired Mobilis Healthcare, increasing our global presence. While the Homecraft catalog has historically been focused on occupational therapy, Mobilis was a complementary addition, given its strong position in the physiotherapy market.
In 2010, Patterson acquired the rehabilitation business of DCC Healthcare. The acquired DCC businesses, Days Healthcare, Physiomed and Ausmedic, rank among the leaders in their overseas markets, providing assistive living products and rehabilitation equipment and supplies to hospitals, physical and occupational therapists, long-term care facilities, dealers and consumers in the U.K., continental Europe, Australia, New ZealandBribery Act and other international markets.
Patterson Medical France consists of the saleanti-bribery laws and distribution of Patterson Medical products in France. Products are marketed to customers through product brochures, mailings, telemarketing and a sales force that covers the French rehabilitation market. Sacedi focuses on distribution in the therapy and sports medicine market segments.
Strategy
Our objective is for Patterson Medical to be the customers’ first choice for rehabilitation medical supplies and equipment in each of its chosen markets.
Emphasizing Value-Added, Full-Service Capabilities. Patterson Medical currently offers our customers a “one-stop shop” for products through our industry-leading catalog with over 20,000 items, focused primarily on physical and occupational therapy products. Patterson Medical adds new products each year to our ever-expanding catalog and is committed to doing so long-term. Consistent with Patterson Medical’s current product offering, some of these new products are branded, exclusive or self-manufactured.
We recognize that different customer groups have very different economic, product, distribution channel requirements and treatment goals. Patterson Medical proactively attempts to anticipate and flexibly respondlaws pertaining to the diverse needsaccuracy of our customers, while focusing on niches, worldwide, where our capabilities, reputationinternal books and customer partnerships can result in a competitive advantage. As such, we foresee an on-going evolution of our product offerings to meet the ever-increasing demands of our diverse customer segments.
Improving Operating Efficiencies. Patterson Medical’s proprietary products, which consist of self-manufactured products, products manufactured for Patterson Medical and products sold through exclusive distribution arrangements, represent approximately 35% of total revenues.
Growing Through Internal Expansion and Acquisitions. Patterson Medical believes we are well positioned to expand in our core markets. Our market presence, clinical understanding and close customer relationships allow us to anticipate and flexibly respond to the diverse needs of our customers. We believe our market knowledge, strong vendor relationships and manufacturing capabilities will continue to drive the delivery of value-added solutions through the continual enrichment of our product mix. Additionally, we believe our broad portfolio of national accounts and commitment to expand our sales force will enhance Patterson Medical’s growth and penetration within our current and new customer base.
Patterson Medical acquired Homecraft, Mobilis, Physiomed, Days Medical, and other businesses to establish a platform for international expansion. Each business that was added has been integrated and has added to an ever expanding brand and product portfolio. The international business continues to accelerate, in terms of both product lines and geographic regions. Since the Homecraft/Kinetec transaction, Patterson Medical has added over 550 pages of new products to the catalog. The international acquisitions brought with them a proven capability to source products at favorable costs and at high levels of quality from China, which has resulted in meaningful cost savings.
In 2004, Patterson Medical acquired the assets of Medco Supply Company, Inc. (“Medco”) from NCH Corporation. With sales of approximately $60 million, Medco is one of the nation’s leading sports medicine distributors and is based in Buffalo, New York. In addition to Medco’s sports medicine supply business, Medco sells first aid, safety and medical consumable products to commercial and institutional customers,records, as well as consumable supplies and equipmentother types of foreign requirements similar to podiatrists. The complete product offering includes approximately 10,000 SKUs that are sold through direct mail catalogs and eight territory sales people. Medco markets to athletic trainers, schools and school nurses, daycare providers and healthcare professionals including podiatrists, chiropractors and physical therapists.
In 2007, Patterson Medical acquired PTOS™ software, a leading line of practice management software for physical therapists.
In 2009, Patterson Medical acquired Mobilis Healthcare, a U.K.-based business with sales of $28 million. Mobilis serves 12,000 customersthose imposed in the U.K.U.S.
See “Item 1A. Risk Factors” for a discussion of additional burdens, risks and
Franceregulatory developments that may affect our results of operations and
owns several leading brands that are sold into its primary markets.In 2010, Patterson Medical acquired the rehabilitation business of Empi Therapy Solutions, with sales of approximately $30 million.
In 2010, Patterson Medical acquired the rehabilitation business of DCC Healthcare, with sales of approximately $70 million.
Products and Services
The following table sets forth the percentage of total sales represented by the principal categories of products and services offered to rehabilitation segment customers:
| | | | | | | | | | | | |
| | | Fiscal Year Ended | |
| | | April 25,
2015 | | | April 26,
2014 | | | April 27,
2013 | |
Consumables | | | 75 | % | | | 74 | % | | | 72 | % |
Equipment and software | | | 20 | | | | 21 | | | | 23 | |
Other | | | 5 | | | | 5 | | | | 5 | |
| | | | | | | | | | | | |
| | | 100 | % | | | 100 | % | | | 100 | % |
| | | | | | | | | | | | |
Consumables
Patterson Medical offers a large selection of supply products that can be categorized as follows:
financial condition. Aids to Daily Living – dressing devices, toileting, dining, bathing aids and grooming devices
Proprietary RightsOrthopedic Soft Goods / Splints – braces, splints and orthotics for protecting, supporting and positioning
Clinical – products that assist in the examination and treatment of patients, such as exercise bands, putty, weights, balls and mats
Mobility – walkers, canes and wheelchair accessories such as gloves, trays and carrying bags
Pediatric Seating and Positioning – rolls, wedges, specialty seating and standers, and mobility assistance products for special needs children; category also includes sensory motor stimulation products such as toys, crafts and devices to assist with balance
Modalities – products for heating and cooling therapies, electrical stimulation, laser, ultrasound, paraffin, iontophoresis and therapeutic creams and lotions
Equipment and Software
Rehabilitation equipment consists of exercise, examination, treatment and therapy equipment and furniture. These products include parallel bars, treatment tables, mat platforms, treadmills, and stationary bicycles. The 2007 acquisition of PTOS™software added a line of practice management software to Patterson Medical’s wide array of product offerings. In addition, certain acquisitions in the recent past have given us access to premium equipment lines.
Other
Other products and services revenues include equipment repair revenues, software maintenance contract revenue and freight recovery on shipments to customers.
Sales and Marketing
Patterson Medical has been going through a process of establishing its brand globally to better leverage its international scope. This has led to a catalog branding transition of our acquired businesses (in various stages) including Sammons Preston in the U.S. and Canada, and Homecraft, Days, Physiomed, and Ausmedic in the remainder of the world.
A core element of Patterson Medical’s strategy is to maintain the most comprehensive single catalog of rehabilitation products and supplies. The catalog, published for over 50 years, is considered the gold standard of the industry and features the most comprehensive product offering with longstanding industry leading positions and recognized brand names. Our product management group works closely with customers, suppliers and the sales force to evaluate new products for inclusion in Patterson Medical’s product offering. We add approximately 2,000 new productshold trademarks relating to the catalog each year.
Patterson Medical has an experienced sales force, national account contracts with major customer groups, unmatched customer service within the industry“Patterson®” name and the proven ability to introduce new products each year, allowing us to compete across the entire spectrum of the rehabilitation medical supplies and non-wheelchair assistive products industry. Our field sales force totals over 200 worldwide. New sales representatives are generally hired from the ranks of physical and occupational therapists, manufacturer representatives and others with extensive industry knowledge.
Patterson Medical’s U.S. national accounts group collaborates with our sales force to meet the changing needs of our expanding account base. The national accounts program is staffed by seasoned professionals who have developed a comprehensive portfolio of contracts. Furthermore, the Patterson Medical organization has national contracts with major purchasing groups within each submarket, including hospitals, nursing homes and dealers.
The rehabilitation medical supplies and equipment business is highly fragmented. No one manufacturer, distributor or customer represents a significant portion of Patterson Medical’s revenue.
To enhance the total value we bring to our customers, Patterson Medical created a value-added benefit program for its preferred customers. The Patterson Advantagesm program entitles our best customers to discount pricing and cash rebates, priority service scheduling, supply management summary reports and continuing education course discounts.
Distribution
Patterson Medical’s distribution process centers on our ability to efficiently fill small dollar amount orders. In the U.S., over 6,000 packages ship daily from six locations. A majority of products are shipped out of three full service, shared Patterson distribution centers, one in Mt. Joy, Pennsylvania, one in Dinuba, California, and another in South Bend, Indiana. Approximately 95% of the small packages in the U.S. ship via UPS.
Patterson Medical’s U.S. call center operates from 7am – 7pm Monday through Friday, processing in excess of 5,000 calls per day. In addition, customers can order 24 hours a day through Patterson Medical’s websites. The combination of in-house staff and web ordering options provides customers with 24 hours a day, seven days a week ordering capability. Approximately 40% of customer orders are through the web or electronic data interchange, which has decreased call center activity, allowing Patterson Medical to provide more personalized service to customers.
Sources of Supply
Among Patterson Medical’s core strengths is our ability to obtain premier products from vendors. Our products are purchased from over 1,500 suppliers and manufacturers. Although no single supplier accounted for more than 7% of Patterson Medical’s total purchases in fiscal 2015, we frequently are the largest single customer of these manufacturers. Suppliers view the ability to distribute their products through our global network positively due to our reputation, longstanding industry leading position, comprehensive catalogs, national account contracts, sales force presence and distribution capabilities. We continually work at strengthening our supplier relationships through the introduction of supplier programs.
Competition
We operate in the highly fragmented rehabilitation medical supplies and equipment industry. Patterson Medical’s competition is generally either locally or regionally focused.
We believe Patterson Medical is the only national player to offer “one-stop shopping” to our customers. Patterson Medical’s national and international scale and purchasing power provide us with a favorable cost position relative to our competition.
For further information on our three operating segments, and operations by geographic area, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this Annual Report on Form 10-K and Note 13 to the Consolidated Financial Statements.
Shared Services Initiative
We have continued to consolidate our distribution infrastructure and business systems over the past several years. As of April 25, 2015, we have eight facilities that serve two or three of our business units. These strategically located facilities enable us to realize operating efficiencies and improve customer service.
Our business units also share a number of sales branch office locations, enabling multiple business units to operate at one physical location. As of April 25, 2015, we have nine shared locations.
The PTC has staff dedicated to support the technology offerings of each of our business units. Such technology product and service offerings have expanded in recent years and we will continue that focus. We
support over 80,000 customers nationwide through the PTC, and strive to resolve any situation in one call, whether the question or concern involves hardware, software, computer networking or digital technology. Development of our proprietary practice management andlogo, as well as certain of our patient education products takes place at the PTC. In addition to the PTC, technology support is provided to customers through our business unit’s sales branches, which provide network installation and customer training.
Patterson Companies, Inc.
Trademarks and Patents
Our products and services are sold under numerous trademarks including “PATTERSON®,” “EAGLESOFT®,” “CAESY®,” “SAMMONS PRESTON®,” “TUMBLE FORMS®,” “INTRAVET®,” “DIA®” and “DOLPHIN®.” Many of our trademarks are registered with the U.S. Patent and Trademark Office.other trademarks. Our U.S. trademark registrations have 10-year terms, and may be renewed for additional 10-year terms. Because we believeWe intend to protect our trademarks are well-recognized within their respective industries and valuable assets, we protect them against infringement. Some of our proprietary software into the orthodontia field is protected by patents, which have varying terms, generally of 17-20 years.
fullest extent practicable.
As of April
25, 2015,30, 2016, we had approximately 7,000
full-time employees. We have not experienced a shortage of qualified personnel in the past and believe that we will be able to attract such employees in the future. We believe our relations with employees to be good.
Available Information
WebsiteWe make available free of charge through our website, Ourwww.pattersoncompanies.com, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, statements of beneficial ownership of securities on Forms 3, 4 and 5 and amendments to thosethese reports are made available on our websiteand statements filed or furnished pursuant to Section 13(a) and Section 16 of the Securities Exchange Act of 1934 as soon as reasonably practicable after the material issuch materials are electronically filed with, or furnished to, the U.S. Securities and Exchange Commissions.Commission, or SEC. This material may be accessed by visiting the Investor Relations section of our website.
The above information is also available at the SEC’s Public Reference Room at U.S. Securities and Exchange Commission, 100 F Street, N.E., Washington, D.C. 20549, on official business days during the hours of 10:00 a.m. to 3:00 p.m., or obtainable by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet website atwww.pattersoncompanies.com.www.sec.gov, where the above information can be viewed.
Information relating to our corporate governance, including our Principles of Business Conduct and Code of Ethics, and information concerning executive officers, Board of Directors and Board committees, and transactions in Patterson securities by directors and officers, is available on or through our website,www.pattersoncompanies.com in the Investor Relations section. Information maintained on the website is not being included as
a part of
ourthis Annual Report on
Form 10-K.Governmental Regulation
The marketing, distribution and sale of certain products we sell are subject to the requirements of various federal, state, and local laws and regulations. We are subject to regulation by the Federal Food and Drug Administration, the Drug Enforcement Administration and the U.S. Department of Transportation. Among the federal laws which impact us are the Federal Food, Drug and Cosmetic Act, which regulates the advertising, recordkeeping, labeling, handling, storage and sale of drugs and medical devices which are distributed by us, and which further requires us to be registered with the Federal Food and Drug Administration; the Safe Medical Devices Act, which imposes certain reporting requirements on us in the event of an incident involving serious illness, injury or death caused by a medical device we have distributed; and the Controlled Substance Act, which regulates the recordkeeping, handling, storage and sale of certain drugs sold by us and requires us to be registered with the Drug Enforcement Administration. In addition, the transportation of certain products we distribute that are considered hazardous materials is subject to regulation by the U.S. Department of Transportation.
Furthermore, the Physician Payment Sunshine Act has imposed new reporting and disclosure requirements for drug and device manufacturers with regard to payments or other transfers of value made to certain
practitioners (including physicians, dentists and teaching hospitals), and for such manufacturers and for group purchasing organizations, with regard to certain ownership interests held by physicians in the reporting entity. The final rule implementing the Physician Payment Sunshine Act is complex, ambiguous and broad in scope; however, wholesale drug and device distributors that take title to such products may be deemed to be “applicable manufacturers” subject to full reporting requirements. It is difficult to predict how the new requirements may impact existing relationships among manufacturers, distributors, physicians, dentists and teaching hospitals.
We also are required to be licensed as a distributor of drugs and medical devices by each state in which we conduct business. In addition, several state Boards of Pharmacy requires us to be licensed in their state for the sale of animal health products within their jurisdiction. Our company is also subject to the requirements of foreign laws and regulations, which impact our operations in those foreign countries in which we conduct business.
While we believe we are in substantial compliance with the laws and regulations, that regulate our business, and that we possess the licenses required in the conduct of our business, our failure to comply with any applicable laws or regulations, or the imposition of new laws or regulations, could negatively impact our business.
Executive Officers of the Registrant
Set forth below is the name, age and position of the executive officers of Patterson,
who are elected annually and serve at the discretion of our Board of Directors, as of June
15, 2015.20, 2016. |
| | | | | |
Scott P. Anderson | | 49 | 48 |
| | President, Chief Executive Officer, Chairman of the Board – Patterson Companies, Inc. |
Ann B. Gugino | | 44 | 43 |
| | Executive Vice President, Chief Financial Officer and Treasurer – Patterson Companies, Inc. |
Paul A. Guggenheim
John E. Adent | | 48 | 55 | | | President – Patterson Dental Supply, Inc. |
George L. Henriques
| | | 54 | | | President – Patterson Veterinary Supply, Inc. |
Michael J. Orscheln
| | | 57 | | | President – Patterson Medical Supply, Inc. |
Ranell M. Hamm
| | | 53 |
| | Chief InformationExecutive Officer –- Patterson Animal Health |
| Les B. Korsh | | 46 |
| | Vice President, General Counsel and Secretary - Patterson Companies, Inc. |
Jerome E. Thygesen
Kelly A. Baker | | 47 | 57
| | | Vice President,Chief Human Resources –Officer - Patterson Companies, Inc. |
Sean M. Muniz
| | | 47 | | | Vice President, Operations – Patterson Companies, Inc. |
Our officers are elected annually and serve at the discretion of the Board of Directors.
Background of Executive Officers
Scott P. Andersonwas elected President and Chief Executive Officer of Patterson in April 2010, and became our Chairman in April 2013. Mr. Anderson has worked with Patterson since 1993. Prior to June 2006 when he became President of Patterson Dental, Supply, Inc., Patterson’s largest business, Mr. Anderson held senior management positions in the dental unit, including Vice President, Sales, and Vice President, Marketing. Mr. Anderson started his career as a territory sales representative in the dental business before becoming national equipment manager, manager of the San Francisco branch and manager of the Minnesota branch, two of Patterson’s largest dental branch offices. Mr. Anderson became one of our directors in June 2010. He also has served as a director of C.H. Robinson Worldwide, Inc. since January 2012.
Ann B. Gugino became Vice President, Chief Financial Officer and Treasurer in November 2014 and was promoted to Executive Vice President, Chief Financial Officer and Treasurer in June 2015. She previously served as Vice President, Strategy & Planning since April 2012. Before that, she was Vice President of Finance and Operations –- Patterson Dental from 2008 until April 2012. She joined Patterson in 2000 as an assistant controller and became Controller-PattersonController - Patterson Dental in 2004. Prior to her career with Patterson, she worked for Ernst & Young LLP and achieved her Certified Public Accountant designation. Paul A. Guggenheimbecame PresidentJohn E. Adent, who currentlyserves as Chief Executive Officer of Patterson Dental Supply, Inc. in April 2010. Mr. Guggenheim previously was the southwest region manager of Patterson Dental. Mr. Guggenheim joined us in 2000 following our acquisition of Guggenheim Brothers Dental Supply. Mr. Guggenheim has worked in the dental industry for over 25 years and is former chairman of the American Dental Trade Association (now the Dental Trade Alliance). He also is past president of the Dental Dealers of America and former chairman of the American Dental Cooperative.George L. Henriques became President of Patterson Veterinary Supply, Inc. in August 2006. Mr. Henriques previously served as Chief Information Officer of Webster since 2000 and is former chairman and board member of the American Veterinary Distributors Association.
Michael J. Orscheln became President of Patterson Medical Supply, Inc. in August 2013. Prior to joining Patterson, Mr. OrschelnAnimal Health, served as President and Chief Executive Officer of Phonak U.S.Animal Health International, Inc. from January 20092004 through Patterson’s acquisition of that company in June 2015.
Les B. Korsh became Vice President, General Counsel and Secretary of Patterson in July 2015. Mr. Korsh served as Patterson’s Associate General Counsel since June 2014. Prior to April 2012. Throughout over 30 yearsjoining Patterson, Mr. Korsh held positions as Vice President and Associate General Counsel for MoneyGram International, Inc. from May 2004 to May 2014, and was a principal in the law firm of healthcare distribution and medical manufacturing experience, Mr. Orscheln has held senior leadership positions with American Hospital Supply Corp., Baxter Healthcare Corp., Moore Corporation, Ltd., and Cardinal Health, Inc.Gray Plant Mooty, P.A. from June 1999 to May 2004. Ranell M. HammKelly A. Bakerbecame Chief InformationHuman Resources Officer in April 2011.February 2016. Prior to joining Patterson, Ms. Hamm was Senior Director of Clinical Information Delivery for UnitedHealth Group. Prior to UnitedHealth Group sheBaker was employed by Assurant, Inc., where sheat General Mills for more than 20 years in multiple human resources roles. Her most recent position at General Mills was Senior Vice President of Finance Systems & Services, IT Security; Chief Information Officer/Chief Operating Officer of Shared Business Services; and Senior Vice President of Shared Services Organization.Jerome E. Thygesen became Vice President, Human Resources in March 2006.for the U.S. Retail Operating Segment of General Mills, a position she held from April 2014 to January 2016. Prior to joining Patterson, Mr. Thygesenthat, Ms. Baker was Vice President, Organizational Development for Fairview Red Wing Health Services from September 2001 to February 2006, and Director of Human Resources, for Red Wing Shoe Company from March 1987 to June 2001.
Sean M. Munizbecame the Vice PresidentCorporate Groups of Operations in November 2012. Mr. Muniz held the position of Director of Facilities and Risk ManagementGeneral Mills since 2007 and, prior to that Mr. Muniz relocated to the Corporate Office when he became the Director of Operations for Patterson Logistics Services, Inc. in 2001. Mr. Muniz began his career with Patterson in 1990.February 2009.
The
statements in this section describerisks described below could have a material adverse effect on our business, reputation, financial condition and/or the
majortrading price of our common stock. Although it is not possible to predict or identify all such risks
and uncertainties, they may include, but are not limited to, the factors discussed below. Our business operations could also be adversely affected by additional factors that are not presently known to us or that we currently consider not to be material to our
businessoperations. You should not consider this list to be a complete statement of all risks and
uncertainties we face. The order in which these factors appear should
not be
considered carefully, in connection with all of the other information set forth in this annual report on Form 10-K. The risks that follow, individuallyconstrued to indicate their relative importance or
in the aggregate, are those that we think could cause our actual results to differ materially from those stated or implied in forward-looking statements.General economic conditions and volatility in the financial markets could adversely affect our operating results and financial condition.
Uncertain weak economic conditions in the U.S. or global economy, or an uncertain economic outlook, could materially adversely affect our operating results and financial condition. Current economic conditions may continue to cause customers to reduce, modify, delay, or cancel purchasing our products and services, and a prolonged period of economic instability could reduce their ability to make payments. Furthermore, such conditions could cause our suppliers to reduce their production, decrease their number of product offerings, or change their terms of sale to us. Increasing commodity prices would also increase our cost of operations, either directly through increased energy costs or indirectly through what we are charged by our suppliers. Current economic conditions could also cause changes in our product mix as our customers prioritize established, low-margin products rather than innovative, high-margin products, which could reduce our profit margin.
In addition, volatility and other disruptions in the financial markets could adversely affect the cost and availability of credit to us, as well as the cost of, and ability to sell, finance contracts we receive from customers to outside financial institutions. Reduced access to capital for our customers limits the amount of investment that they can make in their practices, and with limited investment by the customer, our revenue from equipment sales would be lower.
priority.
The dental
supply, veterinary supply, and
rehabilitation and assistive productsanimal health supply markets are highly fragmented and competitive, and we may not be able to compete successfully.
Our competitors include national, regional and local full-service distributors, mail-order distributors and, increasingly,
internet-basedInternet-based businesses. Some of our competitors have greater resources than we do, or operate through different sales and distribution models that could allow them to compete more successfully. For example, many of our suppliers are manufacturers, some of whom compete with us by selling directly to customers. Furthermore,
internet-basedInternet-based businesses may be able to offer the same product at a lower cost.
Most of our products are available from multiple sources, and our customers tend to have relationships with several different distributors who can fulfill their orders. Our competitors could obtain exclusive rights to market particular products, which we would then be unable to market. Manufacturers also could increase their efforts to sell directly to end-users and thereby eliminate or reduce the role of distributors. These suppliers could sell their products at lower prices and maintain a higher gross margin on the product sales than we can. Increased competition from any supplier of dental or animal health products could significantly reduce our rolemarket share and that of other distributors. adversely impact our financial results.
Industry consolidation among suppliers, price competition, the unavailability of products,
whether due to our inability to gain access to products or to interruptions in supply from manufacturers, or the emergence of new competitors also could increase competition.
There has also been increasing consolidation among manufacturers, which could have a material adverse effect on our margins and product availability. This consolidation could cause the industry to become more competitive as greater economies of scale are achieved by competitors, or as competitors with new lower cost business models are able to operate with lower prices and gross profit on products. These competitive pressures could adversely affect our sales and profitability. Our failure to compete effectively may limit and/or reduce our revenue, profitability and cash flow.
We may be unable to successfully integrate the operations of Animal Health International,
Inc. or realize targeted cost savings
revenues and other benefits of the
merger transaction.Onacquisition.
In June
16, 2015, we
closed a merger transaction withacquired Animal Health
International. We believe that the merger will be beneficial to us and our shareholders; however, achievingInternational, Inc. Achieving the targeted benefits of the
Animal Health International mergeracquisition will depend in part upon whether we can integrate Animal Health
International’sInternational, Inc.’s businesses in an efficient and effective manner. We may not be able to accomplish this integration process smoothly or successfully. The necessity of coordinating geographically separated organizations, systems and facilities and addressing possible differences in business backgrounds, corporate cultures and management philosophies may increase the difficulties of integration. We and Animal Health International,
Inc. operate numerous systems, including those involving management information, purchasing, accounting and finance, sales, billing,
employee benefits, payroll and regulatory compliance. Moreover, the integration of our respective operations will require the dedication of significant management resources, which is likely to distract management’s attention from day-to-day operations. Employee uncertainty and lack of focus during the integration process may also disrupt our business and result in undesired employee attrition. An inability of management to successfully integrate the operations of the two companies could have a material adverse effect on
theour business, results of operations and financial
condition of the combined businesses.condition.
In addition,
we continue to evaluate our
actual cost-savings could differ materially from our initial estimates of synergies to be realized from the Animal Health International,
merger and refine them, so that our actual cost-savings could differ materially from our initial estimates.Inc. acquisition. Actual cost-savings, the costs required to realize the cost-savings and the source of the cost-savings could differ materially from our estimates, and we cannot assure you that we will achieve
the full amount of cost-savings,
on the schedule anticipated or at all or that these cost-savings programs will not have other adverse effects on our business.
In light of these uncertainties, you should not place undue reliance on our estimated cost-savings.Finally, we may not be able to achieve the targeted operating or long-term strategic benefits of the Animal Health International,
merger or could incur higher transition costs.Inc. acquisition. An inability to realize the full extent of, or any
of, the anticipated benefits of the Animal Health International, merger,Inc. acquisition, as well as any delays encountered in the integration process, could have an adverse effect on our business, results of operations and financial condition.
General economic conditions could adversely affect our operating results and financial condition.
Uncertain weak economic conditions in the U.S. or global economy, or an uncertain economic outlook, could materially adversely affect our operating results and financial condition. These uncertainties, including, among other things, sovereign debt levels, the inability of political institutions to effectively resolve actual or perceived economic, currency or budgetary crises or issues, consumer confidence, election results, unemployment levels (and a corresponding increase in uninsured and underinsured population), interest rates, availability of capital, fuel and energy costs, tax rates, healthcare costs and the threat or outbreak of terrorism or public unrest, could adversely impact our customers and suppliers, which could materially adversely affect us. Changes in government, government debt and/or budget crises may lead to reductions in government spending in certain countries and/or higher income or corporate taxes, which could depress spending overall. In addition, recessionary conditions and depressed levels of consumer and commercial spending may cause customers to reduce, modify, delay, or cancel purchasing our products and services, and a prolonged period of economic instability could reduce their ability to make payments. Furthermore, such conditions could cause our suppliers to reduce their production, decrease their number of product offerings, or change their terms of sale to us. Increasing commodity prices may also increase our cost of operations, either directly through increased energy costs or indirectly through what we are charged by our suppliers. Recessionary economic conditions could also cause changes in our product mix as our customers prioritize established, low-margin products rather than innovative, high-margin products, which could reduce our profit margin.
Disruption to our distribution capabilities, including service issues with our third-party shippers, could materially adversely affect our results.
Weather, natural disaster, fire, terrorism, pandemic, strikes, geopolitical events or other reasons could impair our ability to distribute our products and conduct our business. If we are unable to manage effectively such events if they occur, there could be a material adverse effect on our business, financial condition or results of operations. Similarly, strikes or other service interruptions by third-party shippers could cause our operating expenses to rise and materially adversely affect our ability to deliver products on a timely basis. Our ability to provide same-day shipping and next-day delivery is an integral component of our business strategy and any such disruption could adversely impact our business, financial condition or results of operations.
We are dependent on our relationships with our sales representatives, service technicians and our customers.
The inability to attract or retain qualified employees, particularly sales representatives and service technicians who relate directly with our customers, or our inability to build or maintain relationships with customers in the dental and animal health markets, may have an adverse effect on our business. Due to the specialized nature of many of our products and services, generally only highly qualified and trained personnel have the necessary skills to market such products and provide such services. These individuals develop relationships with our customers that could be damaged if these employees are not retained. We face intense competition for the hiring of these professionals, and many professionals in the field that may otherwise be attractive candidates for us to hire may be bound by non-competition agreements with our competitors. Any failure on our part to hire, train and retain a sufficient number of qualified professionals would damage our business.
We are dependent on our suppliers because we do not manufacture the majority of the products we sell.
Interruptions in supply could adversely affect our operating results. If a supplier is unable to deliver product in a timely and efficient manner, whether due to financial difficulties, natural disasters or other reasons, we could experience lost sales. We generally do not have long-term contracts with our suppliers that commit them to producing products for us and there is considerable concentration within our animal health and dental businesses with a few key suppliers. In addition, because we generally do not control the actual production of the products we sell, we may be subject to delays caused by interruption in production based on conditions outside of our control, including the failure to comply with applicable government requirements. The failure of manufacturers of products regulated by the FDA or other governmental agencies to meet these
requirements, could result in product recall, cessation of sales or other market disruptions. An extended interruption in the supply of our products would have an adverse effect on our results of operations.
In addition, a portion of our products is sourced, directly or indirectly, from outside the U.S. Political or financial instability, increased tariffs, restrictions on trade, currency exchange rates, labor unrest, outbreak of pandemics or other events could slow distribution activities, affect foreign trade beyond our control and adversely affect our results of operations.
Material changes in our purchasing relationship with suppliers could have a material adverse effect on our business.
Our ability to sustain our gross profits depends, in part, on the structure of our relationship with our suppliers. Such relationships are subject to change from time to time, such as changing from a “buy/sell” to an agency relationship, or from an agency to a “buy/sell” relationship, either of which could adversely affect our revenues and operating income. Suppliers may also choose to change the method in which products are taken to market. A supplier may change our relationship from a complete distribution provider, including logistics and sales support, to only a logistics provider, or only a sales support provider. A reduction in our role as a value-added service provider would result in reduced margins on product sales, which could have a material adverse effect on our business, financial condition or results of operations.
Patterson’s continued success is substantially dependent on positive perceptions of Patterson’s reputation.
One of the reasons why customers choose to do business with Patterson and why employees choose Patterson as a place of employment is the reputation that Patterson has built over many years. To be successful in the future, Patterson must continue to preserve, grow and leverage the value of Patterson’s brand. Reputational value is based in large part on perceptions of subjective qualities. Even an isolated incident, or the aggregate effect of individually insignificant incidents, can erode trust and confidence, particularly if they result in adverse publicity, governmental investigations or litigation, and as a result, could tarnish Patterson’s brand and lead to adverse effects on our business, financial condition and results of operations.
Risks inherent in acquiring other businesses could offset the anticipated benefits of such acquisitions and we may face difficulty in efficiently and effectively integrating acquired businesses.
As a part of our business strategy, we have acquired businesses in the ordinary course and expect to continue acquiring businesses in the future. These acquisitions can involve a number of risks and challenges, any of which could cause significant operating inefficiencies and adversely affect our growth and profitability, and may not result in the benefits and revenue growth we expect. Such risks and challenges include underperformance relative to our expectations and the price paid for the acquisition; unanticipated demands on our management and operational resources; difficulty in integrating personnel, operations and systems; retention of customers of the combined businesses; assumption of contingent liabilities; and acquisition-related earnings charges.
As we operate through two strategic business units, we consolidate the distribution, information technology, human resources, financial and other administrative functions of those business units jointly to meet their needs while addressing distinctions in the individual markets of those segments. We may not be able to do so effectively and efficiently.
Our ability to continue to make acquisitions will depend upon our success in identifying suitable targets, which requires substantial judgment in assessing their values, strengths, weaknesses, liabilities and potential profitability, as well as the availability of suitable candidates at acceptable prices, and whether restrictions are imposed by anti-trust or other regulations.
Our acquired technology or developed technology may not be successful in maintaining existing customers or gaining new customers, or the technology may fail to produce its intended results.
The process of acquiring or developing new technology products and solutions is inherently complex and uncertain. It requires accurate anticipation of customers’ changing needs and emerging technological trends. We must make long-term investments and commit significant resources before knowing whether these investments will eventually result in products or services that achieve customer acceptance and generate the revenue required to provide desired returns. If we fail to accurately anticipate and meet our customers’ needs through the development of new products and technologies and service offerings or if we fail to adequately protect our intellectual property rights, or if our new products are not widely accepted or if our current or future products fail to meet applicable regulatory requirements, we could lose customers to our competitors and that could materially and adversely affect our results of operations and financial condition. In addition, if technology investments do not achieve the intended results, we may write-off the investments, and we face the risk of claims from system users that the systems failed to produce the intended result or negatively affected the operation of our customers’ businesses. Any such
claims, even those without merit, could be expensive and time-consuming to defend, cause us to lose customers and the associated revenue, divert management’s attention and resources, or require us to pay damages.
We are subject to a variety of litigation that could adversely affect our results of operations and financial condition.
We are subject to a variety of litigation incidental to our business, including product liability claims, intellectual property claims, employment claims, commercial disputes, governmental inquiries and investigations, and other matters arising out of the ordinary course of our business, including antitrust litigation. We also may be subject to securities litigation. From time to time we are named as a defendant in cases as a result of our distribution of products. Additionally, we own interests in companies that manufacture certain dental products. As a result, we are subject to the potential risk of product liability or other claims relating to the manufacture and distribution of products by those entities. Additionally, purchasers of private-label products may seek recourse directly from us, rather than the ultimate product manufacturer, for product-related claims. Another potential risk we face in the distribution of our products is liability resulting from counterfeit or tainted products infiltrating the supply chain. In addition, some of the products that we transport and sell are considered hazardous materials. The improper handling of such materials or accidents involving the transportation of such materials could subject us to liability. Defending against such claims may divert our management’s attention, may be expensive, and may require that we pay damage awards or settlements or become subject to equitable remedies that could adversely affect our financial condition and results of operations. A successful claim brought against us in excess of available insurance or not covered by insurance or indemnification agreements, or any claim that results in significant adverse publicity against us, could have a material adverse effect on our business and our reputation. Furthermore, the outcome of litigation is inherently uncertain.
Changes in consumer preferences could adversely affect our business.
The demand for production animal health products is heavily dependent upon consumer demand for beef, dairy, poultry and swine. The food industry in general is subject to changing consumer trends, demands and preferences. Trends within the food industry change often and our failure to anticipate, identify or react to changes in these trends could lead to, among other things, reduced demand and price reductions for our animal health products, and could have a material adverse effect on our business. Moreover, even if we do anticipate and identify these trends, we may be unable to react effectively. For example, changes in consumer diets may negatively affect consumer demand for beef, dairy, poultry and/or swine, and therefore reduce the demand for our production animal health products which could have a material adverse effect on our business.
In addition, there has been consumer concern and consumer activism with respect to the use of antibiotics and growth promotants in animal feed. A sustained campaign of negative press resulting from media or consumer advocacy groups, industry litigation, loss of export markets or other factors could adversely affect the public’s perception of the industry as a whole, or lead to reluctance by consumers to buy protein or other products. Concern over the impact of growth promotants on animal welfare could result in the removal from the market of products in that category, adversely impacting our sales. In addition, heightened consumer concern over the use of antibiotics and growth promotants in animal feed could result in increased government regulation in response to that concern. Any such event may affect the growth of the production animal market and lead to a decrease in the sales of the products we distribute, which could have a material adverse effect on our business, financial condition and results of operations.
From time to time, we experience changes in customer and product mix that affect gross margin. Changes in customer and product mix result primarily from business acquisitions, changes in customer demand, customer acquisitions, selling and marketing activities and competition. There can be no assurance that we will be able to maintain historical gross margins in the future.
Our business may be directly and indirectly affected by the cyclicality of the livestock market, including the effect of poor or unusual weather conditions, that could reduce demand for the production animal products we distribute.
Poor or unusual weather conditions can significantly affect the purchasing decisions of our production animal customers. The timing and quantity of rainfall are two of the most important factors in agricultural production. Drought can affect the availability and price of feed for livestock. Faced with a reduction in readily available feed or an increase in costs for such feed, our customers may decide to reduce herd size, which would ultimately decrease the demand for the products we distribute, including micro feed ingredients, animal health products, dairy sanitation solutions, as well as the development and implementation of systems for feed, health, information and production animal management.
The outbreak of an infectious disease within either the production animal or companion animal population could have a significant adverse effect on our business and our results of operations.
An outbreak of disease affecting animals, such as foot-and-mouth disease, porcine epidemic diarrhea virus, Newcastle disease, avian flu or bovine spongiform encephalopathy, commonly referred to as “mad cow disease,” could result in the widespread destruction of affected animals and consequently result in a reduction in demand for animal health products. In addition, outbreaks of these or other diseases or concerns of such diseases could create adverse publicity that may have a material adverse effect on consumer demand for meat, dairy and poultry products, and, as a result, on our customers’ demand for the products we distribute. It could also harm export markets for such products and lead to increased government regulation. The outbreak of a disease among the companion animal population which could cause a reduction in the demand for companion animals could also adversely affect our business.
An adverse change in supplier rebates could negatively affect our business.
The terms on which we purchase or sell products from many suppliers of animal health products may entitle us to receive a rebate based on the attainment of certain growth goals. Suppliers may reduce or eliminate rebates offered under their programs, or increase the growth goals or other conditions we must meet to earn rebates to levels that we cannot achieve. Increased competition either from generic or equivalent branded products could result in us failing to earn rebates that are conditioned upon achievement of growth goals. Additionally, factors outside of our control, such as customer preferences, consolidation of suppliers or supply issues, can have a material impact on our ability to achieve the growth goals established by our suppliers, which may reduce the amount of rebates we receive. The occurrence of any of these events could have an adverse impact on our results of operations.
The formation of group purchasing organizations (“GPO”) or provider networks may place us at a competitive disadvantage.
The formation of GPOs and provider networks may shift purchasing decisions to entities or persons with whom we do not have a historical relationship. This may threaten our ability to compete effectively, which would in turn negatively impact our financial results. Although we are seeking to obtain access to lower prices demanded by GPO contracts or other contracts, and develop relationships with provider networks and new GPOs, we cannot assure that such terms will be obtained or contracts will be executed.
Increases in over-the-counter sales of companion animal products, or sales of companion animal products from non-veterinarian sources, could adversely affect our business.
Animal health products are becoming increasingly available to consumers at competitive prices from sources other than veterinarians, including human health product pharmacies, Internet pharmacies and big-box retailers. Any increase competition from such channels could have a material adverse effect on our business, financial condition or results of operations.
Our international operations are subject to inherent risks that could adversely affect our operating results.
There are a number of risks inherent in foreign operations, including complex regulatory requirements, staffing and management complexities, import and export costs, other economic factors and political considerations, all of which are subject to unanticipated changes. Additionally, foreign operations expose us to foreign currency fluctuations. Because our financial statements are denominated in U.S. dollars, changes in currency exchange rates between the U.S. dollar and other currencies will have an impact on our income. Currency exchange rate fluctuations may adversely affect our results of operations and financial condition. Furthermore, we generally do not hedge translation exposure with respect to foreign operations.
The U.S. Health Care Reform Law could materially adversely affect our business.
Provisions of the U.S. Health Care Reform Law could have a material adverse effect on our business. Additionally, further federal and state proposals for health care reform in the U.S. are likely, and foreign government authorities may also adopt reforms of their health systems. We cannot predict what further reform proposals, if any, will be adopted, when they may be adopted, or what impact they may have on us.
Reporting and disclosure obligations under the Physician Payment Sunshine Act provisions of the Health Care Reform Law increase the cost of our regulatory compliance.
The Physician Payment Sunshine Act imposes reporting and disclosure requirements for drug and device manufacturers with regard to payments or other transfers of value made to certain practitioners (including physicians, dentists and teaching hospitals), and for such manufacturers and for group purchasing organizations, with regard to certain ownership interests held by physicians in the reporting entity. Under the Physician Payment Sunshine Act we are required to collect and report detailed information regarding certain financial relationships we have with physicians, dentists and teaching hospitals. We may also be required to report under certain state transparency laws that address circumstances not covered by the Physician Payment Sunshine Act, and some of these state laws, as well as the federal law, can be ambiguous. We are also subject to foreign regulations requiring transparency of certain interactions between suppliers and their customers. Our compliance with these new rules imposes additional costs on us.
Failure to comply with existing and future U.S. and foreign laws and regulatory requirements could subject us to claims or otherwise harm our business.
Our business is subject to requirements under various local, state, federal and international laws and regulations applicable to the distribution of pharmaceuticals and medical devices, and human cells, tissue and cellular and tissue-based products, also known as HCT/P products, and animal feed and supplements. Among other things, such laws, and the regulations promulgated thereunder:
regulate the storage and distribution, labeling, packaging, handling, reporting, record keeping, introduction, manufacturing and marketing of drugs, HCT/P products and medical devices;
subject us to inspection by the FDA and the DEA;
regulate the storage, transportation and disposal of certain of our products that are considered hazardous materials;
require us to advertise and promote our drugs and devices in accordance with applicable FDA requirements;
require registration with the FDA and the DEA and various state agencies;
require record keeping and documentation of transactions involving drug products;
require us to design and operate a system to identify and report suspicious orders of controlled substances to the DEA;
require us to manage returns of products that have been recalled and subject us to inspection of our recall procedures and activities; and
impose reporting requirements if a pharmaceutical, HCT/P product or medical device causes serious illness, injury or death.
Applicable federal, state, local and foreign laws and regulations also may require us to meet various standards relating to, among other things, licensure or registration, sales and marketing practices, product integrity and supply tracking to the manufacturer of the product, personnel, privacy and security of health or other personal information, installation, maintenance and repair of equipment, and the importation and exportation of products. Our business also is subject to requirements of similar and other foreign governmental laws and regulations affecting our operations abroad.
The failure to comply with any of these regulations, or new interpretations of existing laws and regulations, or the imposition of any additional laws and regulations, could materially adversely affect our business. Allegations by a governmental body that we have not complied with these laws could have a material adverse effect on our business. If it is determined that we have not complied with these laws, we are potentially subject to penalties including warning letters, civil and criminal penalties, mandatory recall of product, seizure of product and injunction, consent decrees, and suspension or limitation of product sale and distribution. If we enter into settlement agreements to resolve allegations of non-compliance, we could be required to make settlement payments or be subject to civil and criminal penalties, including fines and the loss of licenses. Non-compliance with government requirements could adversely affect our ability to participate in federal and state government health care programs, and damage our reputation.
If we fail to comply with laws and regulations relating to health care fraud or other laws and regulations, we could suffer penalties or be required to make significant changes to our operations, which could materially adversely affect our business.
We are subject to federal and state (and similar foreign) health care fraud and abuse, referral and reimbursement laws and regulations. Some of these laws, referred to as “false claims laws,” prohibit the submission or causing the submission of false or fraudulent claims for reimbursement to federal, state and other health care payers and programs. Other laws, referred to as “anti-kickback laws,” prohibit soliciting, offering, receiving or paying remuneration in order to induce the referral of a patient or ordering, purchasing, leasing or arranging for or recommending ordering, purchasing or leasing, of items or services that are paid for by federal, state and other health care payers and programs. Health care fraud measures may implicate, for example, our relationships with pharmaceutical manufacturers, our pricing and incentive programs for physician and dental practices, and our dental and physician practice management products that offer billing-related functionality.
If we fail to comply with laws and regulations relating to the confidentiality of sensitive personal information or standards in electronic health data transmissions, we could be required to make significant changes to our products, or incur substantial fines, penalties or other liabilities.
Our dental practice management products include electronic information technology systems that store and process personal health, clinical, financial and other sensitive information of individuals. These information technology systems may be vulnerable to breakdown, wrongful intrusions, data breaches and malicious attack, which could require us to expend significant resources to eliminate these problems and address related security concerns, and could involve claims against us by private parties and/or governmental agencies. For example, we are directly or indirectly subject to numerous federal, state, local and foreign laws and regulations that protect the privacy and security of such information, such as HIPAA. HIPAA requires, among other things, the implementation of various recordkeeping, operational, notice and other practices intended to safeguard that information, limit its use to allowed purposes and notify individuals in the event of privacy and security breaches. Failure to comply with these laws and regulations could expose us to breach of contract claims, substantial fines, penalties and other liabilities and expenses, costs for remediation and harm to our reputation. Also, evolving laws and regulations in this area could restrict the ability of our customers to obtain, use or disseminate patient information, or could require us to incur significant additional costs to re-design our products in a timely manner to reflect these legal requirements, either of which could have a material adverse effect on our results of operations.
Risks generally associated with our information systems and cyber-security attacks could adversely affect our results of operations.
We rely on information systems (“IS”) in our business to obtain, rapidly process, analyze and manage data to, among other things:
facilitate the purchase and distribution of thousands of inventory items through numerous fulfillment centers;
receive, process and ship orders on a timely basis;
accurately bill and collect from thousands of customers;
process payments to suppliers; and
provide products and services that maintain certain of our customers’ electronic medical or dental records (including protected health information of their human patients).
Our IS are vulnerable to natural disasters, power losses, computer viruses, telecommunication failures and other problems. In addition, information security risks have generally increased in recent years. Increased IS security threats and more sophisticated computer crime, including advanced persistent threats, pose a potential risk to the security of our IS, customers and other business partners, as well as the confidentiality, availability, and integrity of our data, customers and other business partners. A cyber-security attack that bypasses our IS security causing an IS security breach may lead to a material disruption of our IS and/or the loss of business information, which could adversely affect our business. These risks may include, among others, the following:
future results could be adversely affected due to the theft, destruction, loss, misappropriation or release of confidential data or intellectual property;
operational or business delays resulting from the disruption or damage of IS and subsequent clean-up and mitigation activities, including our ability to process orders, maintain proper levels of inventories, collect accounts receivable and disburse funds;
negative publicity resulting in reputation or brand damage with our customers, suppliers or industry peers; and
lawsuits for, or regulatory proceedings relating to, a breach of personal financial and health information belonging to our customers and their patients.
We also deliver Internet-based services and, accordingly, depend on our ability and the ability of our customers access the Internet. In the event of any difficulties, outages or delays by Internet service providers, we may be impeded from providing such services, which may have a material adverse effect on our business and our reputation.
Our results of operations and cash flows could be adversely affected if our IS are interrupted, damaged by unforeseen events, incur cyber-security attacks or fail for any extended period of time. If our business continuity plans do not provide effective alternative processes on a timely basis, we may suffer interruptions in our ability to manage or conduct our operations, which may adversely affect our business. We may need to expend additional resources in the future to continue to protect against, or to address problems caused by, any business interruptions or data security breaches.
Breaches of information systems security could damage our reputation, disrupt operations, increase costs and/or decrease revenues.
We collect and store confidential information from customers so that they may, among other things, purchase products or services, enroll in promotional programs, register on our websites or otherwise communicate or interact with us. We also acquire and retain information about suppliers, employees and others in the normal course of business. We may be unable to protect sensitive data and/or the integrity of our IS. In addition, compliance with evolving privacy and information security laws and standards may result in significant additional expense due to increased investment in technology and the development of new operational processes. We could be subject to liability for failure to comply with these laws and standards, failure to protect information, or failure to respond appropriately to an incident or misuse of information, including use of information for unauthorized marketing purposes.
The products we sell are subject to market and technological obsolescence; our software products may contain undetected errors or bugs when released.
Some of the products we distribute are subject to technological obsolescence outside of our control, since we do not manufacture the majority of the products we sell. If our customers discontinue purchasing a given product, we might have to record expense related to the diminution in value of inventories we have in stock, and depending on the magnitude, that expense could adversely impact our operating results.
Furthermore, we cannot be sure that we will be successful in introducing and marketing new software, software enhancements, or e-services, or that such software, software enhancements and e-services will be released on time or accepted by the market. Our software and applicable e-services products, like software products generally, may contain undetected errors or bugs when introduced, or as new versions are released. We cannot be sure that future problems with post-release software errors or bugs will not occur. Any such defective software may result in increased expenses related to the software and could adversely affect our relationships with the customers using such software, as well as our reputation. We do not have any patents on our software or e-services, and rely upon copyright, trademark and trade secret laws, as well as contractual and common-law protections. We cannot provide assurance that such legal protections will be available or enforceable to protect our software or e-services products.
Volatility in the financial markets could adversely affect our operating results and financial condition.
Volatility and other disruptions in the financial markets could adversely affect the cost and availability of credit to us, as well as the cost of, and ability to sell, finance contracts we receive from customers to outside financial institutions. Reduced access to capital for our customers limits the amount of investment that they can make in their businesses, and with limited investment by the customer, our revenue from equipment sales could be adversely affected.
The market price for our common stock may be highly volatile.
The market price for our common stock may be highly volatile. A variety of factors may have a significant impact on the market price of our common stock, including:
the publication of earnings estimates or other research reports and speculation in the press or investment community;
changes in our industry and competitors;
changes in government or legislation;
our financial condition, results of operations and cash flows and prospects;
stock repurchases;
any future issuances of our common stock, which may include primary offerings for cash, stock splits, issuances in connection with business acquisitions, issuances of restricted stock/units and the grant or exercise of stock options from time to time;
general market and economic conditions; and
any outbreak or escalation of hostilities in areas where we do business.
In addition, the NASDAQ Stock Market can experience extreme price and volume fluctuations that can be unrelated or disproportionate to the operating performance of the companies listed on NASDAQ. Broad market and industry factors may negatively affect the market price of our common stock, regardless of actual operating performance. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted against companies. This type of litigation, if instituted, could result in substantial costs and a diversion of management’s attention and resources, which could have a material adverse effect on our business.
Our future success depends on our leadership development and succession planning.
Our success depends, in large part, on our ability to recruit skilled personnel, and then identify and train our personnel to transition into key roles to support the long-term growth of our business. While our Board of Directors and management actively monitor our succession plans and processes, our business could suffer if we lose key personnel unexpectedly. In addition, competition for senior management is intense and we may not be successful in attracting and retaining key personnel.
If we experience significant disruptions in our operations during our enterprise resource planning implementation, our business may be adversely affected.
We depend on our information technology systems for the efficient functioning of our business, including accounting, data storage, purchasing and inventory management. We are working on implementing a new enterprise resource planning system (“ERP”) across our significant operating locations. We expect that the ERP will take three to four years to implement and will require the investment of significant human and financial resources. During implementation, we may encounter difficulties in operating our business, which could disrupt our operations, including our ability to timely ship and track customer orders, determine inventory requirements, manage our supply chain, and otherwise adequately service our customers, and lead to increased costs and other difficulties. If we experience significant disruptions during our ERP implementation, we may not be able to repair our systems in an efficient and timely manner. Accordingly, such events may disrupt or reduce the efficiency of our entire operation and have a material adverse effect on our operating results and cash flows.
We may be required to record a significant charge to earnings if our goodwill or other intangible assets become impaired.
Our balance sheet includes goodwill and other identifiable intangible assets. If impairment of our goodwill or other identifiable intangible assets is determined, we may be required to record a significant charge to earnings in the period of such determination under U.S. generally accepted accounting principles (GAAP).
Our credit agreement contains restrictive covenants, which limit our business and financing activities.
In order to fund our financial obligations in connection with the Animal Health International,
merger,Inc. acquisition, we entered into a credit agreement, which includes customary covenants that impose restrictions on our business and financing activities, subject to certain exceptions or the consent of our lenders, including, among other things, limits on our ability to incur additional debt, create liens, enter into merger, acquisition and divestiture transactions, pay dividends and engage in transactions with affiliates. The credit agreement contains certain customary affirmative covenants, including a requirement that we maintain a maximum consolidated leverage ratio and a minimum consolidated interest coverage ratio, and customary events of default. Our ability to comply with these covenants may be adversely affected by events beyond our control, including economic, financial and industry conditions. A breach of the credit agreement covenants may result in an event of default, which could allow our lenders to terminate the commitments under the credit agreement, declare all amounts outstanding under the credit agreement (if any), together with accrued interest, to be immediately due and payable and exercise other rights and remedies. If this occurs, we may not be able to refinance the accelerated indebtedness on acceptable terms, or at all, or otherwise repay the accelerated indebtedness.
Risks inherent in acquiring other businesses could offset the anticipated benefits of such acquisitions and we may face difficulty in efficiently and effectively integrating acquired businesses since we operate in three distinct segments.
As a part of our business strategy, we have acquired businesses in the ordinary course and expect to continue acquiring businesses in the future. These acquisitions can involve a number of risks and challenges, any of which could cause significant operating inefficiencies and adversely affect our growth and profitability, and may not result in the benefits and revenue growth we expect. Such risks and challenges include underperformance relative to our expectations and the price paid for the acquisition; unanticipated demands on our management and operational resources; difficulty in integrating personnel, operations and systems; retention of customers of the combined businesses; assumption of contingent liabilities; and acquisition-related earnings charges.
As we operate in three distinct segments, we consolidate the distribution, information technology, human resources, financial and other administrative functions of those business units jointly to meet their needs while addressing distinctions in the individual markets of those segments. We may not be able to do so effectively and efficiently.
Our ability to continue to make acquisitions will depend upon our success in identifying suitable targets, which requires substantial judgment in assessing their values, strengths, weaknesses, liabilities and potential profitability, as well as the availability of suitable candidates at acceptable prices, and whether restrictions are imposed by anti-trust or other regulations.
Our international operations are subject to inherent risks that could adversely affect our operating results.
There are a number of risks inherent in foreign operations, including complex regulatory requirements, staffing and management complexities, import and export costs, other economic factors and political considerations, all of which are subject to unanticipated changes. Additionally, foreign operations expose us to foreign currency fluctuations. Furthermore, we generally do not hedge translation exposure with respect to foreign operations.
We depend on our relationships with our sales representatives and customers, as well as suppliers of the products that we distribute.
The inability to attract or retain qualified employees, particularly sales representatives who relate directly with our customers, or our inability to build or maintain relationships with suppliers of products that we distribute may have an adverse effect on our business.
We are dependent on our suppliers because we do not manufacture the majority of the products we sell.
Interruptions in supply could adversely affect our operating results. If a supplier is unable to deliver product in a timely and efficient manner, whether due to financial difficulties, natural disasters or other reasons, we could experience lost sales. We generally do not have long-term contracts with our suppliers that commit them to producing products for us.
While there is generally more than one source of supply for most of the categories of products we sell, there is considerable concentration within our veterinary and dental businesses with a few key suppliers. For example, in fiscal 2015 and 2014, Patterson Veterinary’s top 10 suppliers comprised 65% and 68%, respectively, and the single largest supplier comprised 14% and 17%, respectively, of the total cost of veterinary supply sales. In the event that any of our suppliers were to become unable or unwilling to continue to provide the products we sell in the amounts we require, we would need to identify and obtain products from acceptable replacement sources on a timely basis. There is no guarantee that we would be able to obtain such alternative sources of supply on a timely basis, if at all. An extended interruption in the supply of our products would have an adverse effect on our results of operations.
In addition, a portion of our products is sourced, directly or indirectly, from outside the United States. Political or financial instability, increased tariffs, restrictions on trade, currency exchange rates, labor unrest, outbreak of pandemics or other events could slow distribution activities, affect foreign trade beyond our control and adversely affect our results of operations.
The products we sell are subject to market and technological obsolescence.
We carry approximately 195,000 different product stock keeping units (SKUs). Some of these products are subject to technological obsolescence outside of our control, since we do not manufacture the majority of the products we sell. If our customers discontinue purchasing a given product, we might have to record expense related to the diminution in value of inventories we have in stock, and depending on the magnitude, that expense could adversely impact our operating results.
Audits by tax authorities could result in additional tax payments for prior
periods.periods, and tax legislation could materially adversely affect our financial results and tax liabilities.
The amount of income taxes we pay is subject to ongoing audits by U.S. federal, state and local tax authorities and by non-U.S. tax authorities. If these audits result in assessments different from our reserves, our future results may include unfavorable adjustments to our tax liabilities.
We are subject to
a variety of litigation that could adversely affect our results of operationsthe tax laws and
financial condition.We are subject to a variety of litigation incidental to our business, including product liability claims, intellectual property claims, employment claims, commercial disputes, governmental inquiries and investigations, and other matters arising outregulations of the ordinary course of our business. We also may be subject to securities litigation. Defending these lawsuits may divert our management’s attention, may be expensive, and may require that we pay damage awards or settlements or become subject to equitable remedies that could adversely affect our financial condition and results of operations. Any insurance or indemnification rights that we may have may be insufficient or unavailable to protect us against potential loss exposure. A successful claim brought against us in excess of available insurance or not covered by indemnification agreements, or any claim that results in significant adverse publicity against us, could have an adverse effect on our business and our reputation.
Our future success depends on our leadership development and succession planning.
Our success depends, in large part, on our ability to recruit skilled personnel, and then identify and train our personnel to transition into key roles to support the long-term growth of our business. While our Board of
Directors and management actively monitor our succession plans and processes, our business could suffer if we lose key personnel unexpectedly. In addition, competition for senior management is intense and we may not be successful in attracting and retaining key personnel.
We may be required to record a significant charge to earnings if our goodwill or other intangible assets become impaired.
Our balance sheet includes goodwill and other identifiable intangible assets. If impairment of our goodwill or other identifiable intangible assets is determined, we may be required to record a significant charge to earnings in the period of such determination under U.S. generally accepted accounting principles (GAAP).
The healthcare industry is experiencing substantial changes, which are causing uncertainty in the market and may adversely affect our dental and rehabilitation and assistive products supply businesses.
The healthcare industry is highly regulated and subject to changing political, economic and regulatory influences. In recent years, the healthcare industry has undergone significant change driven by various efforts to reduce costs, including: trends toward managed care; consolidation of healthcare distribution companies; consolidation of healthcare manufacturers; collective purchasing arrangements and consolidation among office-based healthcare practitioners that may enable purchasing at more favorable prices than we can obtain and may shift purchasing decisions to entities or persons with whom we do not have a historical relationship; and changes in reimbursements to customers. Our profit margins and the profit margins of our suppliers and our customers may be adversely affected by industry changes. If we are unable to react effectively to these and other changes in the healthcare industry, our operating results could be adversely affected.
In particular, recent healthcare related legislation and regulation in the U.S. may affect expenditures or reimbursements for rehabilitation and assistive products or expenditures or reimbursements for dental services by private dental insurance plans. Other new regulatory requirements could subject us to additional reporting and disclosure requirements, taxes, and/or restrictions. Regulations under healthcare reform legislation continue to evolve, resulting in uncertainty surrounding their application and related enforcement, as well as consuming resources necessary to comply.
Healthcare markets are rapidly changing, as well. For example, our assumptions concerning future per capita expenditures for dental services, including assumptions as to population growth and the demand for preventive and specialty dental services such as periodontic, endodontic and orthodontic procedures, may be mistaken. Fluctuations in demand for infection control products currently used for prevention of the spread of communicable diseases such as AIDS, hepatitis and herpes may adversely affect our revenue.
Failure to comply with existing and future U.S. and foreign laws and regulatory requirements could subject us to claims or otherwise harm our business.
The marketing, distribution and sale of certain products we sell are subject to the requirements of various federal, state and local governments, as well as foreign jurisdictions. From time to time, various legislative initiatives may be proposed that could materially adversely affect our tax positions. There can be no assurance that our effective tax rate will not be materially adversely affected by legislation resulting from these initiatives. In addition, tax laws and regulations in the U.S.are extremely complex and abroad. Our failuresubject to complyvarying interpretations. Although we believe that our historical tax positions are sound and consistent with applicable laws, may subject us to claims, additional liabilities, or enforcement actions by an administrative agency, which could require us to make settlement payments, be subject to civil or criminal penalties (including fines or loss of licenses), or damage our reputation, any of which could adversely affect our business, financial condition and results of operations.
In the U.S., we are subject to regulation by the Federal Food and Drug Administration, the Drug Enforcement Administration and the U.S. Department of Transportation. Among the federal laws which impact our business are the Federal Food, Drug and Cosmetic Act, which regulates the advertising, record keeping, labeling, handling, storage and sale of drugs and medical devices we distribute, and which requires us to be registered with the Federal Food and Drug Administration; the Safe Medical Devices Act, which imposes certain
reporting requirements on us in the event of an incident involving serious illness, injury or death caused by a medical device we distributed; and the Controlled Substance Act, which regulates the record keeping, handling, storage and sale of certain drugs we sell, and which requires us to be registered with the Drug Enforcement Administration. In addition, the transportation of certain products we distribute, which are considered hazardous materials, is subject to regulation by the U.S. Department of Transportation.
We are also required to be licensed as a distributor of drugs and medical devices by each state in which we conduct business. In addition, several state Boards of Pharmacy require us to be licensed for the sale of animal health products within their jurisdiction. We are also subject to the requirements of foreign laws and regulations, which impact our operations in those foreign countries where we conduct business.
In the course of our business, particularly in providing installation and support relating to our practice management software, we frequently have access to personal financial and health information of our customers and their patients. Because of this access, we are also subject to additional federal and state laws and regulations, such as the Health Insurance Portability and Accounting Act (HIPAA), which, through regulations and rulemaking, impose on us certain requirements to protect the privacy and security of personal health information.
Furthermore, as discussed above, the industries in which we operate have recently experienced an increase in new regulations, which makes compliance increasingly difficult. Costs and resources associated with complying with these increasing regulationsexisting precedent, they can be considerable.
The implementation of the reporting and disclosure obligations of the Physician Payment Sunshine Act could adversely affectno assurance that our business.
The Physician Payment Sunshine Act has imposed new reporting and disclosure requirements for drug and device manufacturers with regard to paymentstax positions will not be challenged by relevant tax authorities or other transfers of value made to certain practitioners (including physicians, dentists and teaching hospitals), and forthat we would be successful in any such manufacturers and for group purchasing organizations, with regard to certain ownership interests held by physicians in the reporting entity. The final rule implementing the Physician Payment Sunshine Act is complex, ambiguous and broad in scope; however, wholesale drug and device distributors which take title to such products may be deemed to be “applicable manufacturers” subject to full reporting requirements. It is difficult to predict how the new requirements may impact existing relationships among manufacturers, distributors, physicians, dentists and teaching hospitals. While we believe we have substantially compliant programs and controls in place to comply with the Physician Payment Sunshine Act requirements, our compliance with the new final rule imposes additional costs on us.
challenge.
We are exposed to the risk of changes in interest rates.
Our balance sheet includes certain non-current assets that are sensitive to movements in short-term interest rates. The variable rates are comprised of both LIBOR and commercial paper rates plus a spread and reset on certain dates, as set forth in the respective agreements. In addition, our balance sheet includes fixed rate long-term debt, whose fair value could be adversely affected by movements in interest rates. We finance purchases by our customers using finance contracts that are issued at fixed interest rates, and sell these contracts under various funding arrangements that are priced using variable interest rates. Sudden and dramatic changes in the interest rates within relevant markets could adversely affect our results of operations.
Risks generally associated with our information systems could adversely affect our results of operations.
We rely on information systems (“IS”) in our business to obtain, rapidly process, analyze and manage data to, among other things:
facilitate the purchase and distribution of thousands of inventory items through numerous distribution centers;
receive, process and ship orders on a timely basis;
accurately bill and collect from thousands of customers;
process payments to suppliers; and
provide technical support to our customers.
A cyber-attack that bypasses our IS security causing an IS security breach may lead to a material disruption of our IS and/or the loss of business information, which could adversely affect our business. These risks may include, among others, the following:
future results could be adversely affected due to the theft, destruction, loss, misappropriation or release of confidential data or intellectual property;
operational or business delays resulting from the disruption of IS and subsequent clean-up and mitigation activities;
negative publicity resulting in reputation or brand damage with our customers, suppliers or industry peers; and
liability for a breach of personal financial and health information belonging to our customers and their patients.
Our results of operations could be adversely affected if our IS are interrupted, damaged by unforeseen events, incur cyber-attacks or fail for any extended period of time.
If we experience significant disruptions in our operations during our enterprise resource planning implementation, our business may be adversely affected.
We depend on our information technology systems for the efficient functioning of our business, including accounting, data storage, purchasing and inventory management. We are working on implementing a new enterprise resource planning system (“ERP”) across our significant operating locations. We expect that the ERP will take three to four years to implement and will require the investment of significant human and financial resources. During implementation, we may encounter difficulties in operating our business, which could disrupt our operations, including our ability to timely ship and track customer orders, determine inventory requirements, manage our supply chain, and otherwise adequately service our customers, and lead to increased costs and other difficulties. If we experience significant disruptions during our ERP implementation, we may not be able to repair our systems in an efficient and timely manner. Accordingly, such events may disrupt or reduce the efficiency of our entire operation and have a material adverse effect on our operating results and cash flows.
Our governing documents, other documents to which we are a party, and Minnesota law may discourage takeovers and business combinations that our shareholders might consider to be in their best interests.
Anti-takeover provisions of our articles of incorporation, bylaws, and Minnesota law could diminish the opportunity for shareholders to participate in acquisition proposals at a price above the then current market price of our common stock. For example, while we have no present plans to issue any preferred stock, our Board of Directors, without further shareholder approval, may issue up to approximately 30 million shares of undesignated preferred stock and fix the powers, preferences, rights and limitations of such class or series, which could adversely affect the voting power of our common stock. Further, as a Minnesota corporation, we are subject to provisions of the Minnesota Business Corporation Act, or MBCA, regarding “control share acquisitions” and “business combinations.” We may, in the future, consider adopting additional anti-takeover measures. The authority of our Board of Directors to issue undesignated preferred stock and the anti-takeover provisions of the MBCA, as well as any future anti-takeover measures adopted by us, may, in certain circumstances, delay, deter or prevent takeover attempts and other changes in control of our company not approved by our Board of Directors.
In addition, our Amended and Restated Equity Incentive Plan provides that awards issued under that plan are fully vested and all restrictions on the awards lapse in the event of a change in control, as defined in such plan. Additionally, our Capital Accumulation Plan provides that on an event of acceleration, as defined in the plan, the restrictions on shares of restricted stock lapse and such stock becomes fully vested. An event of acceleration occurs if (a) a person has acquired a beneficial ownership interest in 30% or more of the voting power of our company, (b) a tender offer is made to acquire 30% or more of our company, (c) a solicitation subject to Rule 14a-11 of the Exchange Act relating to the election or removal of 50%
or more of our Board of Directors occurs, or (d) our shareholders approve a merger, consolidation, share exchange, division or sale of our company’s assets. Furthermore, if the surviving or acquiring company in a change in control does not assume our company’s outstanding incentive awards or provide for their equivalent substitutes, our 2015 Omnibus Incentive Plan provides for accelerated vesting of incentive awards following a change in control upon the termination of the employee’s service and in certain other circumstances, provided such event occurs within two years of a change in control.
Item 1B. UNRESOLVED STAFF COMMENTS
We have not received any written comments regarding our reports from the staff of the SEC issued 180 days or more preceding the end of the 2015 fiscal year that remain unresolved, nor have we received any written comments regarding our reports from the SEC within the past 180 days.
None.
We own our principal executive offices in St. Paul, Minnesota, and the majority of our distribution and manufacturing facilities. Leases of other distribution, manufacturing and administrative facilities generally are on a long-term basis, expiring at various times, with options to renew for additional periods. Most sales offices are leased for varying and usually shorter periods, with or without renewal options. We believe our properties are in good operating condition and are suitable for the purposes for which they are being used.
Patterson Logistics Services
The majority of assets we use to distribute product are owned and operated by Patterson Logistics Services, Inc. (“PLSI”), a wholly-owned subsidiary, which operates the distribution function for the benefit of
all three of our
salesdental and
marketing businessanimal health supply segments in the U.S. PLSI also advises on the operations of our
distributionfulfillment centers outside of the
U.SU.S., but these properties are not owned by PLSI.
In addition, PLSI operates fulfillment centers pursuant to the transition services agreement discussed under Discontinued Operations in Part I, Item 1.
As of April
25, 2015,30, 2016, PLSI operated
the following 15
distributionfulfillment centers (eight primary centers) totaling
approximately 1.21.1 million square
feet of distribution space as follows:feet:onetwo dental distribution center located in Hawaii;
fulfillment centers (Hawaii and Texas);four veterinary distributionanimal health fulfillment centers located in Alabama,(Alabama, Colorado and Texas (two));
two rehabilitation distributionseven fulfillment centers located in New York State and Indiana;
one distribution center located in Texas, which stocks and distributes boththat distribute dental and rehabilitation product;
three distribution centers located inanimal health products (California, Florida, Indiana, Iowa, Pennsylvania, South Carolina and Washington state, which stockWashington); and distribute dental and veterinary products; and
four distributiontwo fulfillment centers located in California, Florida, Indiana and Pennsylvania, which distribute product for all three ofpursuant to the business units.
transition services agreement.Approximately 90% of the PLSI
distributionfulfillment center space is owned.
Patterson Technology Center
The Patterson Technology Center is a state-of-the-art 100,000 square foot facility in Effingham, Illinois, which was completed in fiscal 2012.
In addition to the locations operated by PLSI, Patterson Dental utilizes an owned location in Illinois to manufacture and ship printed office products.
The dental salesDental supply operations in Canada are supported by
distributionfulfillment centers located in Quebec and
Alberta, Canada.The dental supplyAlberta. This segment is headquartered in our principal executive offices, which is an owned facility. This segment alsoand maintains sales and administrative offices at approximately 8880 locations in overacross 40 states in the U.S. and at 10 locations in Canada, the majority of which are leased.
Veterinary Supply
Veterinary Supply headquarters is In addition, this segment operates the Patterson Technology Center, a leasedstate-of-the-art, 100,000 square-foot facility in Devens, Massachusetts. Our veterinaryEffingham, Illinois.
Animal Health Supply
In addition to the locations operated by PLSI, Patterson Animal Health has approximately 100 properties located in the U.S. and Canada, the majority of which are leased. In the U.S., these properties are in 68 locations across 27 states, and comprise fulfillment centers, storage locations, sales
personnel generally reside within branch locations.Internationally, thisand administrative offices, retail stores and call centers. In Canada, animal health supply operations are supported by two fulfillment centers located in Alberta and Ontario. The segment’s operations in the U.K. business has itsare supported by a primary distribution facility in Stoke-on-Trent and additionally hasan additional nine depots used as secondary distribution points throughout the U.K.
Rehabilitation Supply
Patterson Medical is headquartered The headquarters for the animal health supply segment are located in a leased facilityoffice in Warrenville, Illinois. Domestically, the rehabilitation supply segment maintains manufacturing facilities in Wisconsin and New York. This segment’s eighteen branch office locations include nine that are shared with the dental supply segment.
Internationally, this segment has facilities located in the U.K., France, Canada, Australia, New Zealand, China and Thailand.
Greeley, Colorado.
Item 3. LEGAL PROCEEDINGS
From time
In September 2015, we were served with a summons and complaint in an action commenced in the U.S. District Court for the Eastern District of New York, entitled SourceOne Dental, Inc. v. Patterson Companies, Inc., Henry Schein, Inc. and Benco Dental Supply Company, Civil Action No. 15-cv-05440-JMA-GRB. SourceOne, as plaintiff, alleges that, through its website, it markets and sells dental supplies and equipment to time,dentists. SourceOne alleges in the complaint, among other things, that we, may becomealong with the defendants Henry Schein and Benco, conspired to eliminate plaintiff as a partycompetitor and to ordinary routine litigation incidentalexclude them from the market for the marketing, distribution and sale of dental supplies and equipment in the U.S. and that defendants unlawfully agreed with one another to ourboycott dentists, manufacturers, and state dental associations that deal with, or considered dealing with, plaintiff. Plaintiff asserts the following claims: (i) unreasonable restraint of trade in violation of state and federal antitrust laws; (ii) tortious interference with prospective business relations; (iii) civil conspiracy; and (iv) aiding and abetting the other defendants’ ongoing tortious and anticompetitive conduct. Plaintiff seeks equitable relief, compensatory and treble damages, jointly and severally, punitive damages, interest, and reasonable costs and expenses, including without limitation, product liability claims, intellectual property claims, employment claims, commercial disputes, governmental inquiriesattorneys’ fees and investigations, and other matters arising out ofexpert fees. Plaintiff has not specified a damage amount in its complaint. We intend to defend ourselves against the ordinary course of our business. While the results of legal proceedings cannot be predicted with certainty, based upon our historical experience, the resolution of these proceedings isaction vigorously. We do not expected toanticipate that this matter will have a material adverse effect on our financial condition.
Beginning in January 2016, purported class action complaints were filed against defendants Henry Schein, Inc., Benco Dental Supply Co. and Patterson Companies, Inc. Although there were factual and legal variations among these complaints, each alleged that defendants conspired to foreclose and exclude competitors by boycotting manufacturers, state dental associations, and others that deal with defendants’ competitors. On February 9, 2016, the U.S. District Court for the Eastern District of New York ordered all of these actions, and all other actions filed thereafter asserting substantially similar claims against defendants, consolidated financial position, resultsfor pre-trial purposes. On February 26, 2016, a consolidated class action complaint was filed by Arnell Prato, D.D.S., P.L.L.C., d/b/a Down to Earth Dental, Evolution Dental Sciences, LLC, Howard M. May, DDS, P.C., Casey Nelson, D.D.S., Jim Peck, D.D.S., Bernard W. Kurek, D.M.D., Larchmont Dental Associates, P.C., and Keith Schwartz, D.M.D., P.A. (collectively, the “putative class representatives”) in the U.S. District Court for the Eastern District of operations,New York, entitled In re Dental Supplies Antitrust Litigation, Civil Action No. 1:16-CV-00696-BMC-GRB. Subject to certain exclusions, the putative class representatives seek to represent all persons who purchased dental supplies or cash flows.equipment in the U.S. directly from any of the defendants, or non-defendant Burkhart Dental Supply Company, Inc., since August 31, 2008. In the consolidated class action complaint, putative class representatives allege a nationwide agreement among Henry Schein, Benco, Patterson and Burkhart not to compete on price. The consolidated class action complaint asserts a single count under Section 1 of the Sherman Act, and seeks equitable relief, compensatory and treble damages, jointly and severally, interest, and reasonable costs and expenses, including attorneys’ fees and expert fees. Putative class representatives have not specified a damage amount in their complaint. While the outcome of litigation is inherently uncertain, we believe the consolidated class action complaint is without merit, and we intend to vigorously defend ourselves in this litigation.
Item 4. MINE SAFETY DISCLOSURES
PART II
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Patterson’s common stock trades on the NASDAQ Global Select Market® under the symbol “PDCO.” The following table sets forth the range of high and low sale prices for Patterson’s common stock for each full quarterly period within the two most recent fiscal years. Such quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions.
| | | | | | | | | | | | |
| | | High | | | Low | | | Dividends
per share | |
Fiscal 2015 | | | | | | | | | | | | |
First Quarter | | $ | 41.93 | | | $ | 37.03 | | | $ | 0.20 | |
Second Quarter | | | 42.61 | | | | 38.04 | | | | 0.20 | |
Third Quarter | | | 51.49 | | | | 41.43 | | | | 0.20 | |
Fourth Quarter | | | 51.48 | | | | 47.22 | | | | 0.22 | |
Fiscal 2014 | | | | | | | | | | | | |
First Quarter | | | 40.59 | | | | 37.20 | | | | 0.16 | |
Second Quarter | | | 42.60 | | | | 39.59 | | | | 0.16 | |
Third Quarter | | | 44.27 | | | | 39.99 | | | | 0.16 | |
Fourth Quarter | | | 43.01 | | | | 39.05 | | | | 0.20 | |
|
| | | | | | | | | | | |
| | High | | Low | | Dividends per share |
| Fiscal 2016 | | | | | |
| First Quarter | $ | 50.94 |
| | $ | 45.32 |
| | $ | 0.22 |
|
| Second Quarter | 53.07 |
| | 42.62 |
| | 0.22 |
|
| Third Quarter | 48.87 |
| | 38.51 |
| | 0.22 |
|
| Fourth Quarter | 46.64 |
| | 40.17 |
| | 0.24 |
|
| Fiscal 2015 | | | | | |
| First Quarter | 41.93 |
| | 37.03 |
| | 0.20 |
|
| Second Quarter | 42.61 |
| | 38.04 |
| | 0.20 |
|
| Third Quarter | 51.49 |
| | 41.43 |
| | 0.20 |
|
| Fourth Quarter | 51.48 |
| | 47.22 |
| | 0.22 |
|
Holders
On June
15, 2015,20, 2016, the number of holders on record of common stock was
2,043.1,962. The transfer agent for Patterson’s common stock is Wells Fargo Bank, N.A., 161 North Concord Exchange, South St. Paul, Minnesota, 55075-0738, telephone: (651) 450-4064.
We had not paid any cash dividends on our common stock from our initial public offering in 1992 until the fourth quarter of fiscal 2010, at which time a $0.10 per share cash dividend was paid.
Dividends
In fiscal
20152016, a quarterly cash dividend of
$0.20$0.22 per share was paid throughout the year, except in the fourth quarter when the dividend was increased to
$0.22$0.24 per share. We expect to continue to pay a quarterly cash dividend for the foreseeable future; however, the payment of dividends is within the discretion of our Board of Directors and will depend upon our earnings, capital requirements, operating results and financial condition among other factors.
Securities Authorized for Issuance Under Equity Compensation Plans
For information relating to securities authorized for issuance under equity compensation plans, see Part III, Item 12.
On
Purchases of Equity Securities by the Issuer
In March
19, 2013, Patterson’s Board of Directors approved a share repurchase plan by which up to 25,000,000 shares may be purchased in open market transactions through March 19, 2018. As of April
25, 2015, 20,852,00030, 2016, 16,497,259 shares remain available under the current repurchase authorization. No shares were repurchased during the fourth quarter of fiscal
2015.2016.
Performance Graph
The graph below compares the cumulative total shareholder return on $100 invested at the market close on April
23, 2010, the last trading day before the beginning of our30, 2011,
fiscal year, through April
24, 2015, the last trading day of our fiscal year 2015,30, 2016, with the cumulative return over the same time period on the same amount invested in the S&P 500 Index and a Peer Group Index, consisting of
fivesix companies (including our company) based on the same Standard Industrial Classification Code.* The chart below the graph sets forth the actual numbers depicted on the graph.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year Ending | |
| | | 4/24/2010 | | | 4/30/2011 | | | 4/28/2012 | | | 4/27/2013 | | | 4/26/2014 | | | 4/25/2015 | |
Patterson Companies, Inc. | | | 100.00 | | | | 107.36 | | | | 106.83 | | | | 119.74 | | | | 132.92 | | | | 159.49 | |
S&P 500 | | | 100.00 | | | | 114.31 | | | | 120.21 | | | | 138.62 | | | | 166.71 | | | | 193.35 | |
Peer Group | | | 100.00 | | | | 112.10 | | | | 112.83 | | | | 129.15 | | | | 154.70 | | | | 185.86 | |
|
| | | | | | | | | | | | | | | | | |
| | Fiscal Year Ending |
| | 4/30/2011 | | 4/28/2012 | | 4/27/2013 | | 4/26/2014 | | 4/25/2015 | | 4/30/2016 |
| Patterson Companies, Inc. | 100.00 |
| | 99.51 |
| | 111.53 |
| | 123.81 |
| | 148.56 |
| | 136.30 |
|
| S&P 500 | 100.00 |
| | 105.16 |
| | 121.27 |
| | 145.85 |
| | 169.15 |
| | 168.63 |
|
| Peer Group | 100.00 |
| | 97.87 |
| | 110.43 |
| | 131.91 |
| | 158.32 |
| | 174.96 |
|
| |
| * | The current composition of SIC Code 5047 – Wholesale – Medical, Dental & Hospital Equipment & Supplies – is as follows: Fuse Medical, Inc., Henry Schein, Inc., Millennium Healthcare, Inc., Owens & Minor, Inc., Cerebain Biotech Corp. and Patterson Companies, Inc. |
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except per share amounts)
| | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year Ended | |
| | | April 25,
2015 | | | April 26,
2014 (1)(2) | | | April 27,
2013 | | | April 28,
2012 (3) | | | April 30,
2011 | |
Statement of Income Data: | | | | | | | | | | | | | | | | | | | | |
Net sales | | $ | 4,375,020 | | | $ | 4,063,715 | | | $ | 3,637,212 | | | $ | 3,535,661 | | | $ | 3,415,670 | |
Cost of sales | | | 3,136,814 | | | | 2,865,437 | | | | 2,446,443 | | | | 2,373,147 | | | | 2,271,445 | |
| | | | | | | | | | | | | | | | | | | | |
Gross profit | | | 1,238,206 | | | | 1,198,278 | | | | 1,190,769 | | | | 1,162,514 | | | | 1,144,225 | |
Operating expenses | | | 864,779 | | | | 852,522 | | | | 836,314 | | | | 804,505 | | | | 768,217 | |
| | | | | | | | | | | | | | | | | | | | |
Operating income | | | 373,427 | | | | 345,756 | | | | 354,455 | | | | 358,009 | | | | 376,008 | |
Other expense, net | | | (30,756 | ) | | | (32,844 | ) | | | (33,338 | ) | | | (28,197 | ) | | | (20,121 | ) |
| | | | | | | | | | | | | | | | | | | | |
Income before income taxes | | | 342,671 | | | | 312,912 | | | | 321,117 | | | | 329,812 | | | | 355,887 | |
Income taxes | | | 119,410 | | | | 112,300 | | | | 110,845 | | | | 116,997 | | | | 130,502 | |
| | | | | | | | | | | | | | | | | | | | |
Net income | | $ | 223,261 | | | $ | 200,612 | | | $ | 210,272 | | | $ | 212,815 | | | $ | 225,385 | |
| | | | | | | | | | | | | | | | | | | | |
Diluted earnings per share | | $ | 2.24 | | | $ | 1.97 | | | $ | 2.03 | | | $ | 1.92 | | | $ | 1.89 | |
Weighted average shares and potentially dilutive shares outstanding | | | 99,694 | | | | 101,643 | | | | 103,807 | | | | 110,846 | | | | 119,066 | |
Dividends per common share | | $ | 0.82 | | | $ | 0.68 | | | $ | 0.58 | | | $ | 0.50 | | | $ | 0.42 | |
| | | | | |
Balance Sheet Data: | | | | | | | | | | | | | | | | | | | | |
Working capital | | $ | 995,540 | | | $ | 872,254 | | | $ | 912,817 | | | $ | 873,865 | | | $ | 863,278 | |
Total assets | | | 2,947,706 | | | | 2,864,677 | | | | 2,681,778 | | | | 2,739,368 | | | | 2,564,968 | |
Total long-term debt | | | 725,000 | | | | 725,000 | | | | 725,000 | | | | 725,000 | | | | 525,000 | |
Stockholders’ equity | | | 1,514,123 | | | | 1,471,664 | | | | 1,394,455 | | | | 1,375,202 | | | | 1,560,540 | |
|
| | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended |
| | April 30, 2016 (4) | | April 25, 2015 | | April 26, 2014(5) | | April 27, 2013 | | April 28, 2012 |
Statement of Income Data (1): | | | | | | | | | |
| Net sales | $ | 5,386,703 |
| | $ | 3,910,865 |
| | $ | 3,585,141 |
| | $ | 3,135,215 |
| | $ | 3,022,321 |
|
| Cost of sales | 4,063,955 |
| | 2,850,316 |
| | 2,566,444 |
| | 2,138,468 |
| | 2,060,220 |
|
| Gross profit | 1,322,748 |
| | 1,060,549 |
| | 1,018,697 |
| | 996,747 |
| | 962,101 |
|
| Operating expenses | 975,035 |
| | 755,963 |
| | 724,971 |
| | 711,532 |
| | 683,154 |
|
| Operating income | 347,713 |
| | 304,586 |
| | 293,726 |
| | 285,215 |
| | 278,947 |
|
| Other expense, net | (46,020 | ) | | (30,268 | ) | | (32,463 | ) | | (33,670 | ) | | (28,563 | ) |
| Income from continuing operations before taxes | 301,693 |
| | 274,318 |
| | 261,263 |
| | 251,545 |
| | 250,384 |
|
| Income tax expense | 116,009 |
| | 94,235 |
| | 89,931 |
| | 86,629 |
| | 87,524 |
|
| Net income from continuing operations | 185,684 |
| | 180,083 |
| | 171,332 |
| | 164,916 |
| | 162,860 |
|
| Net income from discontinued operations | 1,500 |
| | 43,178 |
| | 29,280 |
| | 45,356 |
| | 49,955 |
|
| Net income | $ | 187,184 |
| | $ | 223,261 |
| | $ | 200,612 |
| | $ | 210,272 |
| | $ | 212,815 |
|
| Diluted earnings per share: | | | | | | | | | |
| Continuing operations | $ | 1.90 |
| | $ | 1.81 |
| | $ | 1.69 |
| | $ | 1.59 |
| | $ | 1.47 |
|
Discontinued operations (2) | 0.01 |
| | 0.43 |
| | 0.28 |
| | 0.44 |
| | 0.45 |
|
| Net diluted earnings per share | $ | 1.91 |
| | $ | 2.24 |
| | $ | 1.97 |
| | $ | 2.03 |
| | $ | 1.92 |
|
| Weighted average shares and potentially dilutive shares outstanding | 97,902 |
| | 99,694 |
| | 101,643 |
| | 103,807 |
| | 110,846 |
|
| Dividends per common share | $ | 0.90 |
| | $ | 0.82 |
| | $ | 0.68 |
| | $ | 0.58 |
| | $ | 0.50 |
|
| Balance Sheet Data: | | | | | | | | | |
| Working capital | $ | 918,206 |
| | $ | 995,540 |
| | $ | 872,254 |
| | $ | 912,817 |
| | $ | 873,865 |
|
Total assets (3) | 3,520,804 |
| | 2,945,248 |
| | 2,863,191 |
| | 2,679,862 |
| | 2,736,889 |
|
Total long-term debt (3) | 1,022,155 |
| | 722,542 |
| | 723,514 |
| | 723,084 |
| | 722,521 |
|
| Stockholders’ equity | 1,441,746 |
| | 1,514,123 |
| | 1,471,664 |
| | 1,394,455 |
| | 1,375,202 |
|
See the Notes to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.
| |
| (1) | Statement of Income Data has been restated to present the results of Patterson Medical as discontinued operations for all periods presented. See Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
| |
| (2) | Fiscal 2014 includes a pre-tax restructuring charge of $15.4 million, or approximately $0.13 per diluted share on an after-tax basis, related to the Medical Restructuring described in Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
(2) | |
| (3) | Prior year balances have been revised to reflect the impact of adopting ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs. |
| |
| (4) | In June 2015, we acquired Animal Health International, Inc. Prior to our acquisition, Animal Health International, Inc. generated sales and earnings before interest, income taxes, depreciation and amortization of $1.5 billion and $68 million, respectively, during the 12 months ended March 2015. In connection with this acquisition, we incurred pre-tax transaction costs of $13.7 million, or $0.11 per diluted share from continuing operations on an after-tax basis. See Note 4 to the Consolidated Financial Statements for additional information. Also in fiscal 2016, we approved a one-time repatriation of approximately $200.0 million of foreign earnings. This one-time repatriation reduced the overall cost of funding the acquisition of Animal Health International, Inc. In addition, certain foreign cash at Patterson Medical was required to be repatriated as part of the sale transaction. The continuing operations tax impact of $12.3 million from the repatriation was recorded during fiscal 2016. See Note 13 to the Consolidated Financial Statements for additional information. |
| |
| (5) | In August 2013, we acquired National Veterinary Services Limited ("NVS"), which had revenues of more than £315 million, or approximately $493 million, in its fiscal year ended June 30, 2013 prior to acquisition. NVS results beginning on the date of the acquisition are included in continuing operations. See Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
(3) | ESOP expense increased operating expenses by approximately $24.0 million, or $0.13 per diluted share, in fiscal 2012 as compared to fiscal 2011 as a result of changes in accounting standards. |
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our
fiscal 2015 financial information
for fiscal 2016 is summarized in this Management’s Discussion and Analysis and the Consolidated Financial Statements and related Notes. The following background is provided to readers to
more fully understandassist in the review of our
Company’s financial information.
Through fiscal 2015, Patterson
operateshad traditionally operated a
specialty distribution business in three
complementary markets: dental supply, veterinary supply and rehabilitation supply.
Historically, our strategy for growth focused on internal growth and the acquisition of smaller distributors and businesses offering related products and services to the dental market. In fiscal
2002,2016, we
expandedacquired Animal Health International, Inc. and divested our
strategy to take advantage of a parallel growth opportunity inwholly-owned subsidiary Patterson Medical Holdings, Inc. (“Patterson Medical”), the
veterinary supply market by acquiring the assets of J. A. Webster, Inc.,entity through which we operated
as Webster Veterinary Supply (Webster) until fiscal 2013. Webster is now known as Patterson Veterinary. Patterson added a third component to our business platform in fiscal 2004 when we entered the rehabilitation supply
market withbusiness. As a result of these two transactions, we now operate in two complementary markets: dental and animal health. While our dental business remains the
acquisitionsame, our animal health business now consists of
AbilityOne Products Corp. (“AbilityOne”). AbilityOne is now knownboth companion animal and production animal lines of business. We classified the results of operations of Patterson Medical as
discontinued operations for all periods presented in the consolidated statements of income. The assets and liabilities of Patterson
Medical.Medical were reflected as held for sale in the consolidated balance sheets as of April 25, 2015.
Operating margins of the
veterinaryanimal health business are considerably lower than the dental
and rehabilitation supply businesses.business. While operating expenses run at a lower rate in the
veterinaryanimal health business,
theirits gross margin is substantially lower due generally to the low margins on the pharmaceutical products that are distributed.
We operate with a 52-53 week accounting convention with our fiscal year ending on the last Saturday in April. Fiscal years
2013,2014, 2015 and 2016 ended on April 26, 2014, April 25, 2015 and April 30, 2016, respectively. Fiscal years 2014 and 2015
ending April 27, 2013, April 26, 2014 and April 25, 2015, respectively, includedconsisted of 52
weeks, while fiscal year 2016 consisted of 53 weeks. Fiscal year
20162017 will end on April
30, 201629, 2017 and
will consist of
5352 weeks.
There
We believe there are several important aspects of Patterson’s business that are useful in analyzing it, including: (1)
market growth in the various markets in which we operate; (2) internal growth; (3) growth through acquisition; and (4) continued focus on controlling costs and enhancing efficiency. Management defines
“internal growth”internal growth as the increase in net sales from period to period, excluding the impact of changes in currency exchange rates, and excluding the net sales, for a period of twelve months following the transaction date, of businesses we have acquired.
The following significant activities occurred in fiscal 2016:
NVS Acquisition.Animal Health International, Inc. Acquisition. In August 2013,June 2015, we completed the acquisition of all the outstanding stock of National Veterinary Services Limited (“NVS”) from Dechra Pharmaceuticals, PLC (“NVS Acquisition”). NVS is the largest veterinary products distributorAnimal Health International, Inc., a leading production animal health distribution company in the U.K. Total cash consideration paid for NVS was £91.2 million (approximately $142.7 million). Sales in fiscal 2015 were $200.2 million higher,U.S. Prior to our acquisition, Animal Health International, Inc. generated sales and earnings before interest, income taxes, depreciation and amortization of $1.5 billion and $68 million, respectively, during the 12 months ended March 2015. Our acquisition more than doubled the revenue of our legacy animal health business, which was previously focused on the companion animal market. Our animal health business now offers an expanded range of products and services to a broader base of customers in North America and the U.K. During fiscal 2016, we incurred $10.4 million, or $0.11 per diluted share, were $0.02 higher, than fiscal 2014 as a resulton an after-tax basis, of this acquisition. The NVS business has lower gross margin and operating expense rates than our historical businesses.Medical Restructuring. In August 2013, we announced a plan to divest certain non-core product lines in our medical segment (“Medical Restructuring”). As a result of the plan to dispose of these product lines, we incurred a pre-tax restructuring charge of $15.4 million or approximately $0.13 per diluted share in fiscal 2014, including. $13.8 million in non-cash losses on disposal of assets. We estimate that disposing of these product lines will generate operational savings of approximately $2 million beginning in fiscal year 2015.
Transaction Costs. During the fourth quarter of fiscal 2015, we incurred $4.6 million of pre-tax transaction costs or approximately $0.03 per diluted share, related to the June 16, 2015 acquisition of Animal Health International, and the potential sale of Patterson Medical.Inc. See “Subsequent Events” in this Item 7 and Note 194 to the Consolidated Financial Statements for information regarding ourthe acquisition of Animal Health International.International, Inc.
Patterson Medical Holdings, Inc. Sale. In August 2015, we sold all of the outstanding shares of common stock of Patterson Medical Holdings, Inc. for $717 million in cash to Madison Dearborn Partners. See Note 5 to the Consolidated Financial Statements for additional information.
Cash Repatriation. In fiscal 2016, we approved a one-time repatriation of approximately $200.0 million of foreign earnings. This one-time repatriation reduced the overall cost of funding the acquisition of Animal Health International, Inc. In addition, certain foreign cash at Patterson Medical was required to be repatriated as part of the sale transaction. The continuing operations tax impact of $12.3 million from the repatriation was recorded during fiscal 2016. See Note 13 to the Consolidated Financial Statements for additional information.
The following table summarizes our
consolidated results
offrom continuing operations
over the past three fiscal years as a percent of
sales: | | | | | | | | | | | | |
| | | Fiscal Year Ended | |
| | | April 25,
2015 | | | April 26,
2014 | | | April 27,
2013 | |
Net sales | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % |
Cost of sales | | | 71.7 | | | | 70.5 | | | | 67.3 | |
| | | | | | | | | | | | |
Gross profit | | | 28.3 | | | | 29.5 | | | | 32.7 | |
Operating expenses | | | 19.8 | | | | 21.0 | | | | 23.0 | |
| | | | | | | | | | | | |
Operating income | | | 8.5 | | | | 8.5 | | | | 9.7 | |
Other expense (income) | | | 0.7 | | | | 0.8 | | | | 0.9 | |
| | | | | | | | | | | | |
Income before income taxes | | | 7.8 | | | | 7.7 | | | | 8.8 | |
Income taxes | | | 2.7 | | | | 2.8 | | | | 3.0 | |
| | | | | | | | | | | | |
Net income | | | 5.1 | % | | | 4.9 | % | | | 5.8 | % |
| | | | | | | | | | | | |
sales from continuing operations:
|
| | | | | | | | |
| | Fiscal Year Ended |
| | April 30, 2016 | | April 25, 2015 | | April 26, 2014 |
| Net sales | 100.0 | % | | 100.0 | % | | 100.0 | % |
| Cost of sales | 75.4 |
| | 72.9 |
| | 71.6 |
|
| Gross profit | 24.6 |
| | 27.1 |
| | 28.4 |
|
| Operating expenses | 18.1 |
| | 19.3 |
| | 20.2 |
|
| Operating income from continuing operations | 6.5 |
| | 7.8 |
| | 8.2 |
|
| Other income (expense) | (0.9 | ) | | (0.8 | ) | | (0.9 | ) |
| Income from continuing operations before taxes | 5.6 |
| | 7.0 |
| | 7.3 |
|
| Income tax expense | 2.2 |
| | 2.4 |
| | 2.5 |
|
| Net income from continuing operations | 3.4 | % | | 4.6 | % | | 4.8 | % |
Fiscal 2016 Compared to Fiscal 2015
Continuing Operations
Net Sales. Consolidated net sales in fiscal 2016 were $5,386.7 million, an increase of 37.7% from $3,910.9 million in fiscal 2015. The growth in sales includes a 35.7% contribution from acquisitions and a 1.8% unfavorable impact of changes in foreign currency exchange rates.
Dental segment sales rose 2.5% to $2,476.2 million in fiscal 2016 from $2,415.0 million in fiscal 2015. The growth included a 1.3% unfavorable impact from changes in foreign currency exchange rates. Consumable sales increased 4.5%. Dental equipment and software sales decreased 1.4%, driven by a 1.3% unfavorable impact from changes in foreign currency exchange rates. Other dental sales, consisting primarily of technical service parts and labor, software support services and artificial teeth, increased 4.7% in fiscal 2016.
Animal Health segment sales grew 96.5% to $2,862.2 million in fiscal 2016 from $1,456.6 million in fiscal 2015. Our acquisition of Animal Health International, Inc. in fiscal 2016 drove most of the increase in sales, contributing $1,396.1 million in sales in fiscal 2016. Consumables increased 101.4%, driven almost entirely by sales from Animal Health International, Inc. Equipment and software sales increased 7.2%, and other sales increased 17.3%, with both increases driven by organic growth and partially offset by unfavorable impacts from changes in foreign currency exchange rates.
Gross Profit. Consolidated gross profit margin decreased 250 basis points from the prior year to 24.6%. The decrease in gross profit margin was predominantly the result of the inclusion of sales and cost of sales from Animal Health International, Inc. in our results, as that business traditionally has lower gross margins than our historical businesses.
Operating Expenses. Consolidated operating expenses for fiscal 2016 were $975.0 million, a 29.0% increase from the prior year of $756.0 million. Operating expenses mainly increased due to the acquisition of Animal Health International, Inc. and transaction-related costs. The consolidated operating expense ratio of 18.1% decreased 120 basis points from the prior year, primarily due to the acquisition of Animal Health International, Inc., which has a lower operating expense ratio than our other business.
Operating Income from Continuing Operations. Operating income from continuing operations was $347.7 million, or 6.5% of net sales, in fiscal 2016, compared to $304.6 million, or 7.8% of sales, in fiscal 2015. The decrease in operating income as a percent of net sales was mainly due to the inclusion of results of Animal Health International, Inc. and transaction-related costs.
Other Income (Expense), Net.Net other expense was $46.0 million in fiscal 2016, compared to $30.3 million in fiscal 2015. The increase was mainly due to increased interest expense related to the credit agreement entered into in connection with the acquisition of Animal Health International, Inc., including $5.2 million of accelerated debt issuance cost amortization incurred in fiscal 2016 as a result of early repayment of debt.
Income Tax Expense.The effective income tax rate was 38.5% in fiscal 2016 and 34.4% in fiscal 2015. The increase in the rate was primarily due to the current year impact of cash repatriation and the impact of the transaction-related costs incurred related to the acquisition of Animal Health International, Inc.
Net Income and Earnings Per Share from Continuing Operations. Net income from continuing operations increased 3.1% to $185.7 million in fiscal 2016, compared to $180.1 million in the prior year. Earnings per diluted share from continuing operations were $1.90 in fiscal 2016 compared to $1.81 in the prior year. Weighted average diluted shares in fiscal 2016 were 97,902,000 compared to 99,694,000 in the prior year. The decrease in the weighted average shares was primarily due to share repurchase activity. The fiscal 2016 cash dividend was $0.90 per common share compared to $0.82 in the prior year.
Discontinued Operations
Net income from discontinued operations was $1.5 million in fiscal 2016, compared to $43.2 million in fiscal 2015. The decrease was primarily due to there being twelve months of operations in the prior year as compared to less than four months of operations in fiscal 2016, as well as by transaction-related costs related to the sale of Patterson Medical, which reduced income before taxes from discontinued operations by $10.5 million in fiscal 2016 as compared to fiscal 2015.
Fiscal 2015 Compared to Fiscal 2014
Continuing Operations
Net Sales.Sales. Consolidated net sales in fiscal 2015 were $4,375.0$3,910.9 million, an increase of 7.7%9.1%, from $4,063.7$3,585.1 million in fiscal 2014. The growth in sales includes a 5.4%6.1% contribution from acquisitions and a 1.0% unfavorable impact of changes in foreign currency translation rates. Dental segment sales in fiscal 2015 rose
3.0%2.8% to
$2,454.3$2,415.0 million from
$2,382.1$2,348.4 million in fiscal 2014. The growth included a 0.2% contribution from acquisitions and a 0.8% unfavorable impact from changes in foreign currency translation rates. Consumable sales increased
2.5%2.6%. Dental equipment and software sales increased 2.9% in fiscal 2015 to $818.3 million with strong contributions from both basic equipment and technology sales, led by new users of CEREC CAD/CAM systems. Other dental sales, consisting primarily of technical service parts and labor, software support services and artificial teeth, increased
6.2%3.5% in fiscal 2015.
Veterinary
Animal Health segment sales grew 21.1% to $1,456.6 million
with thein fiscal 2015. The acquisition of NVS
Acquisitionin fiscal 2014 was responsible for 17.1 percentage points of such growth over the prior year. Consumables increased 2.9%, equipment and software sales increased 5.5% and other increased 1.5%. We believe that our equipment and technology strategy, which includes enhancing our infrastructure and becoming a national technical service provider,
is drivingdrove the increases in equipment, software and services.
Medical segment sales of $464.2 million decreased 3.0% from fiscal 2014. Sales were negatively affected by 4.3% due to reduced sales from the non-core product lines that were divested in fiscal 2014, and by 0.7% due to an unfavorable impact of changes in foreign currency translation rates.
Gross Margin.Profit. Consolidated gross profit margin decreased 120130 basis points from the prior year to 28.3%27.1%. The NVS Acquisition accountsacquisition accounted for 130 basis pointsalmost all of the decrease and the Medical Restructuring accounts for 10 basis points increasepoint decrease, resulting in a comparable gross margins being flat year over year. Veterinary gross margin decreased 150 basis points mainly due to the acquisition of NVS.year for our historical business.
Operating Expenses. The consolidated operating expense ratio of 19.8%19.3% decreased 12090 basis points from the prior year ratio of 21.0%20.2%. The NVS Acquisition accounts for 90 basis points ofdecrease in the decrease. The incremental expenses from the Transaction Costs relatingoperating expense ratio is primarily attributable to the NVS acquisition, of Animal Health International and the potential sale of Patterson Medical increasedas NVS has a lower operating expenses by 10 basis points and the Medical Restructuring decreased operating expenses by 30 basis points resulting in a comparable decrease of 10 basis pointsexpense ratio as compared to our historical business.
Operating Income from the prior year.Continuing Operations.Operating Income. Current year operating income from continuing operations was $373.4$304.6 million, or 8.5%7.8% of net sales. In the prior year, operating income was $345.8sales, in fiscal 2015, compared to $293.7 million, or 8.5%8.2% of net sales.sales, in fiscal 2014.
Other (Expense) Income Net.(Expense), Net.Net other expense was $30.8$30.3 million in the current year,fiscal 2015, a decrease of $2.0$2.2 million from the prior year. Net other expense is comprisedyear, driven primarily ofby a reduction in interest expense partly offset by interest income. Foreign currency had a negative impact of $1.9 million compared to a negative impact of $2.1 million in the prior year.$2.0 million.
Income Taxes.Tax Expense.The effective income tax rate was 34.8%34.4% in both fiscal 2015 as compared to 35.9% inand fiscal 2014. The effective tax rate decreased in fiscal 2015 as compared to fiscal 2014 due to the unfavorable impact of the Medical Restructuring in fiscal 2014 and an overall current year geographical shift in profits due to the NVS acquisition.
Net Income and Earnings Per Share.Share from Continuing Operations. Net income from continuing operations increased 11.3%5.1% to $223.3$180.1 million in fiscal 2015, compared to $200.6$171.3 million in the prior year. The increase is mainly driven by increased sales. Earnings per diluted share from continuing operations were $2.24$1.81 in the current yearfiscal 2015 compared to $1.97$1.69 in the prior year. Transaction Costs in the current year and Medical Restructuring costs in the prior year reduced earnings per diluted share by $0.03 and $0.13, respectively. Weighted average diluted shares in the current yearfiscal 2015 were 99,694,000 compared to 101,643,000 in the prior year. The decrease in the weighted average shares was primarily due to share repurchase activity. The current year’sfiscal 2015 cash dividend was $0.82 per common share compared to $0.68 in the prior year.Fiscal 2014 Compared to Fiscal 2013
Discontinued Operations
Net
Sales. Consolidated net sales in fiscal 2014 were $4,063.7 million, an increase of 11.7%,income from
$3,637.2discontinued operations was $43.2 million in fiscal
2013. The growth in sales includes an 11.3% contribution from acquisitions and a 0.4% unfavorable impact of changes in foreign currency translation rates.Dental segment sales in fiscal 2014 rose 0.1%2015, compared to $2,382.1 million from $2,380.0$29.3 million in fiscal 2013.2014. The growth included a 0.1% contribution from acquisitions and a 0.5% unfavorable impact from changes in foreign currency translation rates. Consumable sales increased 1.3%. Dental equipment and software sales decreased 1.8% in fiscal 2014 to $828.9 millionincrease was primarily due to strong CEREC sales in fiscal 2013 following a successful trade-up program, as well as a decrease in revenues from digital radiography products although unit volumes increased. The average selling price per unit in the latter category declined in fiscal 2014 as the focus shifted from higher capacity product to more mid-line product in the extra oral categories. Other dental sales, consisting primarily of technical service parts and labor, software support services and artificial teeth, increased 0.3% in fiscal 2014.
Veterinary segment sales grew 59.3% to $1,203.0 million. Acquisitions added 55.8% to sales in fiscal 2014. Excluding the NVS Acquisition, consumables increased 2.5%, equipment and software sales increased 20.3% and other increased 15.5%.
Medical segment sales of $478.6 million decreased 4.7% from fiscal 2013, primarily as a result ofrestructuring charges that reduced sales from the non-core product lines that were divested in fiscal 2014. Fiscal 2014 sales were also impactednet income by continuing challenges in our international business due to austerity measures implemented over healthcare costs by foreign governments. Foreign exchange rate changes had an unfavorable impact to fiscal 2014 sales growth of 0.2%.
Gross Margin. Consolidated gross margin decreased 320 basis points from fiscal 2013 to 29.5%. The NVS Acquisition accounts for 250 basis points of the decrease and the Medical Restructuring accounts for 10 basis points resulting in a comparable decrease of 60 basis points from fiscal 2013’s gross margin of 32.7%. Veterinary gross margin decreased 430 basis points mainly due to the acquisition of NVS.
Operating Expenses. The consolidated operating expense ratio of 21.0% decreased 200 basis points from fiscal 2013’s ratio of 23.0%. The NVS Acquisition accounts for 190 basis points of the decrease. The incremental
expenses from information technology initiatives increased operating expense by 30 basis points and the Medical Restructuring increased operating expenses by 30 basis points resulting in a comparable decrease of 70 basis points from fiscal 2013 of 23.0%.
Operating Income. Fiscal 2014 operating income was $345.8 million, or 8.5% of net sales. In fiscal 2013, operating income was $354.5 million, or 9.7% of net sales. The decrease in the operating margin was due primarily to the NVS Acquisition, the Medical Restructuring and incremental expenses from the information technology initiatives, which combined reduced the operating margin by 140 basis points, resulting in a comparable operating margin rate of 9.9%.
Other (Expense) Income, Net. Net other expense was $32.8$13.3 million in fiscal 2014, a decrease of $0.5 million from fiscal 2013. Net other expense was comprised primarily of interest expense, partly offset by interest income. Foreign currency had a negative impact of $2.1 million compared to a negative impact of $1.5 million in fiscal 2013. Interest income of $5.0 million was up from $4.5 million in fiscal 2013.
Income Taxes. The effective income tax rate was 35.9% in fiscal 2014 as compared to 34.5% in fiscal 2013. The effective tax rate increased in fiscal 2014 as compared to fiscal 2013 due to certain one-time benefits that were included in the fiscal 2013 rate and the unfavorable impact of the Medical Restructuring in fiscal 2014.
Net Income and Earnings Per Share.Net income decreased 4.6% to $200.6 million, compared to $210.3 million in fiscal 2013. The decline was the result of the Medical Restructuring and the incremental expenses incurred in the information technology initiatives partially offset by the earnings contribution from NVS. Earnings per diluted share were $1.97 in fiscal 2014 compared to $2.03 in fiscal 2013. The impact on earnings per diluted share from the Medical Restructuring was $0.13 in fiscal 2014, and incremental information technology expenditures impacted diluted earnings per share by $0.07 in fiscal 2014. Weighted average diluted shares in fiscal 2014 were 101,643,000 compared to 103,807,000 in fiscal 2013. The decrease in the weighted average shares is primarily due to share repurchase activity. The fiscal 2014 cash dividend was $0.68 per common share compared to $0.58 in fiscal 2013.
Liquidity and Capital Resources
Patterson’s operating cash flow has been our principal source of liquidity in the last three fiscal years. During
each of these fiscal
2015 and 2014,years, we used our revolving credit facility periodically as a source of liquidity in addition to operating cash flow.
OperatingNet cash provided by operating activities
generated cash ofwas $156.3 million in fiscal 2016, compared to $262.7 million in fiscal 2015
compared toand $195.8 million in fiscal
2014 and $299.2 million in fiscal 2013.2014. Our
cash flows from operating activities are primarily driven by net
income.income from continuing operations, partially offset by uses of cash within discontinued operations of $38.5 million.
Net cash flows used in investing activities were $400.6 million in fiscal 2016, compared to $9.6 million and $283.8 million in fiscal 2015 and 2014, respectively. Capital expenditures were
$62.9$79.4 million,
$40.3$60.7 million and
$22.0$34.0 million in fiscal years
2016, 2015
2014 and
2013,2014, respectively. Significant expenditures in
these yearseach year included investments in our information technology initiatives. We expect
to use a total of approximately $50 million to $70 million for capital expenditures
to be approximately $54 million in fiscal
2016,2017, with our main investment
being in
our information technology initiatives.
Cash used Fiscal 2016 includes the purchase of Animal Health International, Inc. for acquisitions$1,106.6 million, which was partially offset by the receipt of net cash proceeds of $714.4 million from completion of the sale of Patterson Medical. Fiscal years 2016 and equity investments totaled $10.52015 include the sale of securities of $48.7 million in fiscal 2015, $145.8and $40.8 million, in fiscalrespectively. Fiscal 2014 and $14.6 million in fiscal 2013. The majority of theincludes cash used for acquisitions in fiscal 2015 related to the acquisition of Holt Dental. In fiscal 2014, the majority of the$145.8 million and cash used for acquisitions relatedpurchases of time deposits of $99.7 million.
In June 2015, we entered into a credit agreement (the “Credit Agreement”), under which the lenders provided us with senior unsecured lending facilities of up to
$1.5 billion, consisting of a $1.0 billion unsecured term loan and a $500 million unsecured revolving line of credit. The Credit Agreement expires in fiscal 2021. Also in June 2015, our previous $300 million credit facility, which was due to expire in December 2016, was terminated and replaced by the
acquisitionsrevolving line of
NVScredit under the Credit Agreement. At April 30, 2016, $317.6 million was outstanding under the unsecured term loan at an interest rate of 1.81%, and
Mercer Mastery. In fiscal 2013, the majority$20.0 million was outstanding under our current revolving line of
the cash used for acquisitions related to the acquisitionscredit at an interest rate of
Iowa Dental Supply and Universal Vaporizer Support. See “Subsequent Events” in this Item 7 and Note 19 to the Consolidated Financial Statements for information regarding3.875%. There were no outstanding borrowings under our
acquisitioncurrent or previous revolving lines of
Animal Health International.credit at April 25, 2015.
In fiscal 2015, we entered into a Note Purchase Agreement, under which we issued fixed rate Senior Notes in an aggregate principal amount of $250.0 million at an interest rate of 3.48% per annum, due March
24, 2025.
The proceeds were used to repay $250.0 million of Senior Notes that came due onin March 25, 2015. In fiscal 2013, we retired $125.0 million of debt. See Note 7 to the Consolidated Financial Statements for further information.
InAlso in fiscal 2015, a cash payment of $29.0 million was made to settle an interest rate swap. We originally entered into this swap in January 2014 to hedge interest rate fluctuations in anticipation of refinancing the Senior Notes that came due on in March 25, 2015.
In fiscal 2014, we invested in three time deposits with total principal of $110.0 million Canadian. Our time deposit securities are classified as “held-to-maturity” securities and are carried at cost, adjusted for accrued interest and amortization. At April 25, 2015, these securities are classified as short-term investments in the amount of $53.4 million.
Total dividends paid in fiscal years
2016, 2015
and 2014
and 2013 were
$90.6 million, $81.8 million
$85.7 million and
$43.7$85.7 million, respectively. We expect to continue to pay a quarterly cash dividend for the foreseeable future. In addition, during fiscal
2016, we repurchased 4.4 million shares of common stock for $200.0 million. In fiscal 2015, we repurchased
approximately 1.2 million shares of common stock for
approximately $47.5 million. In fiscal 2014, we repurchased approximately 2.4 million shares of common stock for approximately $96.5 million.
In fiscal 2013, we repurchased approximately 5.2 million shares of common stock for approximately $179.5 million. Under a share repurchase plan authorized by the Board of Directors
as ofin March
19, 2013, Patterson may repurchase up to 25.0 million shares of its common stock. This authorization remains in effect through March 19, 2018. As of April
25, 2015,30, 2016, approximately
20.916.5 million shares remain available under the current repurchase authorization.
Management expects funds generated from operations and existing cash to be sufficient to meet our working capital needs for the next fiscal year.
We have
$347.3$137.5 million in cash and cash equivalents as of April
25, 2015,30, 2016, of which
$212.9$49.8 million is in foreign bank accounts.
None of our cash balances is subject to any withdrawal restrictions. See Note
1213 to the Consolidated Financial Statements for further information regarding our intention to permanently reinvest these funds.
In addition, weIncluded in cash and cash equivalents as of April 30, 2016 is $27.2 million of cash collected from previously sold customer financing arrangements that have
a $300 million revolvingnot yet been settled with the third party. See Note 7 to the Consolidated Financial Statements for further information. We expect funds generated from operations, existing cash balances and credit
facility, which expires in fiscal 2017. Patterson’savailability under existing debt facilities
are believedwill be sufficient to
be adequate as a supplementmeet our working capital needs and to
internally generated cash flows to fundfinance anticipated expansion plans and strategic
initiatives.initiatives over the next fiscal year.
We expect to continue to obtain liquidity from the sale of equipment finance contracts. Patterson sells a significant portion of our finance contracts (see below) to a commercial paper funded conduit managed by a third party bank, and as a result, commercial paper is indirectly an important source of liquidity for Patterson. Patterson is allowed to participate in the conduit due to the quality of our finance contracts and our financial strength. Cash flows could be impaired if our financial strength diminishes to a level that precluded us from taking part in this facility or other similar facilities. Also, market conditions outside of our control could adversely affect the ability for us to sell the contracts.
Customer Financing Arrangements
Patterson is
As a convenience to our customers, we offer several different financing alternatives, including a third party program and a Patterson-sponsored program. For the third party program, we act as a facilitator between the customer and the third party financing entity with no on-going involvement in the financing transaction. Under our sponsored program, equipment purchased by customers with strong credit may be financed up to a maximum of $500,000 for any one customer. We generally sell our customers’ financing contracts to outside financial institutions in the normal course of our business. We currently have two arrangements under which we have soldsell these contracts.
First, we operate under an agreement to sell a portion of our equipment finance contracts
received from our customers to
outside financial institutions. These arrangements provide sources of liquidity for us that would have to be replaced should any of the current financial institutions be unable or unwilling to continue under them.In December 2010, the Receivables Purchase Agreement was amended to makecommercial paper conduits with The Bank of Tokyo-Mitsubishi UFJ, Ltd. (“BTMU”)serving as the managing agent. AsWe utilize a special purpose entity (“SPE”), PDC Funding, a consolidated, wholly owned subsidiary, to fulfill a requirement of April 25, 2015,participating in the totalcommercial paper conduit. We receive the proceeds of the contracts upon sale. The capacity under thisthe agreement is $500 million, which includes $300 millionat April 30, 2016 was $575 million.
Second, we also maintain an agreement with BTMU and the remainder with Royal Bank of Canada (RBC). In August 2011, Fifth Third Bank (FTB) replaced U.S. Bank National Association aswhereby the agentbank purchases customers’ financing contracts. We established another SPE, PDC Funding II, a consolidated, wholly owned subsidiary, which sells financing contracts to the bank. We receive the proceeds of the contracts upon sale. The capacity under the Contract Purchase Agreement, which has a capacity ofagreement at April 30, 2016 was $100 million as of April 25, 2015. million.
Our financing business is described in further detail in Note
6 “Customer Financing” of the Notes7 to the Consolidated
Financial Statements in Item 8 of this Form 10-K. Note 6, discusses the nature and business purpose of the arrangements and the activity under each arrangement during fiscal 2015, including the amount of finance contracts sold and the deferred purchase price receivable owed to us.
Statements.
A summary of
Patterson’sour contractual obligations as of April
25, 201530, 2016 follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | | Payments due by year | |
| | | Total | | | Less than
1 year | | | 1-3 years | | | 3-5 years | | | More than
5 years | |
Long-term debt | | $ | 725,000 | | | $ | — | | | $ | 150,000 | | | $ | 60,000 | | | $ | 515,000 | |
Interest on long-term debt | | | 195,080 | | | | 28,759 | | | | 57,517 | | | | 38,497 | | | | 70,307 | |
Operating leases | | | 73,473 | | | | 21,133 | | | | 28,836 | | | | 15,834 | | | | 7,670 | |
| | | | | | | | | | | | | | | | | | | | |
Total | | $ | 993,553 | | | $ | 49,892 | | | $ | 236,353 | | | $ | 114,331 | | | $ | 592,977 | |
| | | | | | | | | | | | | | | | | | | | |
Patterson is unable to determine its contractual obligations by year related to the provisions
|
| | | | | | | | | | | | | | | | | | | |
| | Payments due by year |
| | Total | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years |
| Long-term debt principal | $ | 1,042,625 |
| | $ | 16,500 |
| | $ | 267,750 |
| | $ | 243,375 |
| | $ | 515,000 |
|
| Long-term debt interest | 186,959 |
| | 34,434 |
| | 58,983 |
| | 41,598 |
| | 51,944 |
|
| Operating leases | 72,925 |
| | 22,891 |
| | 28,023 |
| | 15,141 |
| | 6,870 |
|
| Total | $ | 1,302,509 |
| | $ | 73,825 |
| | $ | 354,756 |
| | $ | 300,114 |
| | $ | 573,814 |
|
As of
ASC Topic 740, “Income Taxes”, as the ultimate amount or timing of settlement of its reserves for income taxes cannot be reasonably estimated. The totalApril 30, 2016 our gross liability for
unrecognizeduncertain tax
benefitspositions, including interest and penalties,
at April 25, 2015 is $20.9was $15.0 million.
We are not able to reasonably estimate the amount by which the liability will increase or decrease over an extended period of time or whether a cash settlement of the liability will be required. Therefore, these amounts have been excluded from the schedule of contractual obligations.
For a more complete description of
Patterson’sour contractual obligations, see Notes
78 and
1112 to the Consolidated Financial Statements.
For the past several years, we have grown revenue and earnings by: delivering value-added, full-service capabilities; enhancing customer service through technology; further improving operating efficiencies; and expanding both organically and through acquisitions.
While we expect the recent slow economic growth to continue to affect our performance for the foreseeable future, Patterson’s strategy will remain focused on the initiatives above, as well as our current efforts to broaden our view of our markets and focus on our core strengths in our Dental and
VeterinaryAnimal Health businesses. We believe this combination of strategies will further optimize our operational platform, expand our growth profile and position Patterson to capitalize on the growth opportunities before us. With strong operating cash flow and available credit capacity, we are confident that we will be able to financially support our future growth.
The following table summarizes
Patterson’sour accounts receivable days sales outstanding (“DSO”) and
average annual inventory turnover
for the past three fiscal years:
| | | | | | | | | | | | |
| | | 2015 | | | 2014 | | | 2013 | |
DSO (1) | | | 48 | | | | 46 | | | | 42 | |
Inventory turnover | | | 6.2 | | | | 7.2 | | | | 7.1 | |
(1) | Calculation includes approximately $12 million, $7 million and $9 million as of April 25, 2015, April 26, 2014 and April 27, 2013, respectively, of receivables from finance contracts received from customers related to certain financing promotions. |
|
| | | | | | | | |
| | Fiscal Year Ended |
| | April 30, 2016 | | April 25, 2015 | | April 26, 2014 |
DSO (1) | 49 |
| | 48 |
| | 46 |
|
| Inventory turnover | 7.1 |
| | 6.2 |
| | 7.2 |
|
(1)Calculation includes approximately $18 million, $12 million and $7 million as of April 30, 2016, April 25, 2015 and April 26, 2014, respectively, of receivables from finance contracts received from customers related to certain financing promotions.
Foreign Operations
Foreign
We derive foreign sales
derive primarily from
Patterson Dental
and Patterson Medical operations in Canada,
from Patterson Veterinary’sand Animal Health operations in
Canada and the U.K.
and from Patterson Medical operations in the U.K., France, Australia and Thailand. Fluctuations in currency exchange rates have not significantly impacted
earnings.earnings, as these fluctuations impact sales, cost of sales and operating expenses. However, changes in exchange rates adversely affected net sales by $40.2$69.4 million, $13.9$37.1 million, and $5.6$12.8 million in fiscal years 2016, 2015 2014 and 2013,2014, respectively. Changes in currency exchange rates are a risk accompanying foreign operations, but this risk is not considered material with respect to our consolidated operations.
Critical Accounting Policies and Estimates
Patterson has adopted various accounting policies to prepare our consolidated financial statements in accordance with accounting principles generally accepted in the
United States.U.S. Management believes that our policies are conservative and our philosophy is to adopt accounting policies that minimize the risk of adverse events having a material impact on recorded assets and liabilities. However, the preparation of financial statements requires the use of estimates and judgments regarding the realization of assets and the settlement of liabilities based on the information available to management at the time. Changes subsequent to the preparation of the financial statements in economic, technological and competitive conditions may materially impact the recorded values of Patterson’s assets and liabilities. Therefore, the users of the financial statements should read all the notes to the Consolidated Financial Statements and be aware that conditions currently unknown to management may develop in the future. This may require a material adjustment to a recorded asset or liability to consistently apply to our significant accounting principles and policies that are discussed in Note 1 to the Consolidated Financial Statements. The financial performance and condition of Patterson may also be materially impacted by transactions and events that we have not previously experienced and for which we have not been required to establish an accounting policy or adopt a generally accepted accounting principle.
Revenue Recognition – Revenues are generated from the sale of consumable products, equipment, software products and services, technical service parts and labor, freight and delivery charges, and other sources. Revenues are recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable, and there is reasonable assurance of collection of the sale. Estimates for returns, damaged goods, rebates, loyalty programs and other revenue allowances are made at the time the revenue is recognized based on the historical experience for such items. In addition to revenues generated from the distribution of consumable products under conventional arrangements (buy/sell agreements) where the full market value of the product is recorded as revenue, the veterinaryanimal health segment may earn a small amount of commission income for services provided under agency agreements with certain pharmaceutical manufacturers. The services generally consist of detailing the product and taking the customer’s order. The agency agreement contrasts to a buy/sell agreement in that the veterinaryanimal health segment does not purchase and handle the product or bill and collect from the customer in an agency relationship with a vendor. Consumable product sales are recorded upon delivery, except in those circumstances where terms of the sale are FOB shipping
point.point, in which case sales are recorded upon shipment. Commissions under agency agreements are recorded when the services are provided.
Equipment and software product revenues are recognized upon delivery and, if necessary, installation. In those circumstances where terms of the sale are FOB shipping point, revenues are recognized when products are transferred to the shipping carrier. Revenue derived from post contract customer support for software is deferred and recognized ratably over the period in which the support is provided. Patterson provides financing for select equipment and software sales. Revenue is recorded at the present value of the finance contract, with discount, if any, and interest income recognized over the life of the finance contract as
“other income”.other income, net in our consolidated statement of income. See Note
67 to the Consolidated Financial Statements for more information regarding customer financing.
Other revenue, including freight and delivery charges and technical service parts and labor, is recognized when the related product revenue is recognized or when the product or services are provided to the customer.
The receivables that result from the recognition of revenue are reported net of the related allowances discussed above. Patterson maintains a valuation allowance based upon the expected collectability of receivables held. Estimates are used to determine the valuation allowance and are based on several factors, including
historical collection data, economic trends and credit worthiness of customers. Receivables are written off when we determine the amounts to be uncollectible, typically upon customer bankruptcy or non-response to continuous collection efforts. The portions of receivable amounts that are not expected to be collected during the next twelve months are classified as long-term.
Patterson has a relatively large, dispersed customer base and no single customer accounts for more than 1% of consolidated net sales. In addition, the equipment sold to customers under finance contracts generally serves as collateral for the contract and the customer provides a personal guarantee as well.
Patterson Advantage Loyalty Program – Patterson Dental provides a point-based awards program to qualifying customers involving the issuance of “Patterson Advantage dollars” which can be used toward equipment and technology purchases. The program was initiated in January 2009 and runs on a calendar year schedule. Patterson Advantage dollars earned during a program year expire one year after the end of the program year. The cost and corresponding liability associated with the program is recognized as contra-revenue in accordance with ASC Topic 605-50, “Revenue Recognition-Customer Payments and Incentives.” As of April 25, 2015,30, 2016, we believe we have sufficient experience with the program to reasonably estimate the amount of Patterson Advantage dollars that will not be redeemed and thus have recorded a liability for 87% of the maximum potential amount that could be redeemed. We use the redemption recognition method, and we recognize the estimated value of unused–unused Patterson Advantage dollars as redemptions occur. Breakage recognized was immaterial to all periods presented. Inventory and Reserves – Inventory consists primarily of merchandise held for sale and is stated at the lower of cost or market. Cost is determined using the last-in, first-out (LIFO)("LIFO") method for all inventories, except for foreign inventories and manufactured inventories, which are valued using the first-in, first-out (FIFO)("FIFO") method. We continually assess the valuation of inventories and reduce the carrying value of those inventories that are obsolete or in excess of forecasted usage to estimated realizable value. Estimates are made of the net realizable value of such inventories based on analyses and assumptions including, but not limited to, historical usage, future demand and market requirements. Goodwill and Other Indefinite-Lived Intangible Assets– Goodwill represents the excess of cost over the fair value of identifiable net assets of businesses acquired. We have three reporting units as of April 25, 2015,30, 2016, which are the same as our reportable segments. Other indefinite-lived intangible assets include copyrights, trade names and trademarks. We evaluate goodwill at least
annually using a qualitative assessment to determine whether it is more likely than not that the fair value of any reporting unit is less than its carrying amount.annually. If we determine that the fair value of the reporting unit may be less than its carrying amount, we evaluate goodwill using a two-step impairment test. Otherwise, we conclude that no impairment is indicated and we do not perform the two-step impairment test. In fiscal
2015,2016, we determined it was appropriate to perform a two-step impairment test.
The first step of the goodwill impairment test compares the book value of a reporting unit, including goodwill, with its fair value, as determined by its discounted cash flows. If the book value of a reporting unit exceeds its fair value, the second step of the impairment test is performed to determine the amount of goodwill impairment loss to be recorded. The determination of fair value involves uncertainties because it requires management to make assumptions and to apply judgment to estimate industry and economic factors and the profitability of future business strategies. Patterson conducts impairment testing based on current business strategy in light of present industry and economic conditions, as well as future expectations. Additionally, in assessing goodwill for impairment, the reasonableness of the implied control premium is considered based on market capitalizations and recent market transactions.
Other indefinite-lived intangible assets are assessed for impairment by comparing the carrying value of an asset with its fair value. If the carrying value exceeds fair value, an impairment loss is recognized in an amount equal to the excess. The determination of fair value involves assumptions, including projected revenues and gross profit levels, as well as consideration of any factors that may indicate potential impairment.
In the fourth quarter of fiscal
2015,2016, management completed its annual goodwill and other indefinite-lived intangible asset impairment tests and determined there was no impairment and that none of our reporting units are at risk of failing step 1.
Although we believe estimates and assumptions used in estimating cash flows and determining fair value are reasonable, making material changes to such estimates and assumptions could materially affect such impairment analyses and financial results, including an impairment charge that could be material.Long-Lived Assets – Long-lived assets, including definite-lived intangible assets, are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through the estimated undiscounted future cash flows derived from such assets. Our definite-lived intangible assets primarily consist of an exclusive distribution agreement and customer lists. When impairment exists, the related assets are written down to fair value.
Income Taxes – We are subject to income taxes in both the U.S. and numerous foreign jurisdictions. Significant judgments are required in determining the consolidated provision for income taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. As a result, we recognize tax liabilities based on estimates of whether additional taxes and interest will be due. These tax liabilities are recognized when, despite our belief that our tax return position is supportable, we believe that certain positions may not be fully sustained upon review by tax authorities. We believe that our accruals for tax liabilities are adequate for all open audit years based on our assessment of many factors including past experience and interpretations of tax law. This assessment relies on estimates and assumptions and may involve a series of complex judgments about future events. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact income tax expense in the period in which such determination is made and could materially affect our financial results.
Valuation allowances are established for deferred tax assets if, after assessment of available positive and negative evidence, it is more likely than not that the deferred tax asset will not be fully realized. The valuation allowance reflected in the footnote disclosure relates
primarily to
net operating loss carryforwards of certain foreign
subsidiaries acquiredtax credit carryovers generated in
prior years.fiscal 2016.
Self-insurance – Patterson is self-insured for certain losses related to general liability, product liability, automobile, workers’ compensation and medical claims. We estimate our liabilities based upon an analysis of historical data and actuarial estimates. While current estimates are believed reasonable based on information currently available, actual results could differ and affect financial results due to changes in the amount or frequency of claims, medical cost inflation or other factors. Historically, actual results related to these types of claims have not varied significantly from estimated amounts. Stock-based Compensation – We recognize stock-based compensation based on certain assumptions including inputs within the Black-Scholes Modelvaluation models, estimated forfeitures and estimated forfeitures.performance outcomes. These assumptions require subjective judgment and changes in the assumptions can materially affect fair value estimates. Management assesses the assumptions and methodologies used to estimate forfeitures and to calculate estimated fair value of stock-based compensation on a regular basis. Circumstances may change, and additional data may become available over time, which could result in changes to these assumptions and methodologies and thereby materially impact the fair value determination or estimates of forfeitures. If factors change and we employ different assumptions, the amount of compensation expense associated with stock-based compensation may differ significantly from what was recorded in the current period.Subsequent Events
On June 16, 2015, we completed the previously announced acquisition of Animal Health International, Inc., a leading production animal health distribution company in the United States, for approximately $1.1 billion in cash. Animal Health International generated sales and earnings before interest, income taxes, depreciation and
amortization of $1.5 billion and $68 million, respectively, during the 12 months ended March 2015. This acquisition will more than double the size of Patterson’s veterinary business. The combined unit will offer a range of products and services to customers in the U.S., Canada and the U.K. See Note 19 to the Consolidated Financial Statements for further information.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk consisting of foreign currency rate fluctuations and changes in interest rates.
Patterson is exposed to foreign currency exchange rate fluctuations in our operating statement due to transactions denominated primarily in Canadian Dollars and British Pounds, Euros, Australian Dollars, New Zealand Dollars and Thai Bahts.Pounds. Although Patterson is not currently involved with foreign currency hedge contracts, we continually evaluate our foreign currency exchange rate risk and the different mechanisms for use in managing such risk. A hypothetical 10% change in the value of the U.S. dollar in relation to our most significant foreign currency exposures would have reduced fiscal 20152016 net sales by approximately $91$84 million.This amount is not indicative of the hypothetical net earnings impact due to the partially offsetting impact of the currency exchange movements on cost of sales and operating expenses. Patterson estimates that if foreign currency exchange rates changed by 10% during the year, the annual impact would have been approximate $3 million to earnings before income taxes. During fiscal 2016, we entered into the Credit Agreement under which the lenders provided Patterson with senior unsecured lending facilities of up to $1.5 billion, consisting of a $1.0 billion unsecured term loan and a $500 million unsecured revolving line of credit. Interest on borrowings under the Credit Agreement is variable. Due to the interest rate being variable, fluctuations in interest rates may impact our earnings. Based on our current level of debt, we estimate that a 100 basis point change in the LIBOR rate would have a $3.2 million impact on our income from continuing operations before taxes on an annualized basis.
Patterson’s earnings are also affected by fluctuations in short-term interest rates through the investment of cash balances and the practice of selling fixed rate equipment finance contracts under agreements with both a commercial paper conduit and a bank that provide for pricing based on variable interest rates.
When considering the exposure under the agreements whereby Patterson sells equipment finance contracts to both a commercial paper conduit and bank, Patterson has the ability to select pricing based on interest rates ranging from 30 day LIBOR up to twelve month LIBOR. In addition, the majority of the portfolio of installment contracts generally turns over in
less than 48 months, and Patterson can adjust the rate we charge on new customer contracts at any time. Therefore, in times where the interest rate markets are not rapidly increasing or decreasing, the average interest rate in the portfolio generally moves with the interest rate markets and thus would parallel the underlying interest rate movement of the pricing built into the sale agreements. In calculating the gain on the contract sales, we use an interest rate curve that approximates the maturity period of the then-outstanding contracts. If increases in the interest rate markets occur, the average interest rate in our contract portfolio may not increase at the same rate, resulting in a reduction of gain on the contracts sales as compared to the gain that would be realized if the average interest rate in our portfolio were to increase at a more similar rate to the interest rate markets.
Patterson estimates that if interest rates changed by 10% during the year, the annual impact would have been less than $1 million to earnings before income taxes.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Patterson Companies, Inc.
We have audited Patterson Companies, Inc.’s internal control over financial reporting as of April
25, 2015,30, 2016, based on criteria established in Internal Control
–- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Patterson Companies, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting appearing in Item 9A, Controls and Procedures, of this Annual
reportReport on Form 10-K. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As indicated in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Animal Health International, Inc., which is included in the fiscal 2016 consolidated financial statements of Patterson Companies, Inc. and constituted $1,432 million of total assets, as of April 30, 2016 and $1,396 million and $37 millionof revenues and operating income, respectively, for the year then ended. Our audit of internal control over financial reporting ofPatterson Companies, Inc. also did not include an evaluation of the internal control over financial reporting of Animal Health International, Inc.
In our opinion, Patterson Companies, Inc. maintained, in all material respects, effective internal control over financial reporting as of April
25, 2015,30, 2016, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Patterson Companies, Inc. as of April 30, 2016 and April 25, 2015, and the related consolidated statements of income and other comprehensive income, changes in stockholders’ equity, and cash flows for each
of the three years in the period ended April 26, 2014,30, 2016, and our report dated June 29, 2016 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
June 29, 2016
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Patterson Companies, Inc.
We have audited the accompanying consolidated balance sheets of Patterson Companies, Inc. as of April 30, 2016 and April 25, 2015, and the related consolidated statements of income and other comprehensive income, changes in stockholders’ equity, and cash flows for each of the three
fiscal years in the period ended April
25, 2015, and our report dated June 24, 2015 expressed an unqualified opinion thereon./s/ Ernst & Young LLP
Minneapolis, Minnesota
June 24, 2015
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Patterson Companies, Inc.
We have audited the accompanying consolidated balance sheets of Patterson Companies, Inc. as of April 25, 2015 and April 26, 2014, and the related consolidated statements of income and other comprehensive income, changes in stockholders’ equity, and cash flows for each of the three fiscal years in the period ended April 25, 2015.30, 2016. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Patterson Companies, Inc. at April
25, 201530, 2016 and April
26, 2014,25, 2015, and the consolidated results of its operations and its cash flows for each of the three
fiscal years in the period ended April
25, 2015,30, 2016, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Patterson Companies, Inc.’s internal control over financial reporting as of April
25, 2015,30, 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated June
24, 201529, 2016 expressed an unqualified opinion thereon.
PATTERSON COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
| | | | | | | | |
| | | April 25,
2015 | | | April 26,
2014 | |
ASSETS | | | | | | | | |
Current assets: | | | | | | | | |
Cash and cash equivalents | | $ | 347,260 | | | $ | 264,908 | |
Short-term investments | | | 53,372 | | | | 40,775 | |
Receivables, net of allowance for doubtful accounts of $8,419 and $9,873 at April 25, 2015 and April 26, 2014, respectively | | | 644,139 | | | | 607,580 | |
Inventory | | | 456,687 | | | | 436,463 | |
Prepaid expenses and other current assets | | | 71,767 | | | | 65,991 | |
| | | | | | | | |
Total current assets | | | 1,573,225 | | | | 1,415,717 | |
Property and equipment, net | | | 226,805 | | | | 204,939 | |
Long-term receivables, net | | | 71,686 | | | | 90,535 | |
Goodwill | | | 837,099 | | | | 844,433 | |
Identifiable intangibles, net | | | 199,829 | | | | 223,150 | |
Other | | | 39,062 | | | | 85,903 | |
| | | | | | | | |
Total assets | | $ | 2,947,706 | | | $ | 2,864,677 | |
| | | | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | |
Current liabilities: | | | | | | | | |
Accounts payable | | $ | 349,635 | | | $ | 342,056 | |
Accrued payroll expense | | | 79,964 | | | | 66,567 | |
Other accrued liabilities | | | 148,086 | | | | 134,840 | |
| | | | | | | | |
Total current liabilities | | | 577,685 | | | | 543,463 | |
Long-term debt | | | 725,000 | | | | 725,000 | |
Deferred income taxes | | | 88,264 | | | | 94,004 | |
Other | | | 42,634 | | | | 30,546 | |
| | | | | | | | |
Total liabilities | | | 1,433,583 | | | | 1,393,013 | |
Stockholders’ equity: | | | | | | | | |
Common stock, $.01 par value: authorized shares – 600,000; issued and outstanding shares – 103,278 and 103,965 at April 25, 2015 and April 26, 2014, respectively | | | 1,033 | | | | 1,040 | |
Additional paid-in capital | | | 21,026 | | | | — | |
Accumulated other comprehensive income (loss) | | | (60,346 | ) | | | 25,370 | |
Retained earnings | | | 1,630,148 | | | | 1,531,198 | |
Unearned ESOP shares | | | (77,738 | ) | | | (85,944 | ) |
| | | | | | | | |
Total stockholders’ equity | | | 1,514,123 | | | | 1,471,664 | |
| | | | | | | | |
Total liabilities and stockholders’ equity | | $ | 2,947,706 | | | $ | 2,864,677 | |
| | | | | | | | |
|
| | | | | | | |
| | April 30, 2016 | | April 25, 2015 |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 137,453 |
| | $ | 347,260 |
|
| Short-term investments | — |
| | 53,372 |
|
| Receivables, net of allowance for doubtful accounts of $12,008 and $7,678 | 796,693 |
| | 586,263 |
|
| Inventory | 722,140 |
| | 408,422 |
|
| Prepaid expenses and other current assets | 91,255 |
| | 59,561 |
|
| Current assets held for sale | — |
| | 118,347 |
|
| Total current assets | 1,747,541 |
| | 1,573,225 |
|
| Property and equipment, net | 293,315 |
| | 204,133 |
|
| Long-term receivables, net | 88,248 |
| | 71,686 |
|
| Goodwill | 816,592 |
| | 299,924 |
|
| Identifiable intangibles, net | 509,297 |
| | 125,025 |
|
| Other non-current assets | 65,811 |
| | 35,461 |
|
| Long-term assets held for sale | — |
| | 635,794 |
|
| Total assets | $ | 3,520,804 |
| | $ | 2,945,248 |
|
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 566,253 |
| | $ | 323,294 |
|
| Accrued payroll expense | 75,448 |
| | 72,464 |
|
| Other accrued liabilities | 151,134 |
| | 142,611 |
|
| Current maturities of long-term debt | 16,500 |
| | — |
|
| Borrowings on revolving credit | 20,000 |
| | — |
|
| Current liabilities held for sale | — |
| | 39,316 |
|
| Total current liabilities | 829,335 |
| | 577,685 |
|
| Long-term debt | 1,022,155 |
| | 722,542 |
|
| Deferred income taxes | 206,896 |
| | 41,413 |
|
| Other non-current liabilities | 20,672 |
| | 40,071 |
|
| Long-term liabilities held for sale | — |
| | 49,414 |
|
| Total liabilities | 2,079,058 |
| | 1,431,125 |
|
| Stockholders’ equity: | | | |
| Common stock, $.01 par value: 600,000 shares authorized; 99,107 and 103,278 shares issued and outstanding | 991 |
| | 1,033 |
|
| Additional paid-in capital | 48,477 |
| | 21,026 |
|
| Accumulated other comprehensive income (loss) | (67,964 | ) | | (60,346 | ) |
| Retained earnings | 1,529,158 |
| | 1,630,148 |
|
| Unearned ESOP shares | (68,916 | ) | | (77,738 | ) |
| Total stockholders’ equity | 1,441,746 |
| | 1,514,123 |
|
| Total liabilities and stockholders’ equity | $ | 3,520,804 |
| | $ | 2,945,248 |
|
PATTERSON COMPANIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
AND OTHER COMPREHENSIVE INCOME
(In thousands, except per share amounts)
| | | | | | | | | | | | |
| | | Fiscal Year Ended | |
| | | April 25,
2015 | | | April 26,
2014 | | | April 27,
2013 | |
Net sales | | $ | 4,375,020 | | | $ | 4,063,715 | | | $ | 3,637,212 | |
Cost of sales | | | 3,136,814 | | | | 2,865,437 | | | | 2,446,443 | |
| | | | | | | | | | | | |
Gross profit | | | 1,238,206 | | | | 1,198,278 | | | | 1,190,769 | |
Operating expenses | | | 864,779 | | | | 852,522 | | | | 836,314 | |
| | | | | | | | | | | | |
Operating income | | | 373,427 | | | | 345,756 | | | | 354,455 | |
| | | |
Other income and expense: | | | | | | | | | | | | |
Other income, net | | | 2,937 | | | | 2,869 | | | | 3,059 | |
Interest expense | | | (33,693 | ) | | | (35,713 | ) | | | (36,397 | ) |
| | | | | | | | | | | | |
Income before taxes | | | 342,671 | | | | 312,912 | | | | 321,117 | |
Income taxes | | | 119,410 | | | | 112,300 | | | | 110,845 | |
| | | | | | | | | | | | |
Net income | | $ | 223,261 | | | $ | 200,612 | | | $ | 210,272 | |
| | | | | | | | | | | | |
Earnings per share: | | | | | | | | | | | | |
Basic | | $ | 2.26 | | | $ | 1.99 | | | $ | 2.04 | |
| | | | | | | | | | | | |
Diluted | | $ | 2.24 | | | $ | 1.97 | | | $ | 2.03 | |
| | | | | | | | | | | | |
Weighted average shares: | | | | | | | | | | | | |
Basic | | | 98,989 | | | | 100,727 | | | | 103,030 | |
| | | | | | | | | | | | |
Diluted | | | 99,694 | | | | 101,643 | | | | 103,807 | |
| | | | | | | | | | | | |
Dividends declared per common share | | $ | 0.82 | | | $ | 0.68 | | | $ | 0.58 | |
| | | | | | | | | | | | |
Comprehensive income | | | | | | | | | | | | |
Net income | | $ | 223,261 | | | $ | 200,612 | | | $ | 210,272 | |
Foreign currency translation (loss)/gain | | | (73,271 | ) | | | 6,059 | | | | (7,132 | ) |
Cash flow hedges, net of tax | | | (12,445 | ) | | | (5,854 | ) | | | (158 | ) |
| | | | | | | | | | | | |
Comprehensive income | | $ | 137,545 | | | $ | 200,817 | | | $ | 202,982 | |
| | | | | | | | | | | | |
|
| | | | | | | | | | | |
| | Fiscal Year Ended |
| | April 30, 2016 | | April 25, 2015 | | April 26, 2014 |
| Net sales | $ | 5,386,703 |
| | $ | 3,910,865 |
| | $ | 3,585,141 |
|
| Cost of sales | 4,063,955 |
| | 2,850,316 |
| | 2,566,444 |
|
| Gross profit | 1,322,748 |
| | 1,060,549 |
| | 1,018,697 |
|
| Operating expenses | 975,035 |
| | 755,963 |
| | 724,971 |
|
| Operating income from continuing operations | 347,713 |
| | 304,586 |
| | 293,726 |
|
| Other income (expense): | | | | | |
| Other income, net | 4,045 |
| | 3,425 |
| | 3,250 |
|
| Interest expense | (50,065 | ) | | (33,693 | ) | | (35,713 | ) |
| Income from continuing operations before taxes | 301,693 |
| | 274,318 |
| | 261,263 |
|
| Income tax expense | 116,009 |
| | 94,235 |
| | 89,931 |
|
| Net income from continuing operations | 185,684 |
| | 180,083 |
| | 171,332 |
|
| Net income from discontinued operations | 1,500 |
| | 43,178 |
| | 29,280 |
|
| Net income | $ | 187,184 |
| | $ | 223,261 |
| | $ | 200,612 |
|
| Basic earnings per share: | | | | | |
| Continuing operations | $ | 1.91 |
| | $ | 1.82 |
| | $ | 1.70 |
|
| Discontinued operations | 0.02 |
| | 0.44 |
| | 0.29 |
|
| Net basic earnings per share | $ | 1.93 |
| | $ | 2.26 |
| | $ | 1.99 |
|
| Diluted earnings per share: | | | | | |
| Continuing operations | $ | 1.90 |
| | $ | 1.81 |
| | $ | 1.69 |
|
| Discontinued operations | 0.01 |
| | 0.43 |
| | 0.28 |
|
| Net diluted earnings per share | $ | 1.91 |
| | $ | 2.24 |
| | $ | 1.97 |
|
| Weighted average shares: | | | | | |
| Basic | 97,222 |
| | 98,989 |
| | 100,727 |
|
| Diluted | 97,902 |
| | 99,694 |
| | 101,643 |
|
| Dividends declared per common share | $ | 0.90 |
| | $ | 0.82 |
| | $ | 0.68 |
|
| Comprehensive income | | | | | |
| Net income | $ | 187,184 |
| | $ | 223,261 |
| | $ | 200,612 |
|
| Foreign currency translation gain (loss) | (9,552 | ) | | (73,271 | ) | | 6,059 |
|
| Cash flow hedges, net of tax | 1,934 |
| | (12,445 | ) | | (5,854 | ) |
| Comprehensive income | $ | 179,566 |
| | $ | 137,545 |
| | $ | 200,817 |
|
PATTERSON COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Additional
Paid-in
Capital | | | Accumulated
Other
Comprehensive
Income (Loss) | | | Retained
Earnings | | | Unearned
ESOP
Shares | | | | |
| | | Common Stock | | | | | | | | |
| | | Number | | | Amount | | | | | | | Total | |
Balance at April 28, 2012 | | | 109,924 | | | $ | 1,099 | | | $ | — | | | $ | 32,455 | | | $ | 1,456,233 | | | $ | (114,585 | ) | | $ | 1,375,202 | |
Foreign currency translation | | | — | | | | — | | | | — | | | | (7,132 | ) | | | — | | | | — | | | | (7,132 | ) |
Cash flow hedges | | | — | | | | — | | | | — | | | | (158 | ) | | | — | | | | — | | | | (158 | ) |
Net income | | | — | | | | — | | | | — | | | | — | | | | 210,272 | | | | — | | | | 210,272 | |
Dividends declared | | | — | | | | — | | | | — | | | | — | | | | (57,384 | ) | | | — | | | | (57,384 | ) |
Common stock issued and related tax benefits | | | 870 | | | | 9 | | | | 21,316 | | | | — | | | | — | | | | — | | | | 21,325 | |
Repurchase of common stock | | | (5,224 | ) | | | (52 | ) | | | (35,941 | ) | | | — | | | | (145,763 | ) | | | — | | | | (181,756 | ) |
Stock based compensation | | | — | | | | — | | | | 14,625 | | | | — | | | | — | | | | — | | | | 14,625 | |
ESOP activity | | | — | | | | — | | | | — | | | | — | | | | — | | | | 19,461 | | | | 19,461 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at April 27, 2013 | | | 105,570 | | | | 1,056 | | | | — | | | | 25,165 | | | | 1,463,358 | | | | (95,124 | ) | | | 1,394,455 | |
Foreign currency translation | | | — | | | | — | | | | — | | | | 6,059 | | | | — | | | | — | | | | 6,059 | |
Cash flow hedges | | | — | | | | — | | | | — | | | | (5,854 | ) | | | — | | | | — | | | | (5,854 | ) |
Net income | | | — | | | | — | | | | — | | | | — | | | | 200,612 | | | | — | | | | 200,612 | |
Dividends declared | | | — | | | | — | | | | — | | | | — | | | | (72,413 | ) | | | — | | | | (72,413 | ) |
Common stock issued and related tax benefits | | | 749 | | | | 7 | | | | 27,461 | | | | — | | | | — | | | | — | | | | 27,468 | |
Repurchase of common stock | | | (2,354 | ) | | | (23 | ) | | | (36,104 | ) | | | — | | | | (60,359 | ) | | | — | | | | (96,486 | ) |
Stock based compensation | | | — | | | | — | | | | 8,643 | | | | — | | | | — | | | | — | | | | 8,643 | |
ESOP activity | | | — | | | | — | | | | — | | | | — | | | | — | | | | 9,180 | | | | 9,180 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at April 26, 2014 | | | 103,965 | | | | 1,040 | | | | — | | | | 25,370 | | | | 1,531,198 | | | | (85,944 | ) | | | 1,471,664 | |
Foreign currency translation | | | — | | | | — | | | | — | | | | (73,271 | ) | | | — | | | | — | | | | (73,271 | ) |
Cash flow hedges | | | — | | | | — | | | | — | | | | (12,445 | ) | | | — | | | | — | | | | (12,445 | ) |
Net income | | | — | | | | — | | | | — | | | | — | | | | 223,261 | | | | — | | | | 223,261 | |
Dividends declared | | | — | | | | — | | | | — | | | | — | | | | (82,531 | ) | | | — | | | | (82,531 | ) |
Common stock issued and related tax benefits | | | 507 | | | | 5 | | | | 11,331 | | | | — | | | | — | | | | — | | | | 11,336 | |
Repurchase of common stock | | | (1,194 | ) | | | (12 | ) | | | (5,747 | ) | | | — | | | | (41,780 | ) | | | — | | | | (47,539 | ) |
Stock based compensation | | | — | | | | — | | | | 15,442 | | | | — | | | | — | | | | — | | | | 15,442 | |
ESOP activity | | | — | | | | — | | | | — | | | | — | | | | — | | | | 8,206 | | | | 8,206 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at April 25, 2015 | | | 103,278 | | | $ | 1,033 | | | $ | 21,026 | | | $ | (60,346 | ) | | $ | 1,630,148 | | | $ | (77,738 | ) | | $ | 1,514,123 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | Unearned ESOP Shares | | Total |
| | Number | | Amount | | | | | |
| Balance at April 27, 2013 | 105,570 |
| | $ | 1,056 |
| | $ | — |
| | $ | 25,165 |
| | $ | 1,463,358 |
| | $ | (95,124 | ) | | $ | 1,394,455 |
|
| Foreign currency translation | — |
| | — |
| | — |
| | 6,059 |
| | — |
| | — |
| | 6,059 |
|
| Cash flow hedges | — |
| | — |
| | — |
| | (5,854 | ) | | — |
| | — |
| | (5,854 | ) |
| Net income | — |
| | — |
| | — |
| | — |
| | 200,612 |
| | — |
| | 200,612 |
|
| Dividends declared | — |
| | — |
| | — |
| | — |
| | (72,413 | ) | | — |
| | (72,413 | ) |
| Common stock issued and related tax benefits | 749 |
| | 7 |
| | 27,461 |
| | — |
| | — |
| | — |
| | 27,468 |
|
| Repurchase of common stock | (2,354 | ) | | (23 | ) | | (36,104 | ) | | — |
| | (60,359 | ) | | — |
| | (96,486 | ) |
| Stock based compensation | — |
| | — |
| | 8,643 |
| | — |
| | — |
| | — |
| | 8,643 |
|
| ESOP activity | — |
| | — |
| | — |
| | — |
| | — |
| | 9,180 |
| | 9,180 |
|
| Balance at April 26, 2014 | 103,965 |
| | 1,040 |
| | — |
| | 25,370 |
| | 1,531,198 |
| | (85,944 | ) | | 1,471,664 |
|
| Foreign currency translation | — |
| | — |
| | — |
| | (73,271 | ) | | — |
| | — |
| | (73,271 | ) |
| Cash flow hedges | — |
| | — |
| | — |
| | (12,445 | ) | | — |
| | — |
| | (12,445 | ) |
| Net income | — |
| | — |
| | — |
| | — |
| | 223,261 |
| | — |
| | 223,261 |
|
| Dividends declared | — |
| | — |
| | — |
| | — |
| | (82,531 | ) | | — |
| | (82,531 | ) |
| Common stock issued and related tax benefits | 507 |
| | 5 |
| | 11,331 |
| | — |
| | — |
| | — |
| | 11,336 |
|
| Repurchase of common stock | (1,194 | ) | | (12 | ) | | (5,747 | ) | | — |
| | (41,780 | ) | | — |
| | (47,539 | ) |
| Stock based compensation | — |
| | — |
| | 15,442 |
| | — |
| | — |
| | — |
| | 15,442 |
|
| ESOP activity | — |
| | — |
| | — |
| | — |
| | — |
| | 8,206 |
| | 8,206 |
|
| Balance at April 25, 2015 | 103,278 |
| | 1,033 |
| | 21,026 |
| | (60,346 | ) | | 1,630,148 |
| | (77,738 | ) | | 1,514,123 |
|
| Foreign currency translation | — |
| | — |
| | — |
| | (9,552 | ) | | — |
| | — |
| | (9,552 | ) |
| Cash flow hedges | — |
| | — |
| | — |
| | 1,934 |
| | — |
| | — |
| | 1,934 |
|
| Net income | — |
| | — |
| | — |
| | — |
| | 187,184 |
| | — |
| | 187,184 |
|
| Dividends declared | — |
| | — |
| | — |
| | — |
| | (88,218 | ) | | — |
| | (88,218 | ) |
| Common stock issued and related tax benefits | 208 |
| | 2 |
| | 12,875 |
| | — |
| | — |
| | — |
| | 12,877 |
|
| Repurchase of common stock | (4,379 | ) | | (44 | ) | | — |
| | — |
| | (199,956 | ) | | — |
| | (200,000 | ) |
| Stock based compensation | — |
| | — |
| | 14,576 |
| | — |
| | — |
| | — |
| | 14,576 |
|
| ESOP activity | — |
| | — |
| | — |
| | — |
| | — |
| | 8,822 |
| | 8,822 |
|
| Balance at April 30, 2016 | 99,107 |
| | $ | 991 |
| | $ | 48,477 |
| | $ | (67,964 | ) | | $ | 1,529,158 |
| | $ | (68,916 | ) | | $ | 1,441,746 |
|
PATTERSON COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) | | | | | | | | | | | | |
| | | Fiscal Year Ended | |
| | | April 25,
2015 | | | April 26,
2014 | | | April 27,
2013 | |
Operating activities: | | | | | | | | | | | | |
Net income | | $ | 223,261 | | | $ | 200,612 | | | $ | 210,272 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | |
Depreciation | | | 26,895 | | | | 27,113 | | | | 25,720 | |
Amortization | | | 24,435 | | | | 22,873 | | | | 20,282 | |
Bad debt expense | | | 3,384 | | | | 3,220 | | | | 1,119 | |
Non-cash employee compensation | | | 26,485 | | | | 20,018 | | | | 35,202 | |
Excess tax benefits from stock-based compensation | | | (255 | ) | | | (1,290 | ) | | | (2,487 | ) |
Non-cash charges related to medical divestitures | | | — | | | | 13,842 | | | | — | |
Deferred income taxes | | | 5,702 | | | | 7,765 | | | | 7,049 | |
Change in assets and liabilities net of acquired: | | | | | | | | | | | | |
Receivables | | | (38,023 | ) | | | (50,756 | ) | | | 17,226 | |
Inventory | | | (22,654 | ) | | | (36,019 | ) | | | (39,096 | ) |
Accounts payable | | | 6,769 | | | | 12,345 | | | | 41,347 | |
Accrued liabilities | | | 41,344 | | | | 14,125 | | | | (21,767 | ) |
Long term receivables | | | 814 | | | | (5,108 | ) | | | 27 | |
Other changes from operating activities, net | | | (35,466 | ) | | | (32,904 | ) | | | 4,301 | |
| | | | | | | | | | | | |
Net cash provided by operating activities | | | 262,691 | | | | 195,836 | | | | 299,195 | |
| | | |
Investing activities: | | | | | | | | | | | | |
Additions to property and equipment | | | (62,945 | ) | | | (40,387 | ) | | | (21,983 | ) |
Acquisitions and equity investments, net of cash assumed | | | (10,515 | ) | | | (145,815 | ) | | | (14,650 | ) |
Proceeds from sale | | | 46,369 | | | | 6,546 | | | | — | |
Purchase of investment | | | (543 | ) | | | (99,672 | ) | | | — | |
Other investing activities | | | 18,035 | | | | (4,436 | ) | | | 6,595 | |
| | | | | | | | | | | | |
Net cash used in investing activities | | | (9,599 | ) | | | (283,764 | ) | | | (30,038 | ) |
| | | |
Financing activities: | | | | | | | | | | | | |
Dividends paid | | | (81,760 | ) | | | (85,657 | ) | | | (43,767 | ) |
Repurchases of common stock | | | (47,539 | ) | | | (96,486 | ) | | | (179,525 | ) |
ESOP activity | | | (188 | ) | | | 435 | | | | 1,576 | |
Common stock issued, net | | | 7,300 | | | | 20,217 | | | | 13,131 | |
Retirement of long term debt | | | (250,000 | ) | | | — | | | | (125,000 | ) |
Proceeds from issuance of long-term debt | | | 250,000 | | | | — | | | | — | |
Settlement of swap | | | (29,003 | ) | | | — | | | | — | |
Payment to revolver | | | (130,000 | ) | | | (135,000 | ) | | | — | |
Draw on revolver | | | 130,000 | | | | 135,000 | | | | — | |
Excess tax benefits from stock-based compensation | | | 255 | | | | 1,290 | | | | 2,487 | |
| | | | | | | | | | | | |
Net cash used in financing activities | | | (150,935 | ) | | | (160,201 | ) | | | (331,098 | ) |
Effect of exchange rate changes on cash | | | (19,805 | ) | | | 7,809 | | | | (6,612 | ) |
| | | | | | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | 82,352 | | | | (240,320 | ) | | | (68,553 | ) |
Cash and cash equivalents at beginning of period | | | 264,908 | | | | 505,228 | | | | 573,781 | |
| | | | | | | | | | | | |
Cash and cash equivalents at end of period | | $ | 347,260 | | | $ | 264,908 | | | $ | 505,228 | |
| | | | | | | | | | | | |
| | | |
Supplemental disclosures: | | | | | | | | | | | | |
Income taxes paid | | $ | 110,909 | | | $ | 108,374 | | | $ | 124,146 | |
Interest paid | | | 34,076 | | | | 34,933 | | | | 35,965 | |
Repurchases of common stock with liability due to broker | | | — | | | | — | | | | 2,707 | |
|
| | | | | | | | | | | |
| | Fiscal Year Ended |
| | April 30, 2016 | | April 25, 2015 | | April 26, 2014 |
| Operating activities: | | | | | |
| Net income | $ | 187,184 |
| | $ | 223,261 |
| | $ | 200,612 |
|
| Net income from discontinued operations | 1,500 |
| | 43,178 |
| | 29,280 |
|
| Net income from continuing operations | 185,684 |
| | 180,083 |
| | 171,332 |
|
| Adjustments to reconcile net income from continuing operations to net cash provided by operating activities: | | | | | |
| Depreciation | 34,315 |
| | 23,768 |
| | 23,843 |
|
| Amortization | 48,068 |
| | 20,755 |
| | 18,603 |
|
| Bad debt expense | 8,246 |
| | 2,546 |
| | 2,544 |
|
| Non-cash employee compensation | 28,851 |
| | 23,070 |
| | 16,932 |
|
| Accelerated amortization of debt issuance costs on early retirement of debt | 5,153 |
| | — |
| | — |
|
| Excess tax benefits from stock-based compensation | (2,656 | ) | | (255 | ) | | (1,290 | ) |
| Deferred income taxes | (16,034 | ) | | 460 |
| | 5,533 |
|
| Change in assets and liabilities net of acquired: | | | | | |
| Receivables | (57,249 | ) | | (40,696 | ) | | (49,784 | ) |
| Inventory | (118,351 | ) | | (21,754 | ) | | (41,501 | ) |
| Accounts payable | 119,690 |
| | 10,286 |
| | 13,828 |
|
| Accrued liabilities | (4,055 | ) | | 42,555 |
| | 15,828 |
|
| Long term receivables | (38,882 | ) | | 814 |
| | (5,108 | ) |
| Other changes from operating activities, net | 2,093 |
| | (36,568 | ) | | (22,543 | ) |
| Net cash provided by operating activities- continuing operations | 194,873 |
| | 205,064 |
| | 148,217 |
|
| Net cash provided by (used in) operating activities- discontinued operations | (38,544 | ) | | 57,627 |
| | 47,619 |
|
| Net cash provided by operating activities | 156,329 |
| | 262,691 |
| | 195,836 |
|
| Investing activities: | | | | | |
| Additions to property and equipment | (79,354 | ) | | (60,662 | ) | | (34,041 | ) |
| Acquisitions and equity investments, net of cash assumed | (1,106,583 | ) | | (10,515 | ) | | (145,815 | ) |
| Proceeds from sale of securities | 48,744 |
| | 40,775 |
| | — |
|
| Purchase of investments | — |
| | (543 | ) | | (99,672 | ) |
| Other investing activities | 22,320 |
| | 18,035 |
| | (4,436 | ) |
| Net cash used in investing activities- continuing operations | (1,114,873 | ) | | (12,910 | ) | | (283,964 | ) |
| Net cash provided by investing activities- discontinued operations | 714,239 |
| | 3,311 |
| | 200 |
|
| Net cash used in investing activities | (400,634 | ) | | (9,599 | ) | | (283,764 | ) |
| Financing activities: | | | | | |
| Dividends paid | (90,597 | ) | | (81,760 | ) | | (85,657 | ) |
| Repurchases of common stock | (200,000 | ) | | (47,539 | ) | | (96,486 | ) |
| Proceeds from issuance of long-term debt | 1,000,000 |
| | 250,000 |
| | — |
|
| Debt issuance costs | (11,600 | ) | | — |
| | — |
|
| Retirement of long-term debt | (682,375 | ) | | (250,000 | ) | | — |
|
| Settlement of swap | — |
| | (29,003 | ) | | — |
|
| Draw on revolver | 20,000 |
| | — |
| | — |
|
| Common stock issued, net | 4,825 |
| | 7,300 |
| | 20,217 |
|
| ESOP activity | (133 | ) | | (188 | ) | | 435 |
|
| Excess tax benefits from stock-based compensation | 2,749 |
| | 255 |
| | 1,290 |
|
| Net cash provided by (used in) financing activities | 42,869 |
| | (150,935 | ) | | (160,201 | ) |
| Effect of exchange rate changes on cash | (8,371 | ) | | (19,805 | ) | | 7,809 |
|
| Net increase (decrease) in cash and cash equivalents | (209,807 | ) | | 82,352 |
| | (240,320 | ) |
| Cash and cash equivalents at beginning of period | 347,260 |
| | 264,908 |
| | 505,228 |
|
| Cash and cash equivalents at end of period | $ | 137,453 |
| | $ | 347,260 |
| | $ | 264,908 |
|
| Supplemental disclosures: | | | | | |
| Income taxes paid | $ | 151,662 |
| | $ | 110,909 |
| | $ | 108,374 |
|
| Interest paid | 37,883 |
| | 34,076 |
| | 34,933 |
|
PATTERSON COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2016APRIL 25, 2015
(Dollars, except per share amounts, and shares in thousands)
1. Summary of Significant Accounting Policies
Patterson Companies, Inc. (referred to herein as “Patterson” or in the first person notations “we,” “our,” and “us”) is a value-added
specialty distributor serving the
North American dental supply, U.S. and
U.K. veterinarianCanadian dental supply and the
worldwide rehabilitationU.S., Canadian and
assistive productsU.K. animal health supply
market.markets. Patterson
Companies has three reportable segments:
dental supply, veterinary supplyDental, Animal Health and
rehabilitation supply.Corporate.
The consolidated financial statements include the accounts of our wholly owned subsidiaries. Intercompany transactions and balances have been eliminated in consolidation. The respective assets of PDC Funding Company, LLC and PDC Funding Company II, LLC would be available first and foremost to satisfy the claims of their respective creditors. There are no known creditors of PDC Funding Company, LLC or PDC Funding Company II, LLC.
We operate with a 52-53 week accounting convention with our fiscal year ending on the last Saturday in April. Fiscal years
2013,2014, 2015 and 2016 ended on April 26, 2014, April 25, 2015 and April 30, 2016, respectively. Fiscal years 2014 and 2015
ending April 27, 2013, April 26, 2014 and April 25, 2015, respectively, includedconsisted of 52
weeks, while fiscal year 2016 consisted of 53 weeks. Fiscal year
20162017 will end on April
30, 201629, 2017 and
will consist of
5352 weeks.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Certain prior year amounts have been reclassified to conform to the current year presentation.
Cash and Cash Equivalents
Cash equivalents consist primarily of investments in money market funds and government securities. The maturity of these securities at the time of purchase is 90 days or less. All cash and cash equivalents are classified as available-for-sale and carried at fair value, which approximates cost.
Inventory consists of merchandise held for sale and is stated at the lower of cost or market. Cost is determined using the last-in, first-out
(LIFO)("LIFO") method for all inventories, except for foreign inventories,
and manufactured inventories, which are valued using the first-in, first-out
(FIFO)("FIFO") method. Inventories valued at LIFO represent
76%84% and
75%79% of total inventories at April
30, 2016 and April 25, 2015,
and April 26, 2014, respectively.
The accumulated LIFO reserve was
$76,474$76,501 at April 30, 2016 and $73,381 at April 25,
2015 and $74,607 at April 26, 2014.2015. We believe that inventory replacement cost exceeds the inventory balance by an amount approximating the LIFO reserve.
Property and equipment are stated at cost. Depreciation is calculated on the straight-line method over estimated useful lives of up to 39 years for buildings or the expected remaining life of purchased buildings, the term of the lease for leasehold improvements, 3 years for laptops, 5 years for computer hardware and software, and 5 to 10 years for office furniture and equipment.
Goodwill and Other Indefinite-Lived Intangible Assets
Goodwill represents the excess of cost over the fair value of identifiable net assets of businesses acquired. We have three reporting units as of April
25, 2015,30, 2016, which are the same as our reportable segments. Other indefinite-lived intangible assets include copyrights, trade names and trademarks.
We evaluate goodwill at least
annually using a qualitative assessment to determine whether it is more likely than not that the fair value of any reporting unit is less than its carrying amount.annually. If we determine that the fair value of the reporting unit may be less than its carrying amount, we evaluate goodwill using a two-step impairment test. Otherwise, we conclude that no impairment is indicated and we do not perform the two-step impairment test. In fiscal
2015,2016, we determined it was appropriate to perform a two-step impairment test.
The first step of the goodwill impairment test compares the book value of a reporting unit, including goodwill, with its fair value, as determined primarily by its discounted cash flows. If the book value of a reporting unit exceeds its fair value, the second step of the impairment test is performed to determine the amount of goodwill impairment loss to be recorded. The determination of fair value involves uncertainties because it requires management to make assumptions and to apply judgment to estimate industry and economic factors and the profitability of future business strategies. Patterson conducts impairment testing based on current business strategy in light of present industry and economic conditions, as well as future expectations. Additionally, in assessing goodwill for impairment, the reasonableness of the implied control premium is considered based on market capitalizations and recent market transactions.
Other indefinite-lived intangible assets are assessed for impairment by comparing the carrying value of an asset with its fair value. If the carrying value exceeds fair value, an impairment loss is recognized in an amount equal to the excess. The determination of fair value involves assumptions, including projected revenues and gross profit levels, as well as consideration of any factors that may indicate potential impairment.
In the fourth quarter of fiscal
2015,2016, management completed its annual goodwill and other indefinite-lived intangible asset impairment tests and determined there was no impairment and that none of our reporting units are at risk of failing step 1.
Although we believe estimates and assumptions used in estimating cash flows and determining fair value are reasonable, making material changes to such estimates and assumptions could materially affect such impairment analyses and financial results, including an impairment charge that could be material.
Long-lived assets, including definite-lived intangible assets, are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through the estimated undiscounted future cash flows derived from such assets. Our definite-lived intangible assets primarily consist of an exclusive distribution agreement and customer lists. When impairment exists, the related assets are written down to fair value. No impairment was recognized in the periods presented.
We account for derivative financial instruments under the provisions of Accounting Standards Codification
(ASC)("ASC") Topic 815, “Derivatives and Hedging.” Our use of derivative financial instruments is generally limited to managing well-defined interest rate risks.
Patterson doesWe do not use financial instruments or derivatives for any trading purposes.
Revenues are generated from the sale of consumable products, equipment, software products and services, technical service parts and labor, freight and delivery charges, and other sources. Revenues are recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable, and there is reasonable assurance of collection of the sale. Estimates for returns, damaged goods, rebates, loyalty programs and other revenue allowances are made at the time the revenue is recognized based on the historical experience for such items. In addition to revenues generated from the distribution of consumable products under conventional arrangements (buy/sell agreements) where the full market value of the product is recorded as revenue, the
veterinaryanimal health segment may earn a small amount of commission income for services provided under agency agreements with certain pharmaceutical manufacturers. The services generally consist of detailing the product and taking the customer’s order. The agency agreement contrasts to a buy/sell agreement in that the
veterinaryanimal health segment does not purchase and handle the product or bill and collect from the customer in an agency relationship with a vendor.
Consumable product sales are recorded upon delivery, except in those circumstances where terms of the sale are FOB shipping
point.point, in which case sales are recorded upon shipment. Commissions under agency agreements are recorded when the services are provided.
Equipment and software product revenues are recognized upon delivery and, if necessary, installation. In those circumstances where terms of the sale are FOB shipping point, revenues are recognized when products are transferred to the
shipping carrier. Revenue derived from post contract customer support for software is deferred and recognized ratably over the period in which the support is provided. Patterson provides financing for select equipment and software sales. Revenue is recorded at the present value of the finance contract, with discount, if any, and interest income recognized over the life of the finance contract as
“other income”.other income, net in our consolidated statement of income. See Note
67 for more information regarding customer financing.
Other revenue, including freight and delivery charges and technical service parts and labor, is recognized when the related product revenue is recognized or when the product or services are provided to the customer.
The receivables that result from the recognition of revenue are reported net of the related allowances discussed above. Patterson maintains a valuation allowance based upon the expected collectability of receivables held. Estimates are used to determine the valuation allowance and are based on several factors, including historical collection data, economic trends and credit worthiness of customers. Receivables are written off when we determine the amounts to be uncollectible, typically upon customer bankruptcy or non-response to continuous collection efforts. The portions of receivable amounts that are not expected to be collected during the next twelve months are classified as long-term.
Patterson has a relatively large, dispersed customer base and no single customer accounts for more than
1%10% of consolidated net sales. In addition, the equipment sold to customers under finance contracts generally serves as collateral for the contract and the customer provides a personal guarantee as well.
Net sales
doesdo not include sales tax as we are considered a pass-through conduit for collecting and remitting sales tax.
Patterson Advantage Loyalty Program
The Dental segment provides a point-based awards program to qualifying customers involving the issuance of “Patterson Advantage dollars” which can be used toward equipment and technology purchases. The program
was initiated on January 1, 2009 and runs on a calendar year schedule. Patterson Advantage dollars earned during a program year expire one year after the end of the program year. The cost and corresponding liability associated with the program are recognized as contra-revenue in accordance with ASC Topic 605-50, “Revenue Recognition-Customer Payments and Incentives.” As of April 25, 2015,30, 2016, we believe we have sufficient experience with the program to reasonably estimate the amount of Patterson Advantage dollars that will not be redeemed and thus have recorded a liability for 87% of the maximum potential amount that could be redeemed. We use the redemption recognition method and we recognize the estimated value of unused Advantage dollars as a percentage of Patterson Advantage dollars earned. Breakage recognized was immaterial to all periods presented.
Freight and Delivery Charges
Freight and delivery charges are included in cost of sales in the consolidated statements of income.
We expense all advertising and promotional costs as incurred, except for direct marketing expenses, which are expensed over the shorter of the life of the asset or one year. Total advertising and promotional expenses were
$16,798, $18,263$12,113, $10,181 and
$19,721$10,471 for fiscal years
2016, 2015
and 2014,
and 2013, respectively.
DeferredThere were no deferred direct-marketing expenses included in
prepaid and other current assets on the consolidated balance
sheetsheets as of April
25, 201530, 2016 and April
26, 2014 were $1,329 and $2,031, respectively.25, 2015.
The liability method is used to account for income tax expense. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
Valuation allowances are established for deferred tax assets if, after assessment of available positive and negative evidence, it is more likely than not that the deferred tax asset will not be fully realized.
Employee Stock Ownership Plan
(ESOP)("ESOP")
Compensation expense related to our defined contribution ESOP is computed based on the shares allocated method.
Patterson is self-insured for certain losses related to general liability, product liability, automobile, workers’ compensation and medical claims. We estimate our liabilities based upon an analysis of historical data and actuarial estimates. While current
estimates are believed reasonable based on information currently available, actual results could differ and affect financial results due to changes in the amount or frequency of claims, medical cost inflation or other factors. Historically, actual results related to these types of claims have not varied significantly from estimated amounts.
We recognize stock-based compensation expense based on
the grant-dateestimated grant date fair values. The grant date fair value of
stock options and stock purchases made through our Employee Stock Purchase Plan and our Capital Accumulation Plan are estimated using the Black-Scholes option pricing valuation model. The grant date fair value of performance stock units that vest upon meeting certain market conditions is estimated using the Monte Carlo valuation model. These valuations require estimates to be made including expected stock price volatility which considers historical volatility trends, implied future volatility based on certain traded options and other factors. We estimate the expected life of awards
estimated in accordance with ASC Topic 718, “Stock Compensation”.based on several factors, including types of participants, vesting schedules, contractual terms and various factors surrounding exercise behavior of different groups.
The grant date fair value of time-based restricted stock awards and restricted stock units is calculated based on the closing price of our common stock on the date of grant.
Compensation expense for all share-based payment awards is recognized over the requisite service period (or to the date a participant becomes eligible for retirement, if earlier) for awards that are expected to vest.
Comprehensive income is computed as net income plus certain other items that are recorded directly to stockholders’ equity. Significant items included in comprehensive income are foreign currency translation
adjustments and the effective portion of cash flow hedges, net of tax. Foreign currency translation adjustments do not include a provision for income tax because earnings from foreign operations are considered to be indefinitely reinvested outside the U.S. The income tax benefitexpense (benefit) related to cash flow hedge losses was $10,843,$883, $(10,843) and $0 and $35 for the fiscal years ended April 30, 2016, April 25, 2015 and April 26, 2014, and April 27, 2013, respectively.
The amount of basic earnings per share is computed by dividing net income by the weighted average number of outstanding common shares during the period. The amount of diluted earnings per share is computed by dividing net income by the weighted average number of outstanding common shares and common share equivalents, when dilutive, during the period.
The following table sets forth the denominator for the computation of basic and diluted earnings per share. There were no material adjustments to the numerator.
| | | | | | | | | | | | |
| | | Fiscal Year Ended | |
| | | April 25,
2015 | | | April 26,
2014 | | | April 27,
2013 | |
Denominator | | | | | | | | | | | | |
Denominator for basic earnings per share – weighted average shares | | | 98,989 | | | | 100,727 | | | | 103,030 | |
Effect of dilutive securities – stock options, restricted stock and stock purchase plans | | | 705 | | | | 916 | | | | 777 | |
| | | | | | | | | | | | |
Denominator for diluted earnings per share – adjusted weighted average shares | | | 99,694 | | | | 101,643 | | | | 103,807 | |
| | | | | | | | | | | | |
|
| | | | | | | | |
| | Fiscal Year Ended |
| | April 30, 2016 | | April 25, 2015 | | April 26, 2014 |
| Denominator | | | | | |
| Denominator for basic earnings per share – weighted average shares | 97,222 |
| | 98,989 |
| | 100,727 |
|
| Effect of dilutive securities – stock options, restricted stock and stock purchase plans | 680 |
| | 705 |
| | 916 |
|
| Denominator for diluted earnings per share – adjusted weighted average shares | 97,902 |
| | 99,694 |
| | 101,643 |
|
Potentially dilutive securities representing
765, 147
39 and
36239 shares for fiscal years
2016, 2015
2014 and
2013,2014, respectively, were excluded from the calculation of diluted earnings per share because their effects were anti-dilutive.
Recent Accounting Pronouncements
In
April 2015,May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.
2015-03,Simplifying the Presentation of Debt Issuance Costs (Subtopic 835-30). This ASU requires an entity to present such costs on the balance sheet as a direct deduction from the related debt liability rather than as an asset. Under the current pronouncement, we are required to adopt the new pronouncement in the first quarter of fiscal 2017. Early adoption is permitted. At this time, we do not anticipate a material impact to the financial statements once implemented.In May 2014, the FASB issued ASU No. 2014-09,Revenue “Revenue from Contracts with Customers. (Topic 606)” and issued subsequent amendments to the initial guidance in August 2015, March 2016, April 2016 and May 2016 within ASU No. 2014-092015-04, ASU 2016-08, ASU 2016-10 and ASU 2016-12, respectively.
This ASU supersedes the revenue recognition requirements in “Revenue Recognition (Topic 605),” and requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. ASU 2014-09 isIn July 2015, the FASB
deferred the effective date of this pronouncement by one year to December 15, 2017 for interim and annual reporting periods beginning after that date. Early adoption is permitted, but not before the original effective date, which for annual periods was December 15, 2016, including interim periods within that reporting period and is to be applied retrospectively, with early application not permitted. 2016. We are evaluating the impact of adopting this pronouncement.
In April 2015, the FASB proposed extendingissued ASU No. 2015-03, "Simplifying the effective datePresentation of Debt Issuance Costs (Topic 835-30)." This ASU requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by one year.this ASU. In August 2015, the FASB issued ASU 2015-15, which clarified that debt issuance costs related to line-of-credit arrangements could continue to be presented as an asset and be subsequently amortized over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the arrangement. We early adopted ASU 2015-03 in the fourth quarter of fiscal year 2016 and reclassified $3,970 and $2,458 of debt issuance costs as a direct deduction to our long term debt at April 30, 2016 and April 25, 2015, respectively.
In July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330), Simplifying the Measurement of Inventory.” ASU 2015-11 requires inventory measured using any method other than LIFO or the retail inventory method to be subsequently measured at the lower of cost or net realizable value, rather than at the lower of cost or market. Subsequent measurement of inventory using the LIFO and retail inventory method is unchanged. We are required to adopt the new pronouncement in the first quarter of fiscal 2018, and plan to do so at that time. Early adoption is permitted. We are evaluating the
new standard,effect of adopting this pronouncement, but do not, at this time, anticipate a material impact to
theour financial statements once implemented.
In September 2015, the FASB issued ASU No. 2015-16, “Business Combinations (Topic 805), Simplifying the Accounting for Measurement-Period Adjustments.” This ASU requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments in this ASU require an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. We are required to adopt the new pronouncement in the first quarter of fiscal 2017, with early adoption permitted. We are evaluating the effect of adopting this pronouncement, but do not, at this time, anticipate a material impact to our financial statements once implemented.
In November 2015, the FASB issued ASU No. 2015-17, “Income Taxes (Topic 740), Balance Sheet Classification of Income Taxes.” This ASU eliminates the requirement for an entity to separate deferred income tax liabilities and assets into current and non-current amounts in a classified balance sheet. This ASU requires that deferred tax liabilities and assets be classified as non-current in the classified balance sheet. We early adopted the ASU in the fourth quarter of 2016 with a prospective application and prior period amounts were not reclassified. The ASU did not have a material impact on our financial statements.
In January 2016, the FASB issued ASU No. 2016-01 “Financial Instruments- Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10)”, which amends certain aspects of recognition, measurement, presentation and disclosure of financial instruments, including the requirement to measure certain equity investments at fair value with changes in fair value recognized in net income. We are required to adopt the ASU in the first quarter of fiscal 2019, with early adoption permitted. We are evaluating the impact of adopting this pronouncement.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” This ASU requires lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by most leases, as well as requires additional qualitative and quantitative disclosures. We are required to adopt the ASU in the first quarter of fiscal 2020, with early adoption permitted. We are evaluating the impact of adopting this pronouncement.
In March 2016, the FASB issued ASU No. 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting." This ASU eliminates the APIC pool concept and requires that excess tax benefits and tax deficiencies be recorded in the income statement when awards are settled. The ASU also addresses simplifications related to statement of cash flows classification, accounting for forfeitures, and minimum statutory tax withholding requirements. We are required to adopt the new pronouncement in the first quarter of fiscal 2018. We are evaluating the impact of adopting this pronouncement.
2. Cash and Cash Equivalents
At
April 30, 2016 and April 25, 2015,
and April 26, 2014, cash and cash equivalents consisted of the following:
| | | | | | | | |
| | | April 25,
2015 | | | April 26,
2014 | |
Cash on hand | | $ | 256,691 | | | $ | 213,397 | |
Money market funds | | | 90,569 | | | | 51,511 | |
| | | | | | | | |
Total | | $ | 347,260 | | | $ | 264,908 | |
| | | | | | | | |
|
| | | | | | | |
| | April 30, 2016 | | April 25, 2015 |
| Cash on hand | $ | 122,844 |
| | $ | 256,691 |
|
| Money market funds | 14,609 |
| | 90,569 |
|
| Total | $ | 137,453 |
| | $ | 347,260 |
|
Cash on hand is generally in interest earning accounts.
3. Goodwill and Other Intangible Assets
The changes in the carrying value of goodwill for each of our reportable segments for the fiscal year ended April
25, 201530, 2016 are as follows:
| | | | | | | | | | | | | | | | |
| | | Balance at
April 26, 2014 | | | Acquisition
Activity
and
Divestitures | | | Other
Activity | | | Balance at
April 25, 2015 | |
Dental supply | | $ | 137,463 | | | $ | 3,097 | | | $ | (1,111 | ) | | $ | 139,449 | |
Rehabilitation supply | | | 545,007 | | | | — | | | | (7,832 | ) | | | 537,175 | |
Veterinary supply | | | 161,963 | | | | 924 | | | | (2,412 | ) | | | 160,475 | |
| | | | | | | | | | | | | | | | |
Total | | $ | 844,433 | | | $ | 4,021 | | | $ | (11,355 | ) | | $ | 837,099 | |
| | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | |
| | Balance at April 25, 2015 | | Acquisition Activity and Divestitures | | Other Activity | | Balance at April 30, 2016 |
| Dental | $ | 139,449 |
| | $ | — |
| | $ | (320 | ) | | $ | 139,129 |
|
| Animal Health | 160,475 |
| | 517,965 |
| | (977 | ) | | 677,463 |
|
| Corporate | — |
| | — |
| | — |
| | — |
|
| Total | $ | 299,924 |
| | $ | 517,965 |
| | $ | (1,297 | ) | | $ | 816,592 |
|
The increase in the acquisition activity column
primarily reflects the purchase price allocation for the
Dental segment acquisition of
Holt Dental.Animal Health International, Inc. The other activity column is comprised primarily of the impact from foreign currency translation.
Other intangible assets acquired in the acquisitions in fiscal 2015 had a fair value of approximately $6,245 and a weighted average useful life of 7.7 years.
Balances of other intangible assets, excluding goodwill, are as follows:
| | | | | | | | |
| | | April 25,
2015 | | | April 26,
2014 | |
Unamortized – indefinite lived: | | | | | | | | |
Copyrights, trade names and trademarks | | $ | 76,464 | | | $ | 76,464 | |
| | |
Amortized: | | | | | | | | |
Distribution agreement, customer lists and other | | | 284,393 | | | | 286,365 | |
Less: Accumulated amortization | | | (161,028 | ) | | | (139,679 | ) |
| | | | | | | | |
Net amortized intangible assets | | | 123,365 | | | | 146,686 | |
| | | | | | | | |
Total identifiable intangible assets, net | | $ | 199,829 | | | $ | 223,150 | |
| | | | | | | | |
|
| | | | | | | |
| | April 30, 2016 | | April 25, 2015 |
| Unamortized – indefinite lived: | | | |
| Copyrights, trade names and trademarks | $ | 29,900 |
| | $ | 17,600 |
|
| Amortized: | | | |
| Distribution agreement, customer lists and other | 641,236 |
| | 221,359 |
|
| Less: Accumulated amortization | (161,839 | ) | | (113,934 | ) |
| Net amortized intangible assets | 479,397 |
| | 107,425 |
|
| Total identifiable intangible assets, net | $ | 509,297 |
| | $ | 125,025 |
|
In 2006, we extended our exclusive North American distribution agreement with Dentsply Sirona, Dental Systems GmbHInc. (“Sirona”), for Sirona’s CEREC dental restorative system.system. We paid a $100,000 distribution fee to extend the agreement for a 10-year period that began in October 2007, which is included in identifiable intangibles, net in the consolidated balance sheet. The amortization of the distribution agreement fee is recorded over the expected life, with amortization based on estimates of the pattern in which the economic benefits of the fee are expected to be realized, consisting primarily of revenues generated from the sale of CEREC dental restorative systems. Amortization expense in any year may differ significantly from other years. In fiscal 2013, we expandedour exclusive distribution relationship with Sirona to add Sirona imaging products to our exclusive offerings, as well as add mechanisms to adjust the exclusivity term depending on performance. No additional monies were exchanged as part of this expanded relationship. This is not a “take-or-pay” contract.
With respect to the amortized intangible assets, future amortization expense is expected to approximate
$24,186, $23,498, $22,363, $20,624$52,911, $51,568, $49,597, $38,040 and
$8,590$35,107 for fiscal years
2016, 2017, 2018, 2019,
2020 and
2020,2021, respectively. Actual amounts of amortization expense may differ from estimated amounts due to additional intangible asset acquisitions, actual revenues generated from the sale of CEREC dental restorative systems, changes in foreign currency exchange rates, impairment of intangible assets, accelerated amortization of intangible assets and other events.
4. Acquisitions
During our first fiscal quarter of 2016, we completed the acquisition of Animal Health International, Inc., a leading production animal health distribution company in the U.S. This acquisition more than doubled the revenue previously attributable to our animal health business, which was previously focused on the companion animal health market. Our animal health business now offers an expanded range of products and Equity Investmentsservices to a broader base of customers in North America and the
U.K. Under terms of the merger agreement, we acquired all of Animal Health International, Inc.’s stock for $1,106,583 in cash, net of cash assumed.
In connection with the acquisition, we entered into a credit agreement consisting of a $1,000,000 unsecured term loan and a $500,000 unsecured cash flow revolving line of credit, described further in Note 8 to the Consolidated Financial Statements.
The acquisition has been accounted for in accordance with ASC 805, Business Combinations, with identifiable assets acquired and liabilities assumed recorded at their estimated fair values on the acquisition date. A valuation of the assets and liabilities from the business acquisition was performed utilizing cost, income and market approaches resulting in $588,618 allocated to identifiable net assets.
The following table summarizes the total purchase price consideration and the fair value amounts recognized for the assets acquired and liabilities assumed related to the acquisition, as of the acquisition date:
|
| | | |
| Total purchase price consideration | $ | 1,106,583 |
|
| Receivables | $ | 161,427 |
|
| Inventory | 195,367 |
|
| Prepaid expenses and other current assets | 35,320 |
|
| Property and equipment | 47,405 |
|
| Identifiable intangibles | 434,300 |
|
| Other long-term assets | 38,300 |
|
| Total assets acquired | 912,119 |
|
| Accounts payable | 122,129 |
|
| Accrued liabilities and other current liabilities | 21,227 |
|
| Deferred tax liability | 180,145 |
|
| Total liabilities assumed | 323,501 |
|
| Identifiable net assets acquired | 588,618 |
|
| Goodwill | 517,965 |
|
| Net assets acquired | $ | 1,106,583 |
|
As a result of recording the stepped up fair market basis for GAAP purposes, but receiving primarily carryover basis for tax purposes in the acquisition, we recorded a deferred tax liability of $180,145.
The goodwill of $517,965 resulting from the acquisition reflects the excess of our purchase price over the fair value of the net assets acquired. The goodwill recorded as part of the acquisition primarily reflects the value of the assembled workforce, cost synergies, and the potential to integrate and expand existing product lines. We completed acquisitions during fiscal years 2015, 2014allocated all of the goodwill to our Animal Health reporting segment. None of the goodwill recognized is deductible for income tax purposes, and 2013. Theas such, no deferred taxes have been recorded related to goodwill.
Revenues of $1,396,118 and operating
resultsincome of
each of these acquisitions$37,230 attributable to the acquisition are included in our consolidated
statementsstatement of income
from the date of each acquisition. Pro forma results of operations and details of the purchase price allocations have not been presented for the fiscal year
2015 acquisitions, asended April 30, 2016. Included in operating income for the
effectsfiscal year ended April 30, 2016 is amortization expense of
these business acquisitions were not material either individually or$28,112 related to the identifiable intangible assets acquired in the
aggregate.transaction.
The following summarizes the intangible assets acquired, excluding goodwill. Intangible assets are amortized using methods that approximate the pattern of economic benefit provided by the utilization of the assets.
|
| | | | | |
| | Gross Carrying
Value | | Weighted
Average Life
(years) |
| Unamortized – indefinite lived: | | | |
| Trade names | $ | 12,300 |
| | indefinite |
| Amortized: | | | |
| Customer relationships | 291,900 |
| | 15.0 |
| Trade names | 111,400 |
| | 10.0 |
| Developed technology and other | 18,700 |
| | 12.2 |
| Total amortized intangible assets | 422,000 |
| | 13.6 |
| Total identifiable intangible assets | $ | 434,300 |
| | |
The following unaudited pro forma financial results for the combined results of Patterson and Animal Health International, Inc. for the fiscal years ended April 30, 2016 and April 25, 2015 assume the acquisition occurred on April 27, 2014. The unaudited pro forma financial results may not be indicative of the results that would have occurred had the acquisition been completed as of April 27, 2014, nor are they indicative of future results of operations.
|
| | | | | | | |
| | Fiscal Years Ended |
| | April 30,
2016 | | April 25,
2015 |
| Pro forma net sales | $ | 5,579,739 |
| | $ | 5,452,056 |
|
| Pro forma net income from continuing operations | 193,794 |
| | 176,744 |
|
Pro forma net income from continuing operations for the fiscal year ended April 30, 2016 includes $12,300 of income tax expense related to the repatriation of foreign earnings, described further in Note 13 to the Consolidated Financial Statements.
In August 2013, we completed the acquisition of all the outstanding stock of National Veterinary Services Limited (“NVS”) from Dechra Pharmaceuticals, PLC. NVS is the largest veterinary products distributor in the U.K. Total cash consideration paid for NVS was
approximately $142,693. Operating results for this acquisition are included in the
VeterinaryAnimal Health reporting segment. The acquisition contributed net sales of $419,340 to the segment during fiscal year 2014.
A listing of acquisitions completed during the periods covered by these financial statements is presented below. We acquired 100% of all companies
listed below:listed. |
| |
Entity | Segment |
| Fiscal 2016: | |
Segment
Animal Health International, Inc. | Animal Health |
Fiscal 2015: | | |
Holt Dental Supply | | Dental supply |
C.A.P.L. Limited and Abbey Veterinary Services | Animal Health |
| Fiscal 2014: | |
| Mercer Mastery | Dental |
National Veterinary supplyServices Limited | Animal Health |
5. Discontinued Operations
In August 2015, we sold all of the outstanding shares of common stock of Patterson Medical Holdings, Inc., our wholly owned subsidiary responsible for our rehabilitation supply business known as Patterson Medical (“Patterson Medical”), for $716,886 in cash to Madison Dearborn Partners. As additional consideration for the shares of Patterson Medical, we obtained a number of common units of the parent company of the buyer equal to 10% of the common units outstanding at closing. Unlike the other common units, these units will only become entitled to begin participating in distributions to the common unit holders at such time, if any, as the Madison Dearborn Partners’ investor cash inflows equal or exceed 2.5 times the Madison Dearborn Partners’ investor cash outflows. These units are non-transferable. We recorded a pre-tax gain of $24,328 on the sale of Patterson Medical during the fiscal year ended April 30, 2016 within discontinued operations in the consolidated statements of income.
In connection with the above described transaction, we also entered into a transition services agreement with our former subsidiary, pursuant to which Patterson Medical, as owned by Madison Dearborn Partners, is paying us to provide, among other things, certain information technology, distribution, facilities, finance, tax and treasury, and human resources services for up to 24 months after closing.
As of April 30, 2016, we classified Patterson Medical’s results of operations as discontinued operations for all periods presented in the consolidated statements of income. The assets and liabilities of Patterson Medical were reflected as held for sale in the consolidated balance sheet as of April 25, 2015. The operations and cash flows of Patterson Medical have been eliminated from our continuing operations, which were previously recorded as the rehabilitation supply reportable segment.
The following summarizes the assets and liabilities of Patterson Medical as of April 25, 2015:
|
| | | |
| | April 25, 2015 |
| Assets held for sale | |
| Receivables, net of allowance for doubtful accounts | $ | 57,876 |
|
| Inventory | 48,265 |
|
| Prepaid expenses and other current assets | 12,206 |
|
| Property and equipment, net | 22,672 |
|
| Goodwill | 537,175 |
|
| Identifiable intangibles, net | 74,804 |
|
| Other long-term assets | 1,143 |
|
| Total assets held for sale | $ | 754,141 |
|
| Liabilities held for sale | |
| Accounts payable | $ | 26,341 |
|
| Accrued liabilities and other current liabilities | 12,975 |
|
| Long-term liabilities | 49,414 |
|
| Total liabilities held for sale | $ | 88,730 |
|
The following summarizes the results of operations of our discontinued Patterson Medical operations for the periods presented:
|
| | | | | | | | | | | |
| | Fiscal Year Ended |
| | April 30,
2016 (a) | | April 25,
2015 | | April 26,
2014 |
| Net sales | $ | 168,504 |
| | $ | 464,155 |
| | $ | 478,574 |
|
| Cost of sales | 107,359 |
| | 286,498 |
| | 298,993 |
|
| Operating expenses | 54,954 |
| | 108,816 |
| | 127,551 |
|
| Gain on sale | (24,328 | ) | | — |
| | — |
|
| Other expense | 150 |
| | 488 |
| | 381 |
|
| Income before taxes | 30,369 |
| | 68,353 |
| | 51,649 |
|
| Income tax expense | 28,869 |
| | 25,175 |
| | 22,369 |
|
| Net income from discontinued operations | $ | 1,500 |
| | $ | 43,178 |
| | $ | 29,280 |
|
| |
Fiscal 2014:(a)
| | |
Mercer Mastery
| | Dental supply |
National Veterinary Supply
| | Veterinary supply |
| |
Fiscal 2013:
| | |
Iowa Dental Supply
| | Dental supply |
Universal Vaporizer Support
| | Veterinary supplyIncludes activity up until the sale date of August 28, 2015. |
5.
Operating expenses for the fiscal year ended April 30, 2016 include professional fees of $13,692 incurred in connection with the sale of Patterson Medical. Depreciation and amortization were ceased during the fiscal year ended April 30, 2016 in accordance with accounting for discontinued operations. Income taxes have been allocated to Patterson Medical based on the accounting requirements for presenting discontinued operations. Income taxes as a percent of income before taxes for the fiscal year ended April 30, 2016 are higher than in the prior periods as a result of the requirement to calculate the tax due on the sale of Patterson Medical including certain basis differences that were appropriately not previously recognized for financial reporting purposes.
6. Property and Equipment
Property and equipment consisted of the following items:
| | | | | | | | |
| | | April 25,
2015 | | | April 26,
2014 | |
Land | | $ | 12,988 | | | $ | 14,925 | |
Buildings | | | 125,384 | | | | 129,360 | |
Leasehold improvements | | | 19,458 | | | | 18,295 | |
Furniture and equipment | | | 147,205 | | | | 152,899 | |
Computer hardware and software | | | 122,439 | | | | 109,580 | |
Construction-in-progress(1) | | | 51,851 | | | | 18,110 | |
| | | | | | | | |
| | | 479,325 | | | | 443,169 | |
Accumulated depreciation | | | (252,520 | ) | | | (238,230 | ) |
| | | | | | | | |
Property and equipment, net | | $ | 226,805 | | | $ | 204,939 | |
| | | | | | | | |
(1) | Includes $43,601 and $12,959 of capitalized software as of April 25, 2015 and April 26, 2014, respectively. |
|
| | | | | | | |
| | April 30, 2016 | | April 25, 2015 |
| Land | $ | 11,585 |
| | $ | 10,390 |
|
| Buildings | 111,386 |
| | 109,064 |
|
| Leasehold improvements | 26,291 |
| | 17,905 |
|
| Furniture and equipment | 169,110 |
| | 130,348 |
|
| Computer hardware and software | 141,727 |
| | 115,580 |
|
Construction-in-progress (1) | 95,450 |
| | 51,800 |
|
| | 555,549 |
| | 435,087 |
|
| Accumulated depreciation | (262,234 | ) | | (230,954 | ) |
| Property and equipment, net | $ | 293,315 |
| | $ | 204,133 |
|
6.(1)Includes $88,696 and $43,601 of capitalized software as of April 30, 2016 and April 25, 2015, respectively.
As a convenience to our customers, we offer several different financing alternatives, including both our company-sponsoreda third party program and a third partyPatterson-sponsored program. For the third party program, we act as a facilitator between the customer and the third party financing entity with no on-going involvement in the financing transaction. Under our sponsored program, equipment purchased by customers with strong credit may be financed up to a maximum of $500 for any one customer. We generally sell theour customers’ financing contracts to outside financial institutions in the normal course of our business. PattersonThese financing arrangements are accounted for as a sale of assets under the provisions of ASC 860, Transfers and Servicing. We currently hashave two arrangements under which we sell these contracts.Patterson operates
First, we operate under an agreement to sell a portion of our equipment finance contracts to commercial paper conduits with The Bank of Tokyo-Mitsubishi UFJ, Ltd. serving as the agent. We utilize a special purpose entity (“SPE”), PDC Funding, a consolidated, wholly owned subsidiary, to fulfill a requirement of participating in the commercial paper conduit. We receive the proceeds of the contracts upon sale. At least
12%9% of the proceeds are held by the conduit as security against eventual performance of the portfolio.
This percentage can be greater and is based upon certain ratios defined in the agreement. The capacity under the agreement at April
25, 201530, 2016 was
$500,000.Patterson$575,000.
Second, we also
maintainsmaintain an agreement with Fifth Third Bank whereby the bank purchases customers’ financing contracts.
Patterson hasWe established another
special purpose entity,SPE, PDC Funding II,
as a consolidated, wholly owned subsidiary, which sells financing contracts to the bank. We receive the proceeds of the contracts upon sale. At least
15%10% of the proceeds are held by the conduit as security against eventual performance of the portfolio.
This percentage can be greater and is based upon certain ratios defined in the agreement. The capacity under the agreement at April
25, 201530, 2016 was $100,000.
We retain servicing responsibilities under both agreements, for which we are paid a servicing fee. The servicing fees we receive are considered adequate compensation for services rendered. Accordingly, no servicing asset or liability has been recorded.
The portion of the purchase price for the receivables held by the conduits is a deferred purchase price receivable, which is paid to the SPE as payments on the receivables are collected from customers. The
deferred purchase price receivable represents a beneficial interest indifference between the
transferred financial assetscarrying amount of the receivables sold under these programs and
is recognized atthe sum of the cash and fair value
as part of
the sale transaction. The Company values the deferred purchase price
receivable basedreceivables received at time of transfer is recognized as a gain on
a discounted cash flow analysis using unobservable inputs (i.e. level 3 inputs), which include a forward yield curve, the estimated timing of payments and the credit qualitysale of the
underlying creditor. Significant increasesrelated receivables and recorded in
anynet sales in the consolidated statements of
the significant unobservable inputsincome. Expenses incurred related to customer financing activities were recorded in
isolation would not resultoperating expenses in
a materially lower fair value estimate. The interrelationship between these inputs is insignificant.These financing arrangements are accounted for as a saleour consolidated statements of assets under the provisions of ASC Topic No. 860,Transfers and Servicing. income.
During fiscal
2016, 2015
2014 and
2013,2014, we sold
approximately$359,646, $312,303
$282,698 and
$283,175,$282,698, respectively, of contracts under these
arrangements. Patterson retains servicing responsibilities under both agreements, for which we are paid a servicing fee. The servicing fees received byPatterson are considered adequate compensation for services rendered. Accordingly, no servicing asset or liability has been recorded. The agreements require usarrangements to maintain a minimum current ratiooutside institutions. We recorded net sales in the consolidated statements of income of $30,123, $21,668 and maximum leverage ratio. Patterson was in compliance with the covenants at April 25, 2015.
$15,865 during fiscal 2016, 2015 and 2014, respectively, related to these contracts sold.
Included in cash and cash equivalents in the consolidated balance sheets are $29,863$27,186 and $28,152$29,863 as of April 30, 2016 and April 25, 2015, and April 26, 2014, respectively, which representsrepresent cash collected from previously sold customer financing arrangements that have not yet been settled with the third party. Included in current receivables in the consolidated balance sheets are $87,406, net of unearned income of $1,768, and $88,470, net of unearned income of $4,197, and $63,236, net of unearned income of $5,894, as of April 25, 201530, 2016 and April 26, 2014,25, 2015, respectively, of finance contracts we have not yet sold by Patterson.sold. A total of $535,595$600,961 of finance contracts receivable sold under the
agreements was outstanding at April
25, 2015.30, 2016. The deferred purchase price under the arrangements was
$66,715$108,837 and
$84,750$89,588 as of April
25, 201530, 2016 and April
26, 2014,25, 2015, respectively. Since the internal financing program began in 1994, bad debt write-offs have amounted to less than
one-percent1% of the loans originated.
7. Long-Term
The agreements require us to maintain a minimum current ratio and maximum leverage ratio. We were in compliance with those covenants at April 30, 2016.
In April 2015, the FASB issued ASU No. 2015-03, "Simplifying the Presentation of Debt Issuance Costs (Topic 835-30)." This ASU requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. We have adopted ASU 2015-03 in the fourth quarter of fiscal 2016 and reclassified $3,970 and $2,458 of debt issuance costs from other non-current assets to long-term debt in our consolidated balance sheets as of April 30, 2016 and April 25, 2015, respectively.
Our long-term debt consists of the following:
|
| | | | | | | | | | |
| | | | Carrying Value |
| | Interest Rate | | April 30, 2016 | | April 25, 2015 |
Senior notes due fiscal 2018 1 | 5.75 | % | | $ | 150,000 |
| | $ | 150,000 |
|
Senior notes due fiscal 2019 2 | 2.95 | % | | 60,000 |
| | 60,000 |
|
Senior notes due fiscal 2022 2 | 3.59 | % | | 165,000 |
| | 165,000 |
|
Senior notes due fiscal 2024 2 | 3.74 | % | | 100,000 |
| | 100,000 |
|
Senior notes due fiscal 2025 3 | 3.48 | % | | 250,000 |
| | 250,000 |
|
Term loan due fiscal 2021 4 | 1.81 | % | | 317,625 |
| | — |
|
| Less: Deferred debt issuance costs | | | (3,970 | ) | | (2,458 | ) |
| Total debt | | | 1,038,655 |
| | 722,542 |
|
| Less: Current maturities of long-term debt | | | (16,500 | ) | | — |
|
| Long-term debt | | | $ | 1,022,155 |
| | $ | 722,542 |
|
| |
| 2. | Issued in December 2011. |
| |
| 4. | Issued in June 2015. Interest rate is LIBOR plus 1.375% as of April 30, 2016. |
Expected future minimum principal payments underfor our long-term debt obligations are as follows: $150,000 in fiscal 2018, $60,000 in fiscal 2019follows as of April 30, 2016:
|
| | | |
| Fiscal Year | |
| 2017 | $ | 16,500 |
|
| 2018 | 174,750 |
|
| 2019 | 93,000 |
|
| 2020 | 33,000 |
|
| 2021 | 210,375 |
|
| Thereafter | 515,000 |
|
| Total | $ | 1,042,625 |
|
In June 2015, we entered into a credit agreement with The Bank of Tokyo-Mitsubishi UFJ, Ltd. ("BTMU"), as administrative agent, and
$515,000 in years thereafter.In March 2008, Patterson issued fixed-rateBank of America, N.A., as syndication agent (the “Credit Agreement”). Pursuant to the Credit Agreement, the lenders provided us with senior notes with an aggregate principal amountunsecured lending facilities of $450,000,up to $1,500,000, consisting of (i) $50,000 4.63% senior notes, paid in fiscal 2013; (ii) $250,000 5.17% senior notes, paid in fiscal 2015;a $1,000,000 unsecured term loan and (iii) $150,000 5.75% senior notes, due fiscal 2018.
In December 2011, we issued fixed-rate senior notes with an aggregate principal amount of $325,000, consisting of (i) $60,000 2.95% senior notes, due fiscal 2019; (ii) $165,000 3.59% senior notes, due fiscal 2022; and (iii) $100,000 3.74% senior notes, due fiscal 2024.
A portion of the proceeds from the issuance of debt in December 2011 was used to repurchase shares of our common stock and to repay borrowings under oura $500,000 unsecured revolving line of credit. Interest on borrowings under the Credit Agreement is variable and is determined at our option as LIBOR plus a spread, which can range from 1.125% to 2.000%, or the BTMU prime rate plus a spread, which can range from 0.125% to 1.000%. These spreads, as well as a commitment fee on the unused portion of the facility, are based on our leverage ratio, as defined in the Credit Agreement. The remainingterm loan and revolving credit facilities will mature no later than June 2020.
Upon certain significant asset dispositions, we agreed to use proceeds from such dispositions to effect prepayment of outstanding loan balances under the Credit Agreement. On August 28, 2015, we completed the sale of Patterson Medical, as described further in Note 5 to the Consolidated Financial Statements. As a result of this sale, $670,000 was repaid on the original outstanding $1,000,000 unsecured term loan. We recorded $5,153 of accelerated debt issuance cost amortization within interest expense concurrent with this early repayment of debt. Additionally, principal payments of $12,375 were made during the fiscal year ended April 30, 2016. As of April 30, 2016, $317,625 was outstanding under the unsecured term loan at an interest rate of 1.81%.
In June 2015, our previous $300,000 credit facility, which was due to expire in December 2016, was terminated and replaced by the revolving line of credit under the Credit Agreement. As of April 30, 2016, $20,000 was outstanding under our current revolving line of credit at an interest rate of 3.875%. There were no outstanding borrowings under the previous facility at April 25, 2015.
We are intendedsubject to be usedvarious financial covenants under our debt agreements including the maintenance of leverage and interest coverage ratios. In the event of our default, any outstanding obligations may become due and payable immediately. We met the covenants under our debt agreements as of April 30, 2016.
9. Derivative Financial Instruments
We are a party to certain offsetting and identical interest rate cap agreements. These interest rate cap agreements are not designated for general corporate purposes. Debt issuance costshedge accounting treatment and were entered into to fulfill certain covenants of an equipment finance contracts sale agreement between a commercial paper conduit managed by The Bank of Tokyo-Mitsubishi UFJ, Ltd. and PDC Funding. On November 24, 2015, this sale agreement was amended on terms generally consistent with the expiring agreement. The interest rate cap agreements provide a credit enhancement feature for the financing contracts sold by PDC Funding to the commercial paper conduit.
The interest rate cap agreements are canceled and new agreements entered into periodically to maintain consistency with the dollar maximum of the sale agreements and the maturity of the underlying financing contracts. As of April 30, 2016, PDC Funding had purchased an interest rate cap from a bank with a notional amount of $575,000 and a maturity date of November 2023. We sold an identical interest rate cap to the same bank.
Similar to the above agreements, PDC Funding II and Patterson entered into offsetting and identical interest rate cap agreements with a notional amount of $100,000 in fiscal 2014. In August 2015, these agreements were terminated and replaced with offsetting and identical interest rate cap agreements. The notional amount remained at $100,000 and the new maturity date is July 2023.
In addition to the purchased and sold identical interest rate cap agreements described above, in May 2012 we entered into an interest rate swap agreement with a bank to economically hedge the interest rate risk associated with
the issuance of debt in March 2008 of $1,800 and in December 2011 of $1,800 are being amortized to interest expense over the lifea portion of the
related debt.finance contracts we had sold through the special purpose entities. This agreement expired in April 2015.
These interest rate contracts do not qualify for hedge accounting treatment and, accordingly, we record the fair value of the agreements as an asset or liability and the change as income or expense during the period in which the change occurs.
In
addition, in March 2008 we entered into two forward starting interest rate swap agreements, each with notional amounts of $100,000 and accounted for as cash flow hedges, to hedge interest rate fluctuations in anticipation of the issuance of the
5.17% senior notes due fiscal 2015 and
the 5.75% senior notes due fiscal
2018, respectively.2018. Upon issuance of the hedged debt,
Pattersonwe settled the forward starting interest rate swap agreements and recorded a $1,000 increase, net of income taxes, to other comprehensive income
(loss), which is being amortized
againstas a reduction to interest expense over the life of the related debt.
The pre-tax amount reclassified into earnings during fiscal years 2015, 2014 and 2013 was $185, $200 and $200, respectively. The pre-tax amount expected to be reclassified into earnings during fiscal 2016 is $91.In January 2014 we entered into a forward interest rate swap agreement with a notional amount of $250,000 and accounted for as
a cash flow hedge, to hedge interest rate fluctuations in anticipation of refinancing the 5.17% senior notes due March 25, 2015 with a loan for $250,000 and a term of ten years. This note was repaid on March 25, 2015 and replaced with new $250,000 3.48% senior notes due March 24, 2025. A cash payment of $29,003 was made in March 2015 to settle the interest rate swap. This amount is recorded in other comprehensive income (loss), net of tax, and will be recognized as interest expense over the
ten-year life of the
new notes. The pre-tax amount reclassified into earnings during fiscal year 2015 was $242. The pre-tax amount expected to be reclassified into earnings during fiscal 2016 is $2,900.Patterson has available a $300,000 revolving credit facility through December 2016. Interest on borrowings is based on LIBOR plus a spread which can range from 1.125% to 1.875%. This spread as well as a commitment fee on the unused portion of the facility are based on our leverage ratio, as defined in the agreement. There were no outstanding borrowings under the facility at April 25, 2015 or April 26, 2014.
The debt agreements contain various financial covenants including certain leverage and interest coverage ratios as defined in the agreements. Patterson met the financial and nonfinancial covenants under the debt agreements as of April 25, 2015.
Patterson’s debt consists of the following:
| | | | | | | | |
| | | April 25,
2015 | | | April 26,
2014 | |
5.17% senior notes due fiscal 2015 | | $ | — | | | $ | 250,000 | |
5.75% senior notes due fiscal 2018 | | | 150,000 | | | | 150,000 | |
2.95% senior notes due fiscal 2019 | | | 60,000 | | | | 60,000 | |
3.59% senior notes due fiscal 2022 | | | 165,000 | | | | 165,000 | |
3.74% senior notes due fiscal 2024 | | | 100,000 | | | | 100,000 | |
3.48% senior notes due fiscal 2025 | | | 250,000 | | | | — | |
| | | | | | | | |
Total debt | | | 725,000 | | | | 725,000 | |
Less: current debt obligations | | | — | | | | — | |
| | | | | | | | |
Long-term debt | | $ | 725,000 | | | $ | 725,000 | |
| | | | | | | | |
8. Derivative Financial Instruments
Patterson is a party to certain offsetting and identical interest rate cap agreements. These cap agreements are not designated for hedge accounting treatment and were entered into to fulfill certain covenants of a sale agreement between a commercial paper conduit managed by The Bank of Tokyo-Mitsubishi UFJ, Ltd. and PDC Funding. On November 25, 2014, this agreement was amended on terms consistent with the expiring agreement. The cap agreements provide a credit enhancement feature for the financing contracts sold by PDC Funding to the commercial paper conduit.
The cap agreements are cancelled and new agreements entered into periodically to maintain consistency with the dollar maximum of the sale agreements and the maturity of the underlying financing contracts. As of April 25, 2015, PDC Funding had purchased an interest rate cap from a bank with a notional amount of $500,000 and a maturity date of November 2022. Patterson sold an identical interest rate cap to the same bank.
Similar to the above agreements, PDC Funding II and Patterson entered into offsetting and identical interest rate cap agreements with a notional amount of $100,000 in fiscal 2014. In August 2014, these agreements were terminated and replaced with offsetting and identical interest rate cap agreements. The notional amount remained at $100,000 and the new maturity date is October 2022.
In addition to the purchased and sold identical interest rate cap agreements described above, in May 2012 we entered into an interest rate swap agreement with a bank to economically hedge the interest rate risk associated with a portion of the finance contracts we had sold through the special purpose entities.
These interest rate contracts do not qualify for hedge accounting treatment and, accordingly, we record the fair value of the agreements as an asset or liability and the change as income or expense during the period in which the change occurs.
In January 2014 we entered into a forward interest rate swap agreement with a notional amount of $250,000 and accounted for as cash flow hedge, to hedge interest rate fluctuations in anticipation of refinancing the 5.17% senior notes due March 25, 2015 with a loan for $250,000 and a term of ten years. This note was repaid on March 25, 2015 and replaced with new $250,000 3.48% senior notes due March 24, 2025. A cash payment of $29,003 was made in March 2015 to settle the interest rate swap. This amount will be recognized as interest expense over the ten-year life of the new notes.
related debt.
The following presents the fair value of
interest rate contractsderivative instruments included in the consolidated balance sheets:
| | | | | | | | | | |
Derivative type | | Classification | | April 25,
2015 | | | April 26,
2014 | |
Assets: | | | | | | | | | | |
Interest rate contracts | | Other noncurrent assets | | $ | 1,255 | | | $ | 1,716 | |
Liabilities: | | | | | | | | | | |
Interest rate contracts | | Other noncurrent liabilities | | | 1,255 | | | | 1,720 | |
Interest rate swap | | Other current liabilities | | | — | | | | 5,660 | |
|
| | | | | | | | | |
| Derivative type | Classification | | April 30, 2016 | | April 25, 2015 |
| Assets: | | | | | |
| Interest rate contracts | Other non-current assets | | $ | 816 |
| | $ | 1,255 |
|
| Liabilities: | | | | | |
| Interest rate contracts | Other non-current liabilities | | $ | 816 |
| | $ | 1,255 |
|
The following
presentstables present the
pre-tax effect of
interest rate contracts and interest rate swapsderivative instruments in cash flow hedging relationships on the consolidated statements of income and other comprehensive
income: | | | | | | | | | | | | | | |
| | | | | Fiscal Year Ended | |
Derivative type | | Location of gain/(loss) recognized
on derivative | | April 25,
2015 | | | April 26,
2014 | | | April 27,
2013 | |
Interest rate contracts | | Other income, net | | $ | — | | | $ | 4 | | | $ | 78 | |
Interest rate swap | | Other comprehensive income | | | (12,445 | ) | | | (5,660 | ) | | | — | |
We recorded $56 as interest expense in fiscal 2015 related to interest rate swaps. income ("OCI"):
|
| | | | | | | | | | | |
| | Amount of Gain (Loss) Recognized in OCI on Derivatives (Effective Portion) |
| | Fiscal Year Ended |
| Derivatives in cash flow hedging relationships | April 30, 2016 | | April 25, 2015 | | April 26, 2014 |
| Interest rate swap | $ | — |
| | $ | (23,343 | ) | | $ | (5,660 | ) |
|
| | | | | | | | | | | | | |
| | | | Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Income (Effective Portion) |
| | | | Fiscal Year Ended |
| Derivatives in cash flow hedging relationships | Income statement location | | April 30, 2016 | | April 25, 2015 | | April 26, 2014 |
| Interest rate swap | Interest expense | | $ | (2,817 | ) | | $ | (56 | ) | | $ | 194 |
|
We recorded no ineffectiveness during fiscal
2016, 2015
2014 or
2013.9.2014. As of April 30, 2016, the estimated pre-tax portion of accumulated other comprehensive loss that is expected to be reclassified into earnings over the next twelve months is $2,809, which will be recorded as an increase to interest expense.
10. Fair Value Measurements
Fair value is the price at which an asset could be exchanged in a current transaction between knowledgeable, willing parties. The fair value hierarchy of measurements is categorized into one of three levels based on the lowest level of significant input used:
|
| | |
| | |
| Level 1 – | | Quoted prices in active markets for identical assets and liabilities at the measurement date. |
| |
Level 2 – | | Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. |
| |
| Level 3 – | | Unobservable inputs for which there is little or no market data available. These inputs reflect
management’s assumptions of what market participants would use in pricing the asset or liability. |
Our hierarchy for assets and liabilities measured at fair value on a recurring basis
as of April 25, 2015 is as follows:
| | | | | | | | | | | | | | | | |
| | | Total | | | Quoted
Prices in
Active
Markets
(Level 1) | | | Significant
Other
Observable
Inputs
(Level 2) | | | Significant
Unobservable
Inputs
(Level 3) | |
Assets: | | | | | | | | | | | | | | | | |
Cash equivalents | | $ | 90,569 | | | $ | 90,569 | | | $ | — | | | $ | — | |
Derivative instruments | | | 1,255 | | | | — | | | | 1,255 | | | | — | |
| | | | | | | | | | | | | | | | |
Total assets | | $ | 91,824 | | | $ | 90,569 | | | $ | 1,255 | | | $ | — | |
| | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Derivative instruments | | $ | 1,255 | | | $ | — | | | $ | 1,255 | | | $ | — | |
| | | | | | | | | | | | | | | | |
Our hierarchy for assets and liabilities measured at fair value on a recurring basis as of April 26, 2014 is as follows:
| | | | | | | | | | | | | | | | |
| | | Total | | | Quoted
Prices in
Active
Markets
(Level 1) | | | Significant
Other
Observable
Inputs
(Level 2) | | | Significant
Unobservable
Inputs
(Level 3) | |
Assets: | | | | | | | | | | | | |
Cash equivalents | | $ | 51,511 | | | $ | 51,511 | | | $ | — | | | $ | — | |
Derivative instruments | | | 1,716 | | | | — | | | | 1,716 | | | | — | |
| | | | | | | | | | | | | | | | |
Total assets | | $ | 53,227 | | | $ | 51,511 | | | $ | 1,716 | | | $ | — | |
| | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | |
| | | | | | | | | | | | | | | | |
Derivative instruments | | $ | 7,380 | | | $ | — | | | $ | 7,380 | | | $ | — | |
| | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | |
| | April 30, 2016 |
| | Total | | Level 1 | | Level 2 | | Level 3 |
| Assets: | | | | | | | |
| Cash equivalents | $ | 14,609 |
| | $ | 14,609 |
| | $ | — |
| | $ | — |
|
| Deferred purchase price receivable | 108,837 |
| | — |
| | — |
| | 108,837 |
|
| Derivative instruments | 816 |
| | — |
| | 816 |
| | — |
|
| Total assets | $ | 124,262 |
| | $ | 14,609 |
| | $ | 816 |
| | $ | 108,837 |
|
| Liabilities: | | | | | | | |
| Derivative instruments | $ | 816 |
| | $ | — |
| | $ | 816 |
| | $ | — |
|
|
| | | | | | | | | | | | | | | |
| | April 25, 2015 |
| | Total | | Level 1 | | Level 2 | | Level 3 |
| Assets: | | | | | | | |
| Cash equivalents | $ | 90,569 |
| | $ | 90,569 |
| | $ | — |
| | $ | — |
|
| Deferred purchase price receivable | 89,588 |
| | — |
| | — |
| | 89,588 |
|
| Derivative instruments | 1,255 |
| | — |
| | 1,255 |
| | — |
|
| Total assets | $ | 181,412 |
| | $ | 90,569 |
| | $ | 1,255 |
| | $ | 89,588 |
|
| Liabilities: | | | | | | | |
| Derivative instruments | $ | 1,255 |
| | $ | — |
| | $ | 1,255 |
| | $ | — |
|
Cash equivalents– We value cash equivalents at their current market rates. The carrying value of cash equivalents approximates fair value and maturities are less than three months. Deferred purchase price receivable – We value the deferred purchase price receivable based on a discounted cash flow analysis using unobservable inputs, which include a forward yield curve, the estimated timing of payments and the credit quality of the underlying creditor. Significant changes in any of the significant unobservable inputs in isolation would not result in a materially different fair value estimate. The interrelationship between these inputs is insignificant.
Derivative instruments – Patterson’s derivative instruments consist of interest rate contracts and interest rate swaps. These instruments are valued using inputs such as interest rates and credit spreads. Certain assets are measured at fair value on a
nonrecurringnon-recurring basis. These assets are not measured at fair value on an ongoing basis, but are subject to fair value adjustments under certain circumstances, such as when there is evidence of impairment. There were no fair value adjustments to such assets in fiscal years
2016, 2015
2014 or
2013.Patterson’s long-term2014.
Our debt is not measured at fair value in the consolidated balance sheets. The estimated fair value of our debt as of April
30, 2016 and April 25, 2015
was $1,064,752 and
April 26, 2014 was $746,685,
and $742,619, respectively, as compared to a carrying value of
$725,000$1,038,655 and $722,542 at
bothApril 30, 2016 and April 25, 2015,
and April 26, 2014.respectively. The fair value of debt was measured using a discounted cash flow analysis based on expected market based
yields. These are considered to be Levelyields (i.e. level 2
inputs under the fair value measurements and disclosure guidance.inputs).
The carrying amounts of receivables, net of allowances, accounts payable, and certain accrued and other current liabilities approximated fair value at April
25, 201530, 2016 and April
26, 2014.10.25, 2015.
On October 25, 2013, we invested in three time deposits with total principal of $110,000 Canadian.
Our time deposit securities are classified as “held-to-maturity” securities as we have both the intent and ability to hold until maturity. They are carried at cost, adjusted for accrued interest and amortization. The current value is not materially different than fair value. The fair value was determined based on a discounted cash flow analysis using unobservable inputs (i.e. level 3 inputs), which include a forward yield curve, the estimated timing of payments and the credit quality of the underlying creditor. Significant changes in any of the significant unobservable inputs in isolation would not result in a materially lower fair value estimate. The interrelationship between these inputs is insignificant.On October 24, 2014, time deposits with a principal value of $45,000 Canadian matured with a value of $45,436 Canadian. The remaining time deposits with a principal value of $65,000 Canadian matured on October 28, 2015 with a value of $67,031 Canadian. Our time deposit securities were classified as current assets atheld-to-maturity securities as of April 25, 2015, withas we had both the intent and ability to hold them until maturity. As of April 25, 2015, these securities had a U.S. dollar equivalentcarrying value of $53,372.
11.$53,372 and were recorded in the consolidated balance sheet as short-term investments. They were carried at cost, adjusted for accrued interest and amortization. The carrying value was not materially different than fair value. The fair value was determined based on a discounted cash flow analysis using unobservable inputs (i.e. level 3 inputs), which included a forward yield curve, the estimated timing of payments and the credit quality of the underlying creditor. Significant changes in any of the significant unobservable inputs in isolation would not have resulted in a materially lower fair value estimate. The interrelationship between these inputs was insignificant.
Patterson leases facilities for its branch office locations, a few small distribution facilities, and certain equipment. These leases are accounted for as operating leases. Future minimum rental payments under
non-cancelablenoncancelable operating leases are as follows at April
25, 2015: | | | | |
2016 | | $ | 21,133 | |
2017 | | | 16,052 | |
2018 | | | 12,784 | |
2019 | | | 8,953 | |
2020 | | | 6,881 | |
Thereafter | | | 7,670 | |
| | | | |
Total | | $ | 73,473 | |
| | | | |
30, 2016:
|
| | | |
| 2017 | $ | 22,891 |
|
| 2018 | 16,620 |
|
| 2019 | 11,403 |
|
| 2020 | 8,777 |
|
| 2021 | 6,364 |
|
| Thereafter | 6,870 |
|
| Total | $ | 72,925 |
|
Rent expense was
$21,112, $21,290$23,315, $16,909 and
$22,016$16,410 for the years ended April
30, 2016, April 25, 2015
and April 26, 2014,
and April 27, 2013, respectively.
12.
13. Income Taxes
Significant
The components of
the provision for income
from continuing operations before taxes are as follows:
| | | | | | | | | | | | |
| | | Fiscal Year Ended | |
| | | April 25,
2015 | | | April 26,
2014 | | | April 27,
2013 | |
Current: | | | | | | | | | | | | |
Federal | | $ | 91,264 | | | $ | 84,353 | | | $ | 80,290 | |
Foreign | | | 11,802 | | | | 9,667 | | | | 13,471 | |
State | | | 10,642 | | | | 10,515 | | | | 10,035 | |
| | | | | | | | | | | | |
Total current | | | 113,708 | | | | 104,535 | | | | 103,796 | |
Deferred: | | | | | | | | | | | | |
Federal | | | 2,148 | | | | 7,501 | | | | 6,667 | |
Foreign | | | 3,542 | | | | (240 | ) | | | (963 | ) |
State | | | 12 | | | | 504 | | | | 1,345 | |
| | | | | | | | | | | | |
Total deferred | | | 5,702 | | | | 7,765 | | | | 7,049 | |
| | | | | | | | | | | | |
Provision for income taxes | | $ | 119,410 | | | $ | 112,300 | | | $ | 110,845 | |
| | | | | | | | | | | | |
|
| | | | | | | | | | | |
| | Fiscal Year Ended |
| | April 30,
2016 | | April 25,
2015 | | April 26,
2014 |
Income from continuing operations before taxes
| | | | | |
| United States | $ | 270,501 |
| | $ | 235,421 |
| | $ | 230,486 |
|
| International | 31,192 |
| | 38,897 |
| | 30,777 |
|
| Total | $ | 301,693 |
| | $ | 274,318 |
| | $ | 261,263 |
|
Significant components of income tax expense are as follows:
|
| | | | | | | | | | | |
| | Fiscal Year Ended |
| | April 30,
2016 | | April 25,
2015 | | April 26,
2014 |
| Current: | | | | | |
| Federal | $ | 105,104 |
| | $ | 73,004 |
| | $ | 66,747 |
|
| Foreign | 11,690 |
| | 11,764 |
| | 8,954 |
|
| State | 15,249 |
| | 9,007 |
| | 8,697 |
|
| Total current | 132,043 |
| | 93,775 |
| | 84,398 |
|
| Deferred: | | | | | |
| Federal | (14,308 | ) | | 497 |
| | 5,225 |
|
| Foreign | 323 |
| | 44 |
| | (260 | ) |
| State | (2,049 | ) | | (81 | ) | | 568 |
|
| Total deferred | (16,034 | ) | | 460 |
| | 5,533 |
|
| Income tax expense | $ | 116,009 |
| | $ | 94,235 |
| | $ | 89,931 |
|
As of April 30, 2016, we adopted ASU 2015-17, which simplifies the balance sheet presentation of deferred taxes that requires that deferred tax assets and liabilities be classified as non-current. The pronouncement is being applied prospectively. See Note 1 to the Consolidated Financial Statements. Deferred tax assets and liabilities are included in prepaid expenses and other current assets
(as of April 25, 2015 only) and
in other non-current
liabilitiesassets and deferred income taxes on the consolidated balance sheets. Significant components of Patterson’s deferred tax assets (liabilities) as of April
25, 201530, 2016 and April
26, 201425, 2015 are as follows:
| | | | | | | | |
| | | April 25,
2015 | | | April 26,
2014 | |
Deferred current income tax asset (liability): | | | | | | | | |
Capital accumulation plan | | $ | 5,812 | | | $ | 5,893 | |
Inventory related items | | | 5,974 | | | | 5,512 | |
Bad debt allowance | | | 1,548 | | | | 1,518 | |
LIFO reserve | | | (18,179 | ) | | | (16,279 | ) |
Other | | | 13,987 | | | | 13,447 | |
| | | | | | | | |
Deferred net current income tax asset | | | 9,142 | | | | 10,091 | |
| | |
Deferred long-term income tax (liability) asset: | | | | | | | | |
Amortizable intangibles | | | (25,374 | ) | | | (26,590 | ) |
Goodwill | | | (76,300 | ) | | | (69,613 | ) |
Property, plant, equipment | | | (4,696 | ) | | | (4,744 | ) |
Stock based compensation expense | | | 9,129 | | | | 8,130 | |
Net operating loss carryforwards | | | 5,661 | | | | 6,848 | |
Interest rate swap | | | 10,843 | | | | — | |
Other | | | (3,087 | ) | | | (4,276 | ) |
| | | | | | | | |
| | | (83,824 | ) | | | (90,245 | ) |
Valuation allowance | | | (4,440 | ) | | | (3,759 | ) |
| | | | | | | | |
Deferred net long-term income tax liability | | | (88,264 | ) | | | (94,004 | ) |
| | | | | | | | |
Net deferred income tax liability | | $ | (79,122 | ) | | $ | (83,913 | ) |
| | | | | | | | |
|
| | | | | | | |
| | April 30,
2016 | | April 25,
2015 |
| Deferred tax assets: | | | |
| Capital accumulation plan | $ | 5,898 |
| | $ | 5,723 |
|
| Inventory related items | 6,776 |
| | 4,484 |
|
| Bad debt allowance | 2,649 |
| | 1,380 |
|
| Stock based compensation expense | 9,985 |
| | 7,995 |
|
| Interest rate swap | 9,749 |
| | 10,872 |
|
| Foreign tax credit | 9,300 |
| | — |
|
| Net operating loss carryforwards | 363 |
| | — |
|
| Other | 11,979 |
| | 8,390 |
|
| Gross deferred tax assets | 56,699 |
| | 38,844 |
|
| Less: Valuation allowance | (14,007 | ) | | — |
|
| Total net deferred tax assets | 42,692 |
| | 38,844 |
|
| Deferred tax liabilities | | | |
| LIFO reserve | (21,294 | ) | | (19,173 | ) |
| Amortizable intangibles | (156,782 | ) | | (2,310 | ) |
| Goodwill | (57,405 | ) | | (52,140 | ) |
| Property, plant, equipment | (11,748 | ) | | (4,695 | ) |
| Total deferred tax liabilities | (247,229 | ) | | (78,318 | ) |
| Deferred net long-term income tax liability | $ | (204,537 | ) | | $ | (39,474 | ) |
At April
25, 2015,30, 2016, we had
certain U.S. foreign
tax credits and state net operating loss
assets. The foreign tax credit will expire in 10 years and net operating losses have varying expiration dates. In addition to these carryforwards,
(“NOLs”) of $25,825, the majority of which are attributable to companies outside the U.S. that were acquired in prior years. A valuation allowance has been recorded for a portion of the $5,661 ofwe have additional attribute deferred tax
asset resulting from these NOLs becauseassets which would give rise to tax capital losses if triggered in the future. These losses have a 5 year carryforward period and can only be used against capital gain income. At this time, we believe that it is more likely than not that the
lossesforeign tax credit and capital loss carryforward attributes totaling $14,007 will not be fully utilized
dueprior to
uncertainties relating to future taxable income from the acquired companies.expiration. As a result, a full valuation allowance has been established against these assets.
No provision has been made for U.S. federal income taxes on certain undistributed earnings of foreign subsidiaries that we intend to permanently invest or that may be remitted substantially tax-free. The total undistributed earnings that would be subject to federal income tax if remitted under existing law are approximately
$269,299$102,411 as of April
25, 2015.30, 2016. Determination of the unrecognized deferred tax liability related to these earnings is not practicable because of the complexities with its hypothetical calculation. If a future distribution of these earnings is made, we will be subject to U.S. taxes and withholding taxes payable to various foreign governments. A credit for foreign taxes already paid
wouldmay be available to reduce the U.S. tax liability.
In fiscal 2016, we approved a one-time repatriation of approximately $200,000 of foreign earnings. This one-time repatriation reduced the overall cost of funding the acquisition of Animal Health International, Inc. In addition, certain foreign cash at Patterson Medical was required to be repatriated as part of the sale transaction. The continuing operations tax impact of $12,300 from the repatriation was recorded in fiscal 2016. We have previously asserted that our foreign earnings are permanently reinvested. Except for the repatriations described above, there is no change in our on-going assertion.
Income tax expense varies from the amount computed using the U.S. statutory rate. The reasons for this difference and the related tax effects are shown below:
| | | | | | | | | | | | |
| | | Fiscal Year Ended | |
| | | April 25,
2015 | | | April 26,
2014 | | | April 27,
2013 | |
Tax at U.S. statutory rate | | $ | 119,935 | | | $ | 109,519 | | | $ | 112,391 | |
State tax provision, net of federal benefit | | | 7,758 | | | | 7,768 | | | | 8,322 | |
Effect of foreign taxes | | | (1,506 | ) | | | 461 | | | | (4,603 | ) |
Permanent differences | | | (5,549 | ) | | | (4,843 | ) | | | (3,439 | ) |
Other | | | (1,228 | ) | | | (605 | ) | | | (1,826 | ) |
| | | | | | | | | | | | |
| | $ | 119,410 | | | $ | 112,300 | | | $ | 110,845 | |
| | | | | | | | | | | | |
|
| | | | | | | | | | | |
| | Fiscal Year Ended |
| | April 30,
2016 | | April 25,
2015 | | April 26,
2014 |
| Tax at U.S. statutory rate | $ | 105,593 |
| | $ | 96,012 |
| | $ | 91,442 |
|
| State tax provision, net of federal benefit | 7,364 |
| | 6,479 |
| | 6,554 |
|
| Effect of foreign taxes | (1,195 | ) | | (1,806 | ) | | (2,078 | ) |
| Permanent differences | (3,693 | ) | | (5,363 | ) | | (4,835 | ) |
| Tax on dividends, net of foreign tax credit | 12,300 |
| | — |
| | — |
|
| Other | (4,360 | ) | | (1,087 | ) | | (1,152 | ) |
| Income tax expense | $ | 116,009 |
| | $ | 94,235 |
| | $ | 89,931 |
|
We have accounted for the uncertainty in income taxes recognized in the financial statements in accordance with ASC Topic 740, “Income Taxes”. This standard clarifies the separate identification and reporting of estimated amounts that could be assessed upon audit. The potential assessments are considered unrecognized tax benefits, because, if it is ultimately determined they are unnecessary, the reversal of these previously recorded amounts will result in a beneficial impact to our financial statements.
As of April
25, 201530, 2016 and April
26, 2014,25, 2015, Patterson’s gross unrecognized tax benefits were
$18,987$13,560 and
$19,687,$16,661, respectively. If determined to be unnecessary, these amounts (net of deferred tax assets of
$4,731$3,800 and
$5,003,$4,118, respectively, related to the tax deductibility of the gross liabilities) would decrease our effective tax rate. The gross unrecognized tax benefits are included in other long-term liabilities on the consolidated balance sheet.
A summary of the changes in the gross amounts of unrecognized tax benefits for the years ended April
30, 2016 and April 25, 2015
and April 26, 2014 areis shown below:
| | | | | | | | |
| | | April 25,
2015 | | | April 26,
2014 | |
Balance at beginning of period | | $ | 19,687 | | | $ | 19,155 | |
Additions for tax positions related to the current year | | | 2,995 | | | | 2,801 | |
Additions for tax positions of prior years | | | 57 | | | | 1,372 | |
Reductions for tax positions of prior years | | | (551 | ) | | | (893 | ) |
Statute expirations | | | (3,201 | ) | | | (2,655 | ) |
Settlements | | | — | | | | (93 | ) |
| | | | | | | | |
Balance at end of period | | $ | 18,987 | | | $ | 19,687 | |
| | | | | | | | |
|
| | | | | | | |
| | April 30,
2016 | | April 25,
2015 |
| Balance at beginning of period | $ | 16,661 |
| | $ | 17,256 |
|
| Additions for tax positions related to the current year | 1,794 |
| | 2,516 |
|
| Additions for tax positions of prior years | 560 |
| | 44 |
|
| Reductions for tax positions of prior years | (1,599 | ) | | (502 | ) |
| Statute expirations | (3,486 | ) | | (2,653 | ) |
| Settlements | (370 | ) | | — |
|
| Balance at end of period | $ | 13,560 |
| | $ | 16,661 |
|
We also recognize both interest and penalties with respect to unrecognized tax benefits as a component of income tax expense. As of April
25, 201530, 2016 and April
26, 2014,25, 2015, we had recorded
$1,925$1,438 and
$2,124,$1,760, respectively, for interest and penalties. These amounts are also included in other long-term liabilities on the consolidated balance sheet. These amounts, net of related deferred tax assets, if determined to be unnecessary, would decrease our effective tax rate. During the year ended April
25, 2015,30, 2016, we recorded as part of tax expense
$448$258 related to an increase in our estimated liability for interest and penalties.
Patterson files income tax returns, including returns for our subsidiaries, with federal, state, local and foreign jurisdictions.
TheDuring fiscal 2016, the Internal Revenue Service (“IRS”)
is currently auditingcompleted an audit of our fiscal
years ended April 27, 2013
tax return and
April 26, 2014. The outcome of this audit did not have a material adverse impact on our financial statements. The IRS has either examined or waived examination for all periods up to and including our fiscal year ended April
30, 2011.28, 2012, resulting in these periods being closed. Periodically, state, local and foreign income tax returns are examined by various taxing authorities. We do not believe that the outcome of these various examinations would have a material adverse impact on our financial statements.
13.
14. Segment and Geographic Data
Through fiscal 2015, Patterson iswas comprised of three reportable segments: dental supply, veterinary supply and rehabilitation supply. In fiscal 2016, we reorganized our reportable segments as a result of our acquisition of Animal Health International, Inc. and our divestiture of our wholly-owned subsidiary Patterson Medical Holdings, Inc., the entity through which we operated the rehabilitation supply business. We now present three different reportable segments: Dental, Animal Health and Corporate. Prior period segment results have been restated to conform to this revised current period presentation.
Our Dental and Animal Health reportable business segments are strategic business units that offer similar products and services to different customer bases. The dental supply segmentDental provides a virtually complete range of consumable dental products, clinicalequipment and laboratory equipmentsoftware, turnkey digital solutions and value-added services to dentists and dental laboratories institutions and other dental healthcare providers throughout North America. The veterinary supplyAnimal Health, formerly our Patterson Veterinary reportable segment, is a leading, full-line distributor in North America and the U.K. of veterinary supplies, primarilyanimal health products, services and technologies to both the production-animal and companion-pet (dogs, cats and other common household pets) and equine veterinary clinics. They also provide products and services used formarkets. Our Corporate segment, which was previously included in our dental supply reporting segment through the diagnosis, treatment and/or preventionend of diseases in companion animals and equine throughout the U.S. and U.K. The worldwide rehabilitation supply segment provides a comprehensive rangefiscal 2015, is
comprised of
distributed and self-manufactured rehabilitation medical supplies and assistive products to acute care hospitals, long-term care facilities, rehabilitation clinics, dealers and schools.We evaluate segment performance based on operating income. The corporate office general and administrative expenses, are included in the dental supply segment and consist ofincluding home office support costs in areas such as information technology, finance, legal, human resources and facilities. If these corporate expenses were allocated to the segments, the results would not be materially different as the dentalIn addition, customer financing and other miscellaneous sales are reported within Corporate results. Corporate assets consist primarily of cash and cash equivalents, accounts receivable, property and equipment and long-term receivables. We evaluate segment would absorb a significant portion of these expenses.performance based on operating income. The costcosts to operate the distributionfulfillment centers are allocated to the operating units based on the through-put of the unit.
The following table presents information about
Patterson’sour reportable segments:
| | | | | | | | | | | | |
| | | Fiscal Year Ended | |
| | | April 25,
2015 | | | April 26,
2014 | | | April 27,
2013 | |
Net sales | | | | | | | | | | | | |
Dental supply | | $ | 2,454,295 | | | $ | 2,382,096 | | | $ | 2,379,970 | |
Rehabilitation supply | | | 464,155 | | | | 478,574 | | | | 501,997 | |
Veterinary supply | | | 1,456,570 | | | | 1,203,045 | | | | 755,245 | |
| | | | | | | | | | | | |
Consolidated net sales | | $ | 4,375,020 | | | $ | 4,063,715 | | | $ | 3,637,212 | |
| | | | | | | | | | | | |
Operating income | | | | | | | | | | | | |
Dental supply | | $ | 249,575 | | | $ | 249,138 | | | $ | 247,747 | |
Rehabilitation supply | | | 67,182 | | | | 46,763 | | | | 65,027 | |
Veterinary supply | | | 56,670 | | | | 49,855 | | | | 41,681 | |
| | | | | | | | | | | | |
Consolidated operating income | | $ | 373,427 | | | $ | 345,756 | | | $ | 354,455 | |
| | | | | | | | | | | | |
Depreciation and amortization | | | | | | | | | | | | |
Dental supply | | $ | 35,662 | | | $ | 35,209 | | | $ | 34,953 | |
Rehabilitation supply | | | 6,807 | | | | 7,540 | | | | 7,683 | |
Veterinary supply | | | 8,861 | | | | 7,237 | | | | 3,366 | |
| | | | | | | | | | | | |
Consolidated depreciation and amortization | | $ | 51,330 | | | $ | 49,986 | | | $ | 46,002 | |
| | | | | | | | | | | | |
| | | |
| | | April 25,
2015 | | | April 26,
2014 | | | | |
Total assets | | | | | | | | | | | | |
Dental supply | | $ | 1,500,736 | | | $ | 1,342,333 | | | | | |
Rehabilitation supply | | | 815,526 | | | | 876,211 | | | | | |
Veterinary supply | | | 631,444 | | | | 646,133 | | | | | |
| | | | | | | | | | | | |
Consolidated total assets | | $ | 2,947,706 | | | $ | 2,864,677 | | | | | |
| | | | | | | | | | | | |
|
| | | | | | | | | | | |
| | Fiscal Year Ended |
| | April 30,
2016 | | April 25,
2015 | | April 26,
2014 |
| Net sales | | | | | |
| Dental | $ | 2,476,234 |
| | $ | 2,415,003 |
| | $ | 2,348,403 |
|
| Animal Health | 2,862,249 |
| | 1,456,570 |
| | 1,203,045 |
|
| Corporate | 48,220 |
| | 39,292 |
| | 33,693 |
|
| Consolidated net sales | $ | 5,386,703 |
| | $ | 3,910,865 |
| | $ | 3,585,141 |
|
| Operating income | | | | | |
| Dental | $ | 312,176 |
| | $ | 300,357 |
| | $ | 284,674 |
|
| Animal Health | 94,318 |
| | 56,670 |
| | 49,855 |
|
| Corporate | (58,781 | ) | | (52,441 | ) | | (40,803 | ) |
| Consolidated operating income | $ | 347,713 |
| | $ | 304,586 |
| | $ | 293,726 |
|
| Depreciation and amortization | | | | | |
| Dental | $ | 18,903 |
| | $ | 18,568 |
| | $ | 17,416 |
|
| Animal Health | 44,243 |
| | 8,861 |
| | 7,237 |
|
| Corporate | 19,237 |
| | 17,094 |
| | 17,793 |
|
| Consolidated depreciation and amortization | $ | 82,383 |
| | $ | 44,523 |
| | $ | 42,446 |
|
| | | | | | |
| | April 30,
2016 | | April 25,
2015 | | |
| Total assets | | | | | |
| Dental | $ | 994,113 |
| | $ | 1,022,257 |
| | |
| Animal Health | 2,064,302 |
| | 631,445 |
| | |
| Corporate | 462,389 |
| | 537,405 |
| | |
| Total assets, excluding assets held for sale | 3,520,804 |
| | 2,191,107 |
| | |
| Assets held for sale | — |
| | 754,141 |
| | |
| Total assets | $ | 3,520,804 |
| | $ | 2,945,248 |
| | |
The following table presents sales information by product for Pattersoneach reportable segment:
|
| | | | | | | | | | | |
| | Fiscal Year Ended |
| | April 30,
2016 | | April 25,
2015 | | April 26,
2014 |
| Consolidated | | | | | |
Consumable1 | $ | 4,153,921 |
| | $ | 2,697,581 |
| | $ | 2,418,201 |
|
| Equipment and software | 857,001 |
| | 865,013 |
| | 839,152 |
|
Other 1 | 375,781 |
| | 348,271 |
| | 327,788 |
|
| Total | $ | 5,386,703 |
| | $ | 3,910,865 |
| | $ | 3,585,141 |
|
| Dental | | | | | |
Consumable1 | $ | 1,378,886 |
| | $ | 1,319,407 |
| | $ | 1,285,459 |
|
| Equipment and software | 806,993 |
| | 818,342 |
| | 795,132 |
|
Other 1 | 290,355 |
| | 277,254 |
| | 267,812 |
|
| Total | $ | 2,476,234 |
| | $ | 2,415,003 |
| | $ | 2,348,403 |
|
| Animal Health | | | | | |
Consumable1 | $ | 2,775,035 |
| | $ | 1,378,174 |
| | $ | 1,132,742 |
|
| Equipment and software | 50,008 |
| | 46,671 |
| | 44,020 |
|
Other 1 | 37,206 |
| | 31,725 |
| | 26,283 |
|
| Total | $ | 2,862,249 |
| | $ | 1,456,570 |
| | $ | 1,203,045 |
|
| Corporate | | | | | |
Consumable1 | $ | — |
| | $ | — |
| | $ | — |
|
| Equipment and software | — |
| | — |
| | — |
|
Other 1 | 48,220 |
| | 39,292 |
| | 33,693 |
|
| Total | $ | 48,220 |
| | $ | 39,292 |
| | $ | 33,693 |
|
1 Certain sales were reclassified from consumable to other in the current and its reportable segments: | | | | | | | | | | | | |
| | | Fiscal Year Ended | |
| | | April 25,
2015 | | | April 26,
2014 | | | April 27,
2013 | |
Consolidated | | | | | | | | | | | | |
Consumable and printed products1 | | $ | 3,083,113 | | | $ | 2,810,491 | | | $ | 2,377,635 | |
Equipment and software1 | | | 958,067 | | | | 940,088 | | | | 959,539 | |
Other | | | 333,840 | | | | 313,136 | | | | 300,038 | |
| | | | | | | | | | | | |
Total | | $ | 4,375,020 | | | $ | 4,063,715 | | | $ | 3,637,212 | |
| | | | | | | | | | | | |
Dental supply | | | | | | | | | | | | |
Consumable and printed products1 | | $ | 1,355,982 | | | $ | 1,323,378 | | | $ | 1,307,450 | |
Equipment and software1 | | | 818,342 | | | | 795,132 | | | | 809,652 | |
Other | | | 279,971 | | | | 263,586 | | | | 262,868 | |
| | | | | | | | | | | | |
Total | | $ | 2,454,295 | | | $ | 2,382,096 | | | $ | 2,379,970 | |
| | | | | | | | | | | | |
Rehabilitation supply | | | | | | | | | | | | |
Consumable and printed products | | $ | 346,704 | | | $ | 352,181 | | | $ | 361,164 | |
Equipment and software | | | 93,054 | | | | 100,936 | | | | 114,818 | |
Other | | | 24,397 | | | | 25,457 | | | | 26,015 | |
| | | | | | | | | | | | |
Total | | $ | 464,155 | | | $ | 478,574 | | | $ | 501,997 | |
| | | | | | | | | | | | |
Veterinary supply | | | | | | | | | | | | |
Consumable and printed products | | $ | 1,380,427 | | | $ | 1,134,932 | | | $ | 709,021 | |
Equipment and software | | | 46,671 | | | | 44,020 | | | | 35,069 | |
Other | | | 29,472 | | | | 24,093 | | | | 11,155 | |
| | | | | | | | | | | | |
Total | | $ | 1,456,570 | | | $ | 1,203,045 | | | $ | 755,245 | |
| | | | | | | | | | | | |
1 | Certain products were reclassified from equipment to consumables in the current and prior periods.
|
prior periods.
The following table presents information
about Patterson by geographic area. No individual country, except for the U.S. and the U.K., generated sales greater than 10% of consolidated net sales. There were no material sales between geographic areas.
| | | | | | | | | | | | |
| | | Fiscal Year Ended | |
| | | April 25,
2015 | | | April 26,
2014 | | | April 27,
2013 | |
Net sales | | | | | | | | | | | | |
United States | | $ | 3,368,828 | | | $ | 3,265,939 | | | $ | 3,211,979 | |
United Kingdom | | | 727,741 | | | | 512,040 | | | | 100,150 | |
International | | | 278,451 | | | | 285,736 | | | | 325,083 | |
| | | | | | | | | | | | |
Total | | $ | 4,375,020 | | | $ | 4,063,715 | | | $ | 3,637,212 | |
| | | | | | | | | | | | |
Income before tax | | | | | | | | | | | | |
United States | | $ | 294,530 | | | $ | 289,037 | | | $ | 273,037 | |
International | | | 48,141 | | | | 23,875 | | | | 48,080 | |
| | | | | | | | | | | | |
Total | | $ | 342,671 | | | $ | 312,912 | | | $ | 321,117 | |
| | | | | | | | | | | | |
| | | |
| | | April 25,
2015 | | | April 26,
2014 | | | | |
Property and equipment, net | | | | | | | | | | | | |
United States | | $ | 197,484 | | | $ | 164,960 | | | | | |
United Kingdom | | | 15,412 | | | | 20,434 | | | | | |
International | | | 13,909 | | | | 19,545 | | | | | |
| | | | | | | | | | | | |
Total | | $ | 226,805 | | | $ | 204,939 | | | | | |
| | | | | | | | | | | | |
14.
|
| | | | | | | | | | | |
| | Fiscal Year Ended |
| | April 30,
2016 | | April 25,
2015 | | April 26,
2014 |
| Net sales | | | | | |
| United States | $ | 4,457,254 |
| | $ | 3,029,541 |
| | $ | 2,933,091 |
|
| United Kingdom | 626,603 |
| | 649,541 |
| | 419,341 |
|
| Canada | 302,846 |
| | 231,783 |
| | 232,709 |
|
| Total | $ | 5,386,703 |
| | $ | 3,910,865 |
| | $ | 3,585,141 |
|
| | | | | | |
| | April 30,
2016 | | April 25,
2015 | | |
| Property and equipment, net | | | | | |
| United States | $ | 278,667 |
| | $ | 190,618 |
| | |
| United Kingdom | 2,459 |
| | 2,857 |
| | |
| Canada | 12,189 |
| | 10,658 |
| | |
| Total | $ | 293,315 |
| | $ | 204,133 |
| | |
The following table presents our declared and paid cash dividends per share on our common stock for the past three years. The dividend declared in the fourth quarter of fiscal
20132014 was paid early in the subsequent quarter; all other dividends were declared and paid in the same period.
Patterson expectsWe expect to continue paying a quarterly cash dividend into the foreseeable future.
| | | | | | | | | | | | | | | | |
| | | Quarter | |
| Fiscal year | | 1 | | | 2 | | | 3 | | | 4 | |
2015 | | $ | 0.20 | | | $ | 0.20 | | | $ | 0.20 | | | $ | 0.22 | |
2014 | | | 0.16 | | | | 0.16 | | | | 0.16 | | | | 0.20 | |
2013 | | | 0.14 | | | | 0.14 | | | | 0.14 | | | | 0.16 | |
|
| | | | | | | | | | | | | | | |
| | Quarter |
| Fiscal year | 1 | | 2 | | 3 | | 4 |
| 2016 | $ | 0.22 |
| | $ | 0.22 |
| | $ | 0.22 |
| | $ | 0.24 |
|
| 2015 | 0.20 |
| | 0.20 |
| | 0.20 |
| | 0.22 |
|
| 2014 | 0.16 |
| | 0.16 |
| | 0.16 |
| | 0.20 |
|
During fiscal 2016, we repurchased and retired 4,379 shares of our common stock for $200,000, or an average of $45.68 per share. During fiscal 2015, we repurchased and retired 1,194 shares of our common stock for $47,539, or an average of $39.81 per share. During fiscal 2014, we repurchased and retired 2,354 shares of our common stock for $96,486, or an average of $40.99 per share.
During fiscal 2013, we repurchased and retired 5,224 shares of our common stock for $181,756, or an average of $34.79 per share. In
December 2007, Patterson’s Board of Directors expanded a share repurchase program to allow for the purchase of up to 25,000 shares of common stock in open market transactions. As of March
2011, approximately 20,500 shares had been repurchased under this authorization. At that time, the Board of Directors cancelled and replaced the existing share repurchase program with a new authorization to repurchase an additional 25,000 share of common stock. This program was due to expire on March 15, 2016. On March 19, 2013, Patterson’s Board of Directors approved a
new share repurchase
plan that replaced the existing plan. Under the
current plan, up to
25,000 shares may be repurchased in open market transactions through March 19, 2018. As of April 25, 2015, 20,85230, 2016, 16,497 shares remain available under the current repurchase authorization.
Employee Stock Ownership Plan
(ESOP)("ESOP")
During 1990, Patterson’s Board of Directors adopted a leveraged ESOP. In fiscal 1991, under the provisions of the plan and related financing arrangements, Patterson loaned the ESOP $22,000 (the “1990 note”) for the purpose of acquiring its then outstanding preferred stock, which was subsequently converted to common stock. The Board of Directors determines the contribution from the Company to the ESOP annually. The contribution is used to retire a portion of the debt, which triggers a release of shares that are then allocated to the employee participants. Shares of stock acquired by the plan are allocated to each participant who has completed
1,0001000 hours of service during the plan year. In fiscal 2011, the final payment on the 1990 note was made and all remaining shares were released for allocation to participants.
In fiscal 2002, Patterson’s ESOP and an ESOP sponsored by the Thompson Dental Company (“Thompson”) were used to facilitate the acquisition and merger of Thompson into Patterson. The net result of this transaction was an additional loan of $12,612 being made to the ESOP and the ESOP acquiring 666 shares of common stock.
These shares are accounted for under ASC 718-40 and accordingly these shares are not considered outstanding for the computation of earnings per share until the shares are committed for release to the participants. When the shares are committed for release and allocated to the participants, the expense to Patterson is determined based on current fair value. The loan bears interest at current rates but principal did not begin to amortize until fiscal 2012. Beginning in fiscal 2012 and through fiscal 2020, an annual payment of $200 plus interest is due and in fiscal 2020, a final payment of any outstanding principal and interest balance is due. Prepayments of principal can be made at any time without penalty. Of the 666 shares issued in the transaction, 98 were previously allocated to Thompson employees. The remaining 568 shares began to be allocated in fiscal 2004 as interest was paid on the loan.
During fiscal 2015, 2014 and 2013, shares secured by the Thompson note with an aggregate fair value of $393, $373 and $363, respectively, were committed for release and allocated to ESOP participants.On September 11, 2006, we entered into a third loan agreement with the ESOP and loaned $105,000 (the “2006 note”) for the sole purpose of enabling the ESOP to purchase shares of our common stock. The ESOP purchased 3,160 shares with the proceeds from the 2006 note.
These shares are also accounted for under ASC 718-40. Interest on the unpaid principal balance accrues at a rate equal to six-month LIBOR, with the rate resetting semi-annually. Interest payments were not required during the period from and including September 11, 2006 through April 30, 2010. On April 30, 2010, accrued and unpaid interest was added to the outstanding principal balance under the note, with interest thereafter accruing on the increased principal amount. Unpaid interest accruing after April 30, 2010 is due and payable on each successive April 30 occurring through September 10, 2026.
No principalPrincipal payments
arearen't due until September 10, 2026; however, prepayments can be made without penalty.
During fiscal 2015, 2014 and 2013, shares secured by the 2006 note with aggregate fair values of $10,650, $10,959 and $20,214, respectively, were committed for release and allocated to ESOP participants. In fiscal 2012, Patterson contributed
$23,639$20,214 to the ESOP, which then purchased 844 shares for allocation to the participants. No shares secured by the 2006 note were released prior to fiscal 2011.
Unearned ESOP shares are not considered outstanding for the computation of earnings per share until the shares are committed for release to the participants. During fiscal 2016, 2015 and 2014, the compensation expense recognized related to the ESOP was $11,953, $9,939 and $10,199, respectively.
At April
25, 2015,30, 2016, a total of
12,79811,985 shares of common stock that have been allocated to participants remained in the ESOP and had a fair market value of
$616,760.$519,531. Related to the shares from the Thompson transaction, committed-to-be-released shares were
910 and suspense shares were
445.436. Finally, with respect to the 2006 note, committed-to-be-released shares were
241259 and suspense shares were
2,042.1,783.
We anticipate the allocation of the remaining suspense, or unearned, shares to occur over a period of approximately 5 to 10 years. As of April 25, 2015,30, 2016, the fair value of all unearned shares held by the ESOP was approximately $119,848.$107,814. We will recognize an
income tax deduction as the unearned ESOP shares are released. Such deductions will be limited to the ESOP’s original cost to acquire the shares.
Dividends on allocated shares are passed through to the ESOP participants. Dividends on unallocated shares are used by the ESOP to make debt service payments on the notes due to Patterson.
15.
16. Stock-based Compensation
The consolidated statements of income for fiscal years
2016, 2015
2014 and
20132014 include pre-tax (after-tax) stock-based compensation expense of
$15,442$16,898 ($
10,167)11,120),
$8,686$13,958 ($
5,896)9,171) and
$14,625$8,041 ($
9,452), respectively, recorded in accordance with the provisions of ASC Topic 718, “Stock Compensation”5,416).
All pre-taxPre-tax expense is included in operating expenses within the consolidated statements of income.
The consolidated statement of cash flows presents the pre-tax stock-based compensation expense as an adjustment to reconcile net income to net cash provided by operating activities. In addition,Tax benefits associated with tax deductions in excess of recognized
stock-based compensation expense are presented as a
financing cash
inflow from financing activities. For fiscal years 2015, 2014 and 2013, these excess benefits totaled $255, $1,290 and $2,487, respectively.inflow.
As of April
25, 2015,30, 2016, the total
unrecognized compensation cost
before income taxes, related to non-vested awards
yet to be recognized was
$30,008,$34,772, and it is expected to be recognized over a weighted average period of approximately
2.02.3 years.
Description of General Methods and Assumptions Used to Estimate Fair Value
The following describes certain methods and assumptions used to estimate the fair value of stock-based compensation awards. Further information is presented below within this Note that may be unique to a particular award or group of awards.
Expected dividend yield – Patterson’s initial quarterly dividend occurred in the fourth quarter of fiscal 2010. Accordingly, the expected dividend yield used had been 0% for awards issued prior to that time. For awards issued since, Patterson has included an expected dividend yield based on estimates as of the grant date of awards.
Expected stock price volatility – We have considered historical volatility trends, implied future volatility based on certain traded options and other factors.
Risk-free interest rate – We base the risk-free interest rate on the U.S. Treasury yield curve in effect at the grant date with similar terms to the expected term of the award.
Expected term of stock options and restricted stock – We estimate the expected term, or life, of awards based on several factors, including grantee types, vesting schedules, contractual terms and various factors surrounding exercise behavior of different groups.
Director and Employee Stock Option
2015 Omnibus Incentive Plan
In September
2002,2015, our shareholders
voted to approveapproved the
2002 Stock Option Plan. A total2015 Omnibus Incentive Plan ("Incentive Plan"). The aggregate number of
6,000 shares of common stock
were reserved for issuance under the plan. In September 2004, our shareholders voted to approve a restatement of such plan and renamed it the “Patterson Companies, Inc. Equity Incentive Plan” (“Equity Incentive Plan”). Although this restatement did not change the number of shares reserved for issuance, it expanded the types of awards issuable thereunder. In particular, the Equitythat may be issued is 4,000. The Incentive Plan authorizes various award types to be issued under the plan, including stock options, restricted stock
andawards, restricted stock units,
stock bonuses, cash bonuses, stock appreciation rights, performance awards,
non-employee director awards, cash-based awards and
dividend equivalents. Awards may have a term no longer than ten years and vesting terms are determined by the compensation committee of the Board of Directors. The minimum restriction periodother stock-based awards. We issue new shares for
stock option exercises, restricted stock
award grants and
also for vesting of restricted stock units
is three years,and performance stock units. Awards that expire or
one year in the caseare canceled without delivery of
performance-based awards.In September 2007, our shareholders approved a plan amendment that caused non-employee directors toshares generally become a class of persons eligible to receive awardsavailable for reissuance under the Equity Incentive Plan. In September 2009, our shareholders approved a plan amendment that removed the 2,000 shares limit on the number of shares that may be issued under the Equity Incentive Plan pursuant to awards of restricted stock, restricted stock units or stock bonuses. In September 2012, our shareholders approved a plan amendment that extended the duration of the Equity Incentive Plan to June 12, 2022. plan.
At April
25, 2015,30, 2016, there were
2,8823,784 shares available for awards under the
Equity Incentive Plan.
Prior to fiscal 2006, only stock option
As a result of the approval of the Incentive Plan, awards had beenare no longer granted under any prior equity incentive plan, but all outstanding awards previously granted under such prior plans will remain outstanding and subject to the Equity Incentive Plan. During fiscalterms of such prior plans. At April 30, 2016, there were 1,073 shares outstanding under prior plans.
Stock Option Awards
Stock options granted to employees expire no later than 10 years
2015, 2014 and 2013, expense recognized related to stock options was $451, $768 and $1,175, respectively.after the date of grant. Awards typically vest over 3 or 5 years.
The fair value of stock options granted was estimated as of the grant date using a Black-Scholes option-pricing model with the following assumptions:
| | | | | | | | | | | | |
| | | Fiscal Year Ended | |
| | | April 25,
2015 | | | April 26,
2014 | | | April 27,
2013 | |
Expected dividend yield | | | 2.0 | % | | | 1.8 | % | | | 1.6 | % |
Expected stock price volatility | | | 26.3 | % | | | 30.0 | % | | | 30.6 | % |
Risk-free interest rate | | | 2.1 | % | | | 1.5 | % | | | 1.4 | % |
Expected life of options (years) | | | 7.0 | | | | 7.1 | | | | 7.5 | |
|
| | | | | | | | | | | |
| | Fiscal Year Ended |
| | April 30,
2016 | | April 25,
2015 | | April 26,
2014 |
| Expected dividend yield | 1.8 | % | | 2.0 | % | | 1.8 | % |
| Expected stock price volatility | 25.6 | % | | 26.3 | % | | 30.0 | % |
| Risk-free interest rate | 2.1 | % | | 2.1 | % | | 1.5 | % |
| Expected life (years) | 6.7 |
| | 7.0 |
| | 7.1 |
|
| Weighted average grant date fair value per share | $ | 9.66 |
| | $ | 9.78 |
| | $ | 11.02 |
|
The following is a summary of
all stock
options: | | | | | | | | | | | | |
| | | Number
of
Options | | | Weighted-
Average
Exercise
Price | | | Intrinsic
Value | |
Balance as of April 28, 2012 | | | 986 | | | $ | 31.45 | | | | | |
Granted | | | 56 | | | | 34.10 | | | | | |
Exercised | | | (290 | ) | | | 22.49 | | | | | |
Canceled | | | (31 | ) | | | 33.79 | | | | | |
| | | | | | | | | | | | |
Balance as of April 27, 2013 | | | 721 | | | | 35.03 | | | | | |
Granted | | | 57 | | | | 39.33 | | | | | |
Exercised | | | (345 | ) | | | 35.73 | | | | | |
Canceled | | | (44 | ) | | | 33.11 | | | | | |
| | | | | | | | | | | | |
Balance as of April 26, 2014 | | | 389 | | | | 35.29 | | | | | |
Granted | | | 74 | | | | 39.64 | | | | | |
Exercised | | | (49 | ) | | | 34.73 | | | | | |
Canceled | | | (76 | ) | | | 35.81 | | | | | |
| | | | | | | | | | | | |
Balance as of April 25, 2015 | | | 338 | | | $ | 36.22 | | | $ | 4,081 | |
| | | | | | | | | | | | |
Vested or expected to vest as of April 25, 2015 | | | 292 | | | $ | 36.36 | | | $ | 3,491 | |
| | | | | | | | | | | | |
Exercisable as of April 25, 2015 | | | 108 | | | $ | 38.02 | | | $ | 1,131 | |
| | | | | | | | | | | | |
The weighted average fair values per share of options granted during fiscal years 2015, 2014 and 2013 were $9.78, $11.02 and $10.15, respectively. option activity:
|
| | | | | | | | | | |
| | Number of Options | | Weighted- Average Exercise Price | | Aggregate Intrinsic Value |
| Balance as of April 25, 2015 | 338 |
| | $ | 36.22 |
| | |
| Granted | 923 |
| | 55.39 |
| | |
| Exercised | (87 | ) | | 36.49 |
| | |
| Canceled | (64 | ) | | 39.03 |
| | |
| Balance as of April 30, 2016 | 1,110 |
| | $ | 52.09 |
| | $ | 1,402 |
|
| Vested or expected to vest as of April 30, 2016 | 1,046 |
| | $ | 52.17 |
| | $ | 1,279 |
|
| Exercisable as of April 30, 2016 | 49 |
| | $ | 35.22 |
| | $ | 402 |
|
The weighted average remaining contractual lives of options outstanding and options exercisable as of April
25, 201530, 2016 were
5.48.6 and
2.54.3 years, respectively.
We settle stock option exercises with newly issued common shares.Related to stock options exercised, the intrinsic value, cash received and tax benefits realized were $290, $1,710$901, $3,173 and $286,$854, respectively, in fiscal 2016; $290, $1,710 and $286, respectively, in fiscal 2015; and $1,722, $12,309 and $1,273, respectively, in fiscal 2014; and $3,397, $6,518 and $641, respectively, in fiscal 2013.2014.
Restricted Stock
Restricted stock awards and
Performance Unit AwardsIn fiscal 2006, we began to issue restricted stock and performance unit awards under the Equity Incentive Plan. The grant date fair value is based on the closing stock price on the day of the grant. Restricted stock awardsunits granted to employees generally vest over a five, seven or nine-year period and are subject to forfeiture provisions.
nine year period. Certain restricted stock awards, which are held by management,branch managers, are subject to accelerated vesting provisions beginning three years after the grant date, based on certain operating goals. Restricted stock awards are also granted to non-employee directors on the date of each annual meeting of shareholders. These awardsannually and vest over three1 or 3 years. The performance unitgrant date fair value of restricted stock awards issued primarily to executive management, are earned at the end of a three-year period if certain operating goals are met, and are settled in an equivalent number of common shares or in cash as determined by the compensation committee of the Board of Directors. The satisfaction of operating goalsrestricted stock units is not finally determined until the end of a three-year period. Accordingly, Patterson recognizes expense related to performance unit awards over the requisite service period using the straight-line method based on the outcome that is probable. During fiscal years 2015, 2014 and 2013, expense recognized related to restrictedclosing stock and performance unit awards was $11,204, $4,793 and $10,255, respectively.price on the day of the grant. The total fair value of restricted stock awards and restricted stock units that vested in fiscal 2015, 2014 and 2013 was $8,474, $6,831 and $6,923, respectively. Patterson granted performance units in fiscal2016, 2015 and 2014 that can be earned at the end of fiscal 2017was $19,805, $8,474 and 2016, respectively, subject to the achievement of certain financial objectives.
$6,831, respectively.
The following is a summary of all non-vested restricted stock awardsaward activity:
|
| | | | | | |
| | Restricted Stock Awards |
| | Shares | | Weighted- Average Grant Date Fair Value |
| Outstanding at April 25, 2015 | 1,168 |
| | $ | 34.39 |
|
| Granted | 191 |
| | 48.91 |
|
| Vested | (421 | ) | | 33.33 |
|
| Forfeitures | (178 | ) | | 36.34 |
|
| Outstanding at April 30, 2016 | 760 |
| | $ | 38.18 |
|
The following is a summary of restricted stock unit activity:
|
| | | | | | |
| | Restricted Stock Units |
| | Shares | | Weighted-
Average
Grant Date
Fair Value |
| Outstanding at April 25, 2015 | 122 |
| | 35.30 |
|
| Granted | 66 |
| | 44.88 |
|
| Vested | (6 | ) | | 39.54 |
|
| Forfeitures | (111 | ) | | 35.03 |
|
| Outstanding at April 30, 2016 | 71 |
| | $ | 44.26 |
|
Performance Unit Awards
In fiscal 2015 and
2014, we granted performance unit
awards: | | | | | | | | |
| | | Restricted Stock Awards | |
| | | Shares | | | Weighted-
Average
Grant Date
Fair Value | |
Outstanding at April 28, 2012 | | | 1,162 | | | $ | 30.92 | |
Granted | | | 314 | | | | 34.10 | |
Vested | | | (192 | ) | | | 35.62 | |
Forfeitures | | | (127 | ) | | | 30.98 | |
| | | | | | | | |
Outstanding at April 27, 2013 | | | 1,157 | | | | 31.82 | |
Granted | | | 283 | | | | 38.02 | |
Vested | | | (174 | ) | | | 38.76 | |
Forfeitures | | | (43 | ) | | | 31.91 | |
| | | | | | | | |
Outstanding at April 26, 2014 | | | 1,223 | | | | 33.02 | |
Granted | | | 271 | | | | 39.87 | |
Vested | | | (207 | ) | | | 34.52 | |
Forfeitures | | | (119 | ) | | | 32.83 | |
| | | | | | | | |
Outstanding at April 25, 2015 | | | 1,168 | | | $ | 34.39 | |
| | | | | | | | |
| | | | | | | | |
| | | Performance Unit Awards | |
| | | Shares | | | Weighted-
Average
Grant Date
Fair Value | |
Outstanding at April 28, 2012 | | | 96 | | | $ | 35.41 | |
Granted | | | 130 | | | | 34.09 | |
Forfeitures and cancellations | | | (21 | ) | | | 34.09 | |
| | | | | | | | |
Outstanding at April 27, 2013 | | | 205 | | | | 34.09 | |
Granted | | | 124 | | | | 38.05 | |
Forfeitures and cancellations | | | (2 | ) | | | 34.75 | |
| | | | | | | | |
Outstanding at April 26, 2014 | | | 327 | | | | 35.59 | |
Granted | | | 133 | | | | 39.72 | |
Vested | | | (9 | ) | | | 35.22 | |
Forfeitures and cancellations | | | (124 | ) | | | 35.72 | |
| | | | | | | | |
Outstanding at April 25, 2015 | | | 327 | | | $ | 37.57 | |
| | | | | | | | |
Employee Stock Purchase Plan
awards, primarily to executive management, which are earned at the end of a three year period if certain operating goals are met. Accordingly, we recognize expense over the requisite service period based on the outcome that is probable for these awards. In June 1992,fiscal 2016, we adopted an granted performance unit awards with a market-based condition to certain executives. The number of shares to be received at vesting will range from 0% - 200% of the target number of stock units based on Patterson's total shareholder return ("TSR") relative to the performance of companies in the S&P Midcap 400 Index measured over a 3 year period. We estimate the grant date fair value of the TSR awards using the Monte Carlo valuation model. The total fair value of performance unit awards that vested in fiscal 2016 was $2,966. No performance unit awards vested in fiscal 2015 and 2014.
The following is a summary of performance unit award activity at target:
|
| | | | | | |
| | Performance Unit Awards |
| | Shares | | Weighted- Average Grant Date Fair Value |
| Outstanding at April 25, 2015 | 205 |
| | $ | 38.91 |
|
| Granted | 87 |
| | 54.55 |
|
| Vested | (78 | ) | | 37.70 |
|
| Forfeitures and cancellations | (57 | ) | | 40.69 |
|
| Outstanding at April 30, 2016 | 157 |
| | $ | 47.56 |
|
Employee Stock Purchase Plan (the “Stock Purchase Plan”("ESPP"). A
We sponsor an ESPP under which a total of
4,7506,750 shares
of common stock werehave been reserved for
issuance under the Stock Purchase Plan. In June 2012, our Board of Directors approved to increase the number ofpurchase by employees. Eligible employees may purchase shares
available to 6,750. The Stock Purchase Plan, which is intended to qualify under Section 423 of the Internal Revenue Code, is administered by the Board of Directors or by a committee appointed by the Board of Directors and follows a calendar plan year. Employees are eligible to participate after six months of employment, if they are employed for at least 20 hours per week and more than five months per year. The Stock Purchase Plan permits eligible employees to purchase common stock through payroll deductions, which may not exceed 10 percent of an employee’s compensation, at 85% of the lower of the fair market value of
theour common stock on the
beginning of the annual offering
dateperiod, or
aton the end of each
three-monthquarterly purchase period,
following thewhich occur on March 31, June 30, September 30 and December 31. The offering
date during the applicable offering period. Employees mayperiods begin on January 1 of each calendar year and end
their participation in the offering at any time during the offering period, and participation ends automatically on
terminationDecember 31 of
employment.each calendar year. At April
25, 2015,30, 2016, there were
1,5001,269 shares available for purchase under the
Stock Purchase Plan.The Stock Purchase Plan includes a look-back option, and, accordingly, there are several option elements for which the fair value is estimated onESPP.
We estimate the grant date
fair value of shares purchased under our ESPP using the Black-Scholes
option-pricing model. Total expense recognized related tooption pricing valuation model with the
employee stock purchase plan was $2,048, $1,838 and $1,816 during fiscal years 2015, 2014 and 2013, respectively.The following table summarizes the weighted-average assumptions relating to the Stock Purchase Plan:
| | | | | | | | | | | | |
| | | Fiscal Year Ended | |
| | | April 25,
2015 | | | April 26,
2014 | | | April 27,
2013 | |
Expected dividend yield | | | 1.6 | % | | | 1.6 | % | | | 1.6 | % |
Expected stock price volatility | | | 31.0 | % | | | 31.0 | % | | | 31.0 | % |
Risk-free interest rate | | | 0.1 | % | | | 0.1 | % | | | 0.2 | % |
Expected life of options (years) | | | 0.5 | | | | 0.5 | | | | 0.5 | |
weighted average assumptions:
|
| | | | | | | | | | | |
| | Fiscal Year Ended |
| | April 30,
2016 | | April 25,
2015 | | April 26,
2014 |
| Expected dividend yield | 2.0 | % | | 1.6 | % | | 1.6 | % |
| Expected stock price volatility | 21.1 | % | | 31.0 | % | | 31.0 | % |
| Risk-free interest rate | 0.5 | % | | 0.1 | % | | 0.2 | % |
| Expected life (years) | 0.6 |
| | 0.5 |
| | 0.5 |
|
| Weighted average grant date fair value per share | $ | 9.16 |
| | $ | 10.74 |
| | $ | 9.46 |
|
Capital Accumulation Plan
(CAP)In 1996, we adopted("CAP")
We also sponsor an employee CAP. A total of 6,000 shares of common stock are reserved for issuance under the CAP. Key employees of Patterson
or its subsidiaries are eligible to participate by purchasing common stock through payroll deductions
which must be between 5% and 25% of an employee’ compensation, at 75% of the price of the common stock at the beginning of or the end of the calendar year, whichever is lower. The shares issued are restricted stock and are held in the custody of Patterson until the restrictions lapse. The restriction period is
typically three years from the beginning of the plan year,
but restrictedand shares are subject to forfeiture provisions. At April
25, 2015, 2,05330, 2016, 2,018 shares were available for purchase under the CAP.
Based on the provisions of the CAP, there are option elements for which the fair value is estimated on
We estimate the grant date fair value of shares purchased under our CAP using the Black-Scholes option-pricing model. Total expense recognized relatedoption pricing valuation model with the following weighted average assumptions:
|
| | | | | | | | | | | |
| | Fiscal Year Ended |
| | April 30,
2016 | | April 25,
2015 | | April 26,
2014 |
| Expected dividend yield | 2.0 | % | | 1.6 | % | | 1.6 | % |
| Expected stock price volatility | 19.7 | % | | 31.0 | % | | 31.0 | % |
| Risk-free interest rate | 0.6 | % | | 0.3 | % | | 0.3 | % |
| Expected life (years) | 1.0 |
| | 1.0 |
| | 1.0 |
|
| Weighted average grant date fair value per share | $ | 14.13 |
| | $ | 17.67 |
| | $ | 15.00 |
|
17. Litigation
In September 2015, we were served with a summons and complaint in an action commenced in the U.S. District Court for the Eastern District of New York, entitled SourceOne Dental, Inc. v. Patterson Companies, Inc., Henry Schein, Inc. and Benco
Dental Supply Company, Civil Action No. 15-cv-05440-JMA-GRB. SourceOne, as plaintiff, alleges that, through its website, it markets and sells dental supplies and equipment to
dentists. SourceOne alleges in the
CAP was $1,739, $1,287complaint, among other things, that we, along with the defendants Henry Schein and
$1,379 during fiscal years 2015, 2014Benco, conspired to eliminate plaintiff as a competitor and
2013, respectively.Theto exclude them from the market for the marketing, distribution and sale of dental supplies and equipment in the U.S. and that defendants unlawfully agreed with one another to boycott dentists, manufacturers, and state dental associations that deal with, or considered dealing with, plaintiff. Plaintiff asserts the following table summarizesclaims: (i) unreasonable restraint of trade in violation of state and federal antitrust laws; (ii) tortious interference with prospective business relations; (iii) civil conspiracy; and (iv) aiding and abetting the weighted-average assumptions relatingother defendants’ ongoing tortious and anticompetitive conduct. Plaintiff seeks equitable relief, compensatory and treble damages, jointly and severally, punitive damages, interest, and reasonable costs and expenses, including attorneys’ fees and expert fees. Plaintiff has not specified a damage amount in its complaint. We intend to defend ourselves against the CAP:
| | | | | | | | | | | | |
| | | Fiscal Year Ended | |
| | | April 25,
2015 | | | April 26,
2014 | | | April 27,
2013 | |
Expected dividend yield | | | 1.6 | % | | | 1.6 | % | | | 1.6 | % |
Expected stock price volatility | | | 31.0 | % | | | 31.0 | % | | | 31.0 | % |
Risk-free interest rate | | | 0.3 | % | | | 0.3 | % | | | 0.3 | % |
Expected life of options (years) | | | 1.0 | | | | 1.0 | | | | 1.0 | |
16. Litigation
From time to time, we may become a party to ordinary routine litigation incidental to our business, including, without limitation, product liability claims, intellectual property claims, employment claims, commercial disputes, governmental inquiries and investigations, and other matters arising out of the ordinary course of our business.action vigorously. We have accrued our best estimate of potential losses relating to product liability and other claimsdo not anticipate that were probable to result in a liability and for which it was possible to reasonably estimate a loss. While the results of legal proceedings cannot be predicted with certainty, based upon our historical experience, the resolution of these proceedings is not expected tothis matter will have a material adverse effect on our consolidated financial position, resultscondition.
Beginning in January 2016, purported class action complaints were filed against defendants Henry Schein, Inc., Benco Dental Supply Co. and Patterson Companies, Inc. Although there were factual and legal variations among these complaints, each alleged that defendants conspired to foreclose and exclude competitors by boycotting manufacturers, state dental associations, and others that deal with defendants’ competitors. On February 9, 2016, the U.S. District Court for the Eastern District of
operations, or cash flows. We also disclose the natureNew York ordered all of
these actions, and
range of loss forall other actions filed thereafter asserting substantially similar claims against
us when losses are reasonably possibledefendants, consolidated for pre-trial purposes. On February 26, 2016, a consolidated class action complaint was filed by Arnell Prato, D.D.S., P.L.L.C., d/b/a Down to Earth Dental, Evolution Dental Sciences, LLC, Howard M. May, DDS, P.C., Casey Nelson, D.D.S., Jim Peck, D.D.S., Bernard W. Kurek, D.M.D., Larchmont Dental Associates, P.C., and
material.17.Keith Schwartz, D.M.D., P.A. (collectively, the “putative class representatives”) in the U.S. District Court for the Eastern District of New York, entitled In re Dental Supplies Antitrust Litigation, Civil Action No. 1:16-CV-00696-BMC-GRB. Subject to certain exclusions, the putative class representatives seek to represent all persons who purchased dental supplies or equipment in the U.S. directly from any of the defendants, or non-defendant Burkhart Dental Supply Company, Inc., since August 31, 2008. In the consolidated class action complaint, putative class representatives allege a nationwide agreement among Henry Schein, Benco, Patterson and Burkhart not to compete on price. The consolidated class action complaint asserts a single count under Section 1 of the Sherman Act, and seeks equitable relief, compensatory and treble damages, jointly and severally, interest, and reasonable costs and expenses, including attorneys’ fees and expert fees. Putative class representatives have not specified a damage amount in their complaint. While the outcome of litigation is inherently uncertain, we believe the consolidated class action complaint is without merit, and we intend to vigorously defend ourselves in this litigation.
18. Quarterly Results (unaudited)
Quarterly results are determined in accordance with the accounting policies used for annual data and include certain items based upon estimates for the entire year. All fiscal quarters include results for 13
weeks except for the quarter ended August 1, 2015, which included 14 weeks.
| | | | | | | | | | | | | | | | |
| | | Quarter Ended | |
| | | Apr. 25,
2015(1) | | | Jan. 24,
2015 | | | Oct. 25,
2014 | | | Jul. 26,
2014 | |
Net sales | | $ | 1,148,854 | | | $ | 1,063,312 | | | $ | 1,103,325 | | | $ | 1,059,529 | |
Gross profit | | | 333,600 | | | | 302,559 | | | | 305,822 | | | | 296,225 | |
Operating income | | | 106,696 | | | | 90,756 | | | | 91,221 | | | | 84,754 | |
Net income | | | 64,518 | | | | 54,676 | | | | 53,778 | | | | 50,289 | |
Earnings per share – basic | | | 0.65 | | | | 0.55 | | | | 0.54 | | | | 0.51 | |
Earnings per share – diluted | | | 0.65 | | | | 0.55 | | | | 0.54 | | | | 0.50 | |
| | | | | | | | | | | | | | | | |
| | | Quarter Ended | |
| | | Apr. 26,
2014(2) | | | Jan. 25,
2014(2) | | | Oct. 26,
2014(2) | | | Jul. 27,
2013 | |
Net sales | | $ | 1,102,077 | | | $ | 1,082,679 | | | $ | 998,834 | | | $ | 880,125 | |
Gross profit | | | 315,868 | | | | 311,461 | | | | 289,431 | | | | 281,518 | |
Operating income | | | 92,601 | | | | 96,651 | | | | 75,223 | | | | 81,281 | |
Net income | | | 55,671 | | | | 57,021 | | | | 42,028 | | | | 45,892 | |
Earnings per share – basic | | | 0.56 | | | | 0.56 | | | | 0.42 | | | | 0.45 | |
Earnings per share – diluted | | | 0.55 | | | | 0.56 | | | | 0.41 | | | | 0.45 | |
Revenues attributable to the acquisition of Animal Health International, Inc. are $403,580, $406,588, $414,028 and $171,922 for the quarters ended April 30, 2016, January 30, 2016, October 31, 2015 and August 1, 2015, respectively. Operating income attributable to the acquisition of Animal Health International, Inc. is $15,034, $9,827, $10,716 and $1,653 for the quarters ended April 30, 2016, January 30, 2016, October 31, 2015 and August 1, 2015, respectively.
|
| | | | | | | | | | | | | | | |
| | Quarter Ended |
| | April 30,
2016(1) | | January 30,
2016 | | October 31,
2015 | | August 1,
2015 |
| Net sales | $ | 1,453,770 |
| | $ | 1,400,853 |
| | $ | 1,389,210 |
| | $ | 1,142,870 |
|
| Gross profit | 363,741 |
| | 339,864 |
| | 330,899 |
| | 288,244 |
|
| Operating income from continuing operations | 106,344 |
| | 95,729 |
| | 83,463 |
| | 62,177 |
|
| Net income from continuing operations | 65,620 |
| | 57,190 |
| | 42,563 |
| | 20,311 |
|
| Net income (loss) from discontinued operations | — |
| | (750 | ) | | (7,142 | ) | | 9,392 |
|
| Net income | 65,620 |
| | 56,440 |
| | 35,421 |
| | 29,703 |
|
| Basic earnings (loss) per share: | | | | | | | |
| Continuing operations | $ | 0.69 |
| | $ | 0.60 |
| | $ | 0.43 |
| | $ | 0.20 |
|
| Discontinued operations | — |
| | (0.01 | ) | | (0.07 | ) | | 0.10 |
|
| Net basic earnings per share | $ | 0.69 |
| | $ | 0.59 |
| | $ | 0.36 |
| | $ | 0.30 |
|
| Diluted earnings (loss) per share: | | | | | | | |
| Continuing operations | $ | 0.68 |
| | $ | 0.60 |
| | $ | 0.43 |
| | $ | 0.20 |
|
| Discontinued operations | — |
| | (0.01 | ) | | (0.07 | ) | | 0.10 |
|
| Net diluted earnings per share | $ | 0.68 |
| | $ | 0.59 |
| | $ | 0.36 |
| | $ | 0.30 |
|
|
| | | | | | | | | | | | | | | |
| | Quarter Ended |
| | April 25,
2015 | | January 24,
2015 | | October 25,
2014 | | July 26,
2014 |
| Net sales | $ | 1,035,061 |
| | $ | 958,628 |
| | $ | 978,220 |
| | $ | 938,956 |
|
| Gross profit | 288,203 |
| | 262,442 |
| | 259,287 |
| | 250,617 |
|
| Operating income from continuing operations | 89,073 |
| | 77,377 |
| | 72,140 |
| | 65,996 |
|
| Net income from continuing operations | 53,459 |
| | 46,434 |
| | 41,865 |
| | 38,325 |
|
| Net income (loss) from discontinued operations | 11,059 |
| | 8,242 |
| | 11,913 |
| | 11,964 |
|
| Net income | 64,518 |
| | 54,676 |
| | 53,778 |
| | 50,289 |
|
| Basic earnings (loss) per share: | | | | | | | |
| Continuing operations | $ | 0.54 |
| | $ | 0.47 |
| | $ | 0.42 |
| | $ | 0.39 |
|
| Discontinued operations | 0.11 |
| | 0.08 |
| | 0.12 |
| | 0.12 |
|
| Net basic earnings per share | $ | 0.65 |
| | $ | 0.55 |
| | $ | 0.54 |
| | $ | 0.51 |
|
| Diluted earnings (loss) per share: | | | | | | | |
| Continuing operations | $ | 0.54 |
| | $ | 0.47 |
| | $ | 0.42 |
| | $ | 0.38 |
|
| Discontinued operations | 0.11 |
| | 0.08 |
| | 0.12 |
| | 0.12 |
|
| Net diluted earnings per share | $ | 0.65 |
| | $ | 0.55 |
| | $ | 0.54 |
| | $ | 0.50 |
|
| |
| (1) | During the fourthfirst quarter of fiscal 2015,2016, we incurred $4,645 of pre-tax transaction costs,$9,302, or $0.03$0.09 per diluted share from continuing operations on an after-tax basis, of transaction costs related to the June 16, 2015 acquisition of Animal Health International, andInc. Also during the potential sale of Patterson Medical. |
(2) | During the fourth, third and second quartersfirst quarter of fiscal 2014,2016, we incurred $7,404, $1,255 and $6,779approved a one-time repatriation of pre-tax restructuringapproximately $200,000 of foreign earnings. This one-time repatriation reduced the overall costs respectively,of funding the acquisition of Animal Health International, Inc. In addition, certain foreign cash at Patterson Medical was required to be repatriated as part of the sale transaction. The tax impact of the repatriation recorded during the first quarter of fiscal 2016 was $11,800, or $0.06, $0.01 and $0.07$0.12 per diluted per share respectively, related to our Medical segment.from continuing operations on an after-tax basis. |
18.
19. Accumulated Other Comprehensive
Income (Loss)Loss ("AOCL")
The following table summarizes
accumulated other comprehensive income (loss) atthe changes in AOCL as of April
25, 2015 and at April 24, 2014 and the activity for fiscal 2015: | | | | | | | | | | | | |
| | | Cash Flow
Hedges | | | Currency
Translation
Adjustment | | | Total | |
Accumulated other comprehensive income (loss) at April 26, 2014 | | $ | (6,223 | ) | | $ | 31,593 | | | $ | 25,370 | |
Other comprehensive income (loss) before reclassifications | | | (12,410 | ) | | | (73,271 | ) | | | (85,681 | ) |
Amounts reclassified from accumulated other comprehensive income (loss) | | | (35 | ) | | | — | | | | (35 | ) |
| | | | | | | | | | | | |
Accumulated other comprehensive income (loss) at April 25, 2015 | | $ | (18,668 | ) | | $ | (41,678 | ) | | $ | (60,346 | ) |
| | | | | | | | | | | | |
30, 2016:
|
| | | | | | | | | | | |
| | Cash Flow Hedges | | Currency Translation Adjustment | | Total |
| AOCL at April 25, 2015 | $ | (18,668 | ) | | $ | (41,678 | ) | | $ | (60,346 | ) |
| Other comprehensive loss before reclassifications | — |
| | (20,635 | ) | | (20,635 | ) |
| Amounts reclassified from AOCL | 1,934 |
| | 11,083 |
| | 13,017 |
|
| AOCL at April 30, 2016 | $ | (16,734 | ) | | $ | (51,230 | ) | | $ | (67,964 | ) |
The amounts reclassified from
accumulated other comprehensive income (loss)AOCL during fiscal
20152016 represent gains and losses on cash flow hedges, net of taxes of
$91.$883, and amounts reclassified related to the divestiture of Patterson Medical of $11,083. The
net impact to the consolidated statements of income was an increase to interest expense of
$56.19. Subsequent Events
On June 16, 2015, we completed the previously announced acquisition of Animal Health International, Inc., a leading production animal health distribution company in the U.S. This acquisition will more than double the size of Patterson’s veterinary business. The combined unit will offer a range of products and services to customers in the U.S., Canada and the U.K. Under terms of the definitive agreement, Patterson has acquired all of Animal Health International’s stock for $1,100,000 in cash. Animal Health International generated sales and earnings before interest, income taxes, depreciation and amortization of $1,500,000 and $68,000, respectively, during the 12 months ended March 2015.
We financed the acquisition through a combination of a $1,000,000 unsecured term loan and a $500,000 unsecured cash flow revolving line of credit. The initial interest rate under the credit agreement is LIBOR plus 200 basis points. In the event of certain significant asset dispositions, we have agreed to use the proceeds from such dispositions to effect prepayment of outstanding loan balances under the unsecured term loan and unsecured cash flow revolving line of credit.
The allocation of the purchase price for assets acquired and liabilities assumed is subject to completion of a formal valuation process and review by management, which has not yet been completed. We will finalize the purchase price allocation as soon as practicable within the measurement period, but in no event later than one year following the acquisition date. The results of operations of Animal Health International will be included in Patterson’s consolidated results of operations beginning June 17, 2015.
$2,817.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Item 9A. CONTROLS AND PROCEDURES
Management’s Annual Report on Internal Control Over Financial Reporting
The management of Patterson Companies, Inc. (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Our internal control system is designed to provide reasonable assurance to our management and Board of Directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Patterson’s internal control over financial reporting includes those policies and procedures that:Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of Patterson;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of Patterson are being made only in accordance with authorizations of management and directors; and
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those internal control systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Under the supervision and with the participation of our management, including our principal executive officer and principal financial and accounting officer, we assessed the effectiveness of our internal control over financial reporting as of April 25, 2015,30, 2016, using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) inInternal Control –- Integrated Framework(2013). Based on itsthis assessment, management has concluded that our internal control over financial reporting was effective as of April 25, 2015. During its assessment, management did not identify any material weaknesses in our internal control over financial reporting.30, 2016. Ernst & Young LLP, the independent registered public accounting firm that audited our consolidated financial statements included in Item 8,Financial Statements and Supplementary Data, of this Annual Report on Form 10-K, has issued an unqualified report on our internal control over financial reporting. On June 16, 2015, we acquired Animal Health International, Inc., which was a privately-held company prior to the acquisition. We are in the process of integrating Animal Health International, Inc.’s operations, and as permitted under SEC regulations, we have excluded the operations of Animal Health International, Inc. from the scope of our Sarbanes-Oxley Section 404 report on internal control over financial reporting for the fiscal year ended April 30, 2016. Animal Health International, Inc. is included within the Animal Health segment of our consolidated financial statements for the fiscal year ended April 30, 2016, including $1,432 million, $1,396 million, and $37 million of total assets, revenues, and operating income, respectively. We are in the process of evaluating Animal Health International, Inc.’s internal controls and implementing our internal control structure over the acquired operations, and we expect to complete this effort during fiscal 2017.
|
| |
| |
| /s/ Scott P. Anderson | |
| President and Chief Executive Officer |
|
| |
| /s/ Ann B. Gugino | |
Executive Vice President, Chief Financial Officer and Treasurer | |
The report of our independent registered public accounting firm on internal control over financial reporting is included in Item 8 of this Annual Report on Form 10-K.
Evaluation of Disclosure Controls and Procedures
As of April 25, 2015, we carried out an evaluation, under
Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, ofwe evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15 and 15d-15 of the Securities and Exchange Act of 1934 (the “Exchange Act”). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective.effective as of April 30, 2016. Disclosure controls and procedures are defined by Rules 13a-15(e) and 15d-15(e) of the Exchange Act as controls and other procedures that are designed to ensure that information required to be disclosed by Patterson in reports filed with the SEC under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in reports filed under the Exchange Act is
accumulated and communicated to our management, including our principal executive and principal financial officers, or
personpersons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
During the fourth quarter of fiscal year 2015, there
There were no
significant changes in our internal
controlscontrol over financial reporting
that occurred during the quarter ended April 30, 2016 that have materially affected, or are reasonably likely to materially affect, our internal
controlscontrol over financial reporting.
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information regarding the directors of Patterson is incorporated herein by reference to the descriptions set forth under the caption “Proposal No. 1 Election of Directors” in Patterson’s Proxy Statement for its Annual Meeting of Shareholders to be held on September
21, 201512, 2016 (the
“2015“2016 Proxy Statement”). Information regarding executive officers of Patterson is incorporated herein by reference to Item 1 of Part I of this Form 10-K under the caption “Executive Officers of the Registrant.” Information regarding compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated herein by reference to the information set forth under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in the
20152016 Proxy Statement. The information called for by Item 10, as to the audit committee and the audit committee financial expert, is set forth under the captions “Proposal No. 1 Election of Directors” and “Our Board of Directors and Committees” in the
20152016 Proxy Statement and such information is incorporated by reference herein.
We have adopted Principles of Business Conduct and Code of Ethics for our Chief Executive Officer, Chief Financial Officer, Directors and all employees. Our Code of Ethics is available on our website (www.pattersoncompanies.com) under the section “Investor Relations – Corporate Governance.” We intend to satisfy the disclosure requirement of Form 8-K regarding an amendment to, or waiver from, a provision of our Code of Ethics by posting such information on our website at the address and location specified above.
Item 11. EXECUTIVE COMPENSATION
Information regarding executive compensation and director compensation is incorporated herein by reference to the information set forth under the captions “Non-Employee Director Compensation,” “Executive Compensation” and “Our Board of Directors and Committees – Committee ResponsibilityResponsibilities – Our Compensation Committee and Its Report” in the 20152016 Proxy Statement.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information regarding the security ownership of certain beneficial owners and management is incorporated herein by reference to the information set forth under the captions “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” in the 20152016 Proxy Statement.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information called for by Item 13 is incorporated herein by reference to the information set forth under the captions “Certain Relationships and Related Transactions” and “Our Board of Directors and Committees” in the 20152016 Proxy Statement.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information relating to principal accounting fees and services and pre-approval policies and procedures is set forth under the caption “Proposal No.
43 Ratification of Selection of Independent Registered Public Accounting Firm – Principal Accountant Fees and Services” in the
20152016 Proxy Statement and such information is incorporated by reference herein.
PART IV
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(a) | 1. Financial Statements. |
1. Financial Statements.
The following Consolidated Financial Statements and supplementary data of Patterson and its subsidiaries are included in Part II, Item 8:
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
as of April 25, 2015 and April 26, 2014Consolidated Statements of Income and Other Comprehensive Income
for the Years Ended April 25, 2015, April 26, 2014 and April 27, 2013Consolidated Statement of Changes in Stockholders’ Equity
for the Years Ended April 25, 2015, April 26, 2014 and April 27, 2013Consolidated Statements of Cash Flows
for the Years Ended April 25, 2015, April 26, 2014 and April 27, 2013Notes to Consolidated Financial Statements
2. Financial Statement Schedules.
The following financial statement schedule is filed herewith: Schedule II – Valuation and Qualifying Accounts
for the Years Ended April 25, 2015, April 26, 2014 and April 27, 2013.Schedules other than that listed above have been omitted because they are not applicable or the required information is included in the financial statements or notes thereto.
|
| | |
Exhibit No.
| | Document Description
|
| Exhibit | | Document Description |
| | |
| 3.1 | | Restated Articles of Incorporation (incorporated by reference to our Quarterly Report onForm 10-Q, filed September 9, 2004 (File No. 000-20572)). |
| |
| | |
| 3.2 | | Amended and Restated Bylaws (incorporated by reference to our Current Report on Form 8-K, filed December 13, 2013 (File No. 000-20572)). |
| |
| 4.1 | | Specimen form of Common Stock Certificate (incorporated by reference to our Quarterly Report on Form 10-Q, filed September 9, 2004 (File No. 000-20572)). |
| |
| 10.1 | | Patterson Companies, Inc. Fiscal 20152016 Incentive Plan(filed herewith). |
| |
| 10.2 | | Patterson Companies Capital Accumulation Plan (incorporated by reference to our Definitive Proxy Statement, (filed on August 7, 1996 (File No. 000-20572))herewith).
|
| |
| 10.3 | | 2001 Non-Employee Director Stock Option Plan (incorporated by reference to our Annual Report on Form 10-K, filed on July 25, 2002 (File No. 000-20572)). |
| |
| 10.4 | | Patterson Companies, Inc. Amended and Restated Employee Stock Purchase Plan (incorporated by reference to our Definitive Proxy Statement, filed on August 7, 2012 (File No. 000-20572)). |
| |
| 10.5 | | Patterson Dental Company Amended and Restated Employee Stock Ownership Plan, effective May 1, 2001 (incorporated by reference to our Annual Report on Form 10-K, filed on July 25, 2002 (File No. 000-20572)). |
| |
| 10.6 | | Stock Option Plan for Canadian Employees, effective June 13, 2000 (incorporated by reference to our Quarterly Report on Form 10-Q, filed on March 11, 2003 (File No. 000-20572)). |
| | |
| | |
Exhibit No.
| | Document Description
|
| |
| 10.7 | | Deferred Profit Sharing Plan for the Employees of Patterson Dental Canada Inc. (incorporated by reference to our Definitive Proxy Statement, filed on July 28, 2008 (File No. 000-20572)). |
| | |
| 10.8 | | Patterson Companies, Inc. Amended and Restated Equity Incentive Plan (incorporated by reference to our Definitive Proxy Statement, filed on August 7, 2012 (File No. 000-20572)). |
| | |
| 10.9 | | Patterson Companies, Inc. 2014 Sharesave Plan (incorporated by reference to our Definitive Proxy Statement, filed on August 5, 2014 (File No. 000-20572)). |
| | |
| 10.10 | | 2015 Omnibus Incentive Plan (incorporated by reference to our Definitive Proxy Statement, filed August 7, 2015 (File No. 000-20572)). |
| | |
| 10.11 | | ESOP Loan Agreement dated April 1, 2002 (incorporated by reference to our Annual Report on Form 10-K, filed on July 24, 2003 (File No. 000-20572)). |
| | |
10.1110.12 | | Promissory Note dated April 1, 2002 between GreatBanc Trust Company, an Illinois corporation, not in its individual or corporate capacity, but solely as trustee of the Thompson Dental Company Employee Stock Ownership Plan and Trust and Thompson Dental Company (incorporated by reference to our Annual Report on Form 10-K, filed on July 24, 2003 (File No. 000-20572)). |
| | |
10.1210.13 | | ESOP Loan Agreement dated September 11, 2006 (incorporated by reference to our Current Report on Form 8-K, filed on September 12, 2006 (File No. 000-20572)). |
| |
10.13 | | |
| 10.14 | | ESOP Note dated September 11, 2006 (incorporated by reference to our Current Report onForm 8-K, filed on September 12, 2006 (File No. 000-20572)). |
| | |
10.1410.15 | | Note Purchase Agreement dated March 19, 2008 among Patterson Companies, Inc., Patterson Medical Holdings, Inc., Patterson Medical Supply, Inc., Patterson Dental Holdings, Inc., Patterson Dental Supply, Inc., Webster Veterinary Supply, Inc. and Webster Management, LP (incorporated by reference to our Current Report on Form 8-K, filed March 24, 2008 (File No. 000-20572)). |
| | |
10.1510.16 | | Credit Agreement, dated December 1, 2011, among Patterson Companies, Inc., and JPMorgan Chase Bank, N.A., The Bank of Tokyo-Mitsubishi UFJ, Ltd., and U.S. Bank NA, Wells Fargo Bank, NA, and Bank of America, N.A. (incorporated by reference to our Current Report on Form 8-K, filed December 6, 2011 (File No. 000-20572)). |
| | |
10.1610.17 | | Note Purchase Agreement, dated December 8, 2011, by and among Patterson Companies, Inc., Patterson Medical Holdings, Inc., Patterson Medical Supply, Inc., Patterson Dental Holdings, Inc., Patterson Dental Supply, Inc., Webster Veterinary Supply, Inc., Webster Management, LP (incorporated by reference to our Current Report on Form 8-K, filed December 12, 2011 (File No. 000-20572)). |
| | |
10.1710.18 | | Note Purchase Agreement, dated March 23, 2015, by and among Patterson Companies, Inc., Patterson Medical Holdings, Inc., Patterson Medical Supply, Inc., Patterson Dental Holdings, Inc., Patterson Dental Supply, Inc., Patterson Veterinary Supply, Inc., and Patterson Management, LP (incorporated by reference to our Current Report on Form 8-K, filed March 25, 2015 (File No. 000-20572)). |
| | |
10.1810.19 | | Commitment Letter, dated May 2, 2015, by and between Merrill Lynch, Pierce, Fenner & Smith Incorporated, Bank Of America, N.A., The Bank Of Tokyo-Mitsubishi UFJ, Ltd. and Patterson Companies, Inc. (incorporated by reference to our Current Report on Form 8-K, filed May 4, 2015 (File No. 000-20572)). |
| | |
10.1910.20 | | Credit Agreement dated as of June 16, 2015 by and among Patterson Companies, Inc., the lenders from time to time parties thereto, Bank of Tokyo-Mitsubishi UFJ, Ltd., as administrative agent, and Bank of America, N.A., as syndication agent (incorporated by reference to our Current Report on Form 8-K, filed June 17, 2015 (File No. 000-20572)). |
|
| | |
10.20 | | |
| 10.21 | | Amended and Restated Contract Purchase Agreement dated August 12, 2011 among PDC Funding Company II, LLC, Patterson Companies, Inc., and Fifth Third Bank (incorporated by reference to our Current Report on Form 8-K, filed August 16, 2011 (File No. 000-20572)). |
| | |
Exhibit No.
| | Document Description
|
| |
10.2110.22 | | Receivables Sale Agreement, dated as May 10, 2002, by and among Patterson Dental Supply, Inc., Webster Veterinary Supply, Inc., and PDC Funding Company, LLC (incorporated by reference to our Annual Report on Form 10-K, filed on July 25, 2002 (File No. 000-20572)). |
| |
10.22 | | |
| 10.23 | | Amended and Restated Receivables Sales Agreement dated August 12, 2011 by and among Patterson Dental Supply, Inc., Webster Veterinary Supply, Inc. and PDC Funding Company II, LLC( incorporated by reference to our Annual Report on Form 10-K, filed herewith)June 24, 2015 (File No. 000-20572)). |
| | |
10.2310.24 | | Third Amended and Restated Receivables Purchase Agreement dated December 3, 2010 between PDC Funding Company, LLC, Patterson Companies, Inc., The Bank of Tokyo-Mitsubishi UFJ, Ltd., New York Branch (the “Bank”) and a commercial paper conduit managed by the Bank (incorporated by reference to our Current Report on Form 8-K, filed December 8, 2010 (File No. 000-20572)). |
| | |
10.2410.25 | | Assignment and Assumption and Amendment No. 1 to Third Amended and Restated Receivables Purchase Agreement dated December 20, 2010, by and among The Bank of Tokyo-Mitsubishi UFJ, Ltd., Victory Receivables Corporation, PDC Funding Company, LLC, Patterson Companies, Inc., Royal Bank of Canada and Thunder Bay Funding, LLC (incorporated by reference to our Current Report on Form 8-K, filed December 23, 2010 (File No. 000-20572)). |
| | |
10.2510.26 | | Agreement and Plan of Merger, dated May 2, 2015, by and among Patterson Companies, Inc., Rams Merger Sub, Inc., Animal Health International, Inc. and Leonard Green & Partners, L.P. (incorporated by reference to our Current Report on Form 8-K, filed May 4, 2015 (File No. 000-20572)). |
| | |
| 10.27 | | Stock Purchase Agreement between Patterson Companies, Inc. and Lanai Holdings III, Inc. dated July 1, 2015 (incorporated by reference to our Current Report on Form 8-K, filed July 1, 2015 (File No. 000-20572)).
|
| | |
| 10.28 | | Employment Agreement between John Adent and Animal Health International, Inc., dated May 2, 2015 (filed herewith).
|
| | |
| 21 | | Subsidiaries(filed (filed herewith). |
| | |
| 23 | | Consent of Independent Registered Public Accounting Firm(filed (filed herewith). |
| | |
| 31.1 | | Certification of the Chief Executive Officer pursuant to Rules 13a-4(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(filed (filed herewith). |
| | |
| 31.2 | | Certification of the Chief Financial Officer pursuant to Rule 13a-4(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(filed (filed herewith). |
| | |
| 32.1 | | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)(filed herewith). |
| | |
| 32.2 | | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(filed (filed herewith). |
| | |
|
| | |
| 101 | | (Filed Electronically) The following financial information from our Annual Report on Form 10-K for fiscal 2015, filed with the SEC on June 24, 2015,2016, formatted in Extensible Business Reporting Language (XBRL): (i) the consolidated balance sheets, at April 25, 2015 and April 26, 2014, (ii) the consolidated statements of income, for the years ended April 25, 2015, April 26, 2014 and April 27, 2013, (iii) the consolidated statements of cash flows, for the years ended April 25, 2015, April 26, 2014 and April 27, 2013, (iv) the consolidated statements of changes in stockholders’ equity for the years ended April 25, 2015, April 26, 2014 and April 27, 2013 and (v) the notes to the consolidated financial statements.(*) |
| |
| (*) | The XBRL related information in Exhibit 101 to this Annual Report on Form 10-K shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document. |
(c) See Index to Exhibits.
Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
| | | |
| | PATTERSON COMPANIES, INC. |
| | |
Dated: June 24, 2015 29, 2016 | | By | | /s/ Scott P. Anderson |
| | | | Scott P. Anderson, |
| | | | President, and Chief Executive Officer and Chairman of the Board |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
| | | | |
| | | | | Date |
| | |
/s/ Scott P. Anderson Scott P. Anderson
| | President, and Chief Executive Officer and Chairman of the Board) (Principal Executive Officer & Chairman of the Board of Directors) | | June 24, 201529, 2016 |
| Scott P. Anderson | | | |
| | | | |
| /s/ Ann B. Gugino Ann B. Gugino
| | Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) | | June 24, 201529, 2016 |
| Ann B. Gugino | | | |
| | | | |
| /s/ John D. Buck John D. Buck
| | Director | | June 24, 201529, 2016 |
| John D. Buck | | | |
| | | | |
| /s/ Jody H. Feragen Jody H. Feragen
| | Director | | June 24, 201529, 2016 |
| Jody H. Feragen | | | |
| | | | |
| /s/ Sarena S. Lin Sarena S. Lin
| | Director | | June 24, 201529, 2016 |
| Sarena S. Lin | | | |
| | | | |
| /s/ Ellen A. Rudnick Ellen A. Rudnick
| | Director | | June 24, 201529, 2016 |
| Ellen A. Rudnick | | | |
| | | | |
| /s/ Neil A. Schrimsher Neil A. Schrimsher
| | Director | | June 24, 201529, 2016 |
| Neil A. Schrimsher | | | |
| | | | |
/s/ HaroldLes C. SlavkinHarold C. Slavkin
Vinney | | Director | | June 24, 201529, 2016 |
| | |
/s/ Les C. Vinney
Les C. Vinney
| | | |
| | | | |
| /s/ James W. Wiltz | | Director | | June 24, 201529, 2016 |
| | |
/s/ James W. Wiltz
James W. Wiltz
| | Director | | June 24, 2015 |
VALUATION AND QUALIFYING ACCOUNTS
PATTERSON COMPANIES, INC.
(In thousands) | | | | | | | | | | | | | | | | | | | | |
| | | Balance at
Beginning
of Period | | | Charged to
Costs and
Expenses | | | Charged
to Other
Accounts | | | Deductions | | | Balance at
End of
Period | |
Year ended April 25, 2015 | | | | | | | | | | | | | | | | | | | | |
Deducted from asset accounts: | | | | | | | | | | | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 9,873 | | | $ | 3,384 | | | $ | — | | | $ | 4,838 | | | $ | 8,419 | |
| | | | | | | | | | | | | | | | | | | | |
LIFO inventory adjustment | | $ | 74,607 | | | $ | 1,867 | | | $ | — | | | $ | — | | | $ | 76,474 | |
Inventory obsolence reserve | | | 8,663 | | | | 15,600 | | | | — | | | | 16,827 | | | | 7,436 | |
| | | | | | | | | | | | | | | | | | | | |
Total inventory reserve | | $ | 83,270 | | | $ | 17,467 | | | $ | — | | | $ | 16,827 | | | $ | 83,910 | |
| | | | | | | | | | | | | | | | | | | | |
Year ended April 26, 2014 | | | | | | | | | | | | | | | | | | | | |
Deducted from asset accounts: | | | | | | | | | | | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 5,808 | | | $ | 3,220 | | | $ | 3,552 | | | $ | 2,707 | | | $ | 9,873 | |
| | | | | | | | | | | | | | | | | | | | |
LIFO inventory adjustment | | $ | 70,415 | | | $ | 4,192 | | | $ | — | | | $ | — | | | $ | 74,607 | |
Inventory obsolence reserve | | �� | 6,333 | | | | 14,846 | | | | 391 | | | | 12,907 | | | | 8,663 | |
| | | | | | | | | | | | | | | | | | | | |
Total inventory reserve | | $ | 76,748 | | | $ | 19,038 | | | $ | 391 | | | $ | 12,907 | | | $ | 83,270 | |
| | | | | | | | | | | | | | | | | | | | |
Year ended April 27, 2013 | | | | | | | | | | | | | | | | | | | | |
Deducted from asset accounts: | | | | | | | | | | | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 7,831 | | | $ | 1,119 | | | $ | — | | | $ | 3,142 | | | $ | 5,808 | |
| | | | | | | | | | | | | | | | | | | | |
LIFO inventory adjustment | | $ | 66,808 | | | $ | 3,607 | | | $ | — | | | $ | — | | | $ | 70,415 | |
Inventory obsolence reserve | | | 5,456 | | | | 10,863 | | | | — | | | | 9,986 | | | | 6,333 | |
| | | | | | | | | | | | | | | | | | | | |
Total inventory reserve | | $ | 72,264 | | | $ | 14,470 | | | $ | — | | | $ | 9,986 | | | $ | 76,748 | |
| | | | | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | |
| | Balance at Beginning of Period | | Charged to Costs and Expenses | | Charged to Other Accounts | | Deductions | | Balance at End of Period |
| Year ended April 30, 2016 | | | | | | | | | |
| Deducted from asset accounts: | | | | | | | | | |
| Allowance for doubtful accounts | $ | 7,678 |
| | $ | 8,246 |
| | $ | 1,947 |
| | $ | 5,863 |
| | $ | 12,008 |
|
| LIFO inventory adjustment | $ | 73,381 |
| | $ | 3,120 |
| | $ | — |
| | $ | — |
| | $ | 76,501 |
|
| Inventory obsolescence reserve | 4,218 |
| | 15,547 |
| | 1,550 |
| | 14,694 |
| | 6,621 |
|
| Total inventory reserve | $ | 77,599 |
| | $ | 18,667 |
| | $ | 1,550 |
| | $ | 14,694 |
| | $ | 83,122 |
|
| Year ended April 25, 2015 | | | | | | | | | |
| Deducted from asset accounts: | | | | | | | | | |
| Allowance for doubtful accounts | $ | 8,322 |
| | $ | 2,546 |
| | $ | — |
| | $ | 3,190 |
| | $ | 7,678 |
|
| LIFO inventory adjustment | $ | 71,596 |
| | $ | 1,785 |
| | $ | — |
| | $ | — |
| | $ | 73,381 |
|
| Inventory obsolescence reserve | 3,498 |
| | 17,624 |
| | — |
| | 16,904 |
| | 4,218 |
|
| Total inventory reserve | $ | 75,094 |
| | $ | 19,409 |
| | $ | — |
| | $ | 16,904 |
| | $ | 77,599 |
|
| Year ended April 26, 2014 | | | | | | | | | |
| Deducted from asset accounts: | | | | | | | | | |
| Allowance for doubtful accounts | $ | 4,093 |
| | $ | 2,544 |
| | $ | 3,552 |
| | $ | 1,867 |
| | $ | 8,322 |
|
| LIFO inventory adjustment | $ | 67,187 |
| | $ | 4,409 |
| | $ | — |
| | $ | — |
| | $ | 71,596 |
|
| Inventory obsolescence reserve | 3,288 |
| | 12,642 |
| | 391 |
| | 12,823 |
| | 3,498 |
|
| Total inventory reserve | $ | 70,475 |
| | $ | 17,051 |
| | $ | 391 |
| | $ | 12,823 |
| | $ | 75,094 |
|
|
| | |
| Exhibit 10.1 | | Patterson Companies, Inc. Fiscal 20152016 Incentive PlanPlan. |
| | |
Exhibit 10.2210.2 | | Amended and Restated Receivables Sales Agreement dated August 12, 2011 by and among Patterson Dental Supply,Companies, Inc., Webster Veterinary Supply, Inc. and PDC Funding Company II, LLC. Capital Accumulation Plan. |
| | |
| Exhibit 10.28 | | Employment Agreement between John Adent and Animal Health International, Inc., dated May 2, 2015. |
| | |
| Exhibit 21 | | SubsidiariesSubsidiaries. |
| | |
| Exhibit 23 | | Consent of Independent Registered Public Accounting FirmFirm. |
| | |
| Exhibit 31.1 | | Certification of the Chief Executive Officer pursuant to Rules 13a-4(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 20022002. |
| | |
| Exhibit 31.2 | | Certification of the Chief Financial Officer pursuant to Rules 13a-4(a) and 15d-14(a), under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 20022002. |
| | |
| Exhibit 32.1 | | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 20022002. |
| | |
| Exhibit 32.2 | | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 20022002. |
| | |
| Exhibit 101 | | (Filed Electronically) The following financial information from our Annual Report on Form 10-K for fiscal 2015, filed with the SEC on June 24, 2015,2016, formatted in Extensible Business Reporting Language (XBRL): (i) the consolidated balance sheets, at April 25, 2015 and April 26, 2014, (ii) the consolidated statements of income, for the years ended April 25, 2015, April 26, 2014 and April 27, 2013, (iii) the consolidated statements of cash flows, for the years ended April 25, 2015, April 26, 2014 and April 27, 2013, (iv) the consolidated statements of changes in stockholders’ equity for the years ended April 25, 2015, April 26, 2014 and April 27, 2013 and (v) the notes to the consolidated financial statements.(*) |
| |
| (*) | The XBRL related information in Exhibit 101 to this Annual Report on Form 10-K shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document. |
90