Annual Report 2012
Marking 20 years of profitable
growth as a publicly-traded
value-added distributor
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20112012
About Patterson
Patterson Companies, Inc. (Nasdaq: PDCO) is a $3.5 billion value-added specialty distributor serving the dental,
companion-pet veterinary and rehabilitation markets.
Patterson Dental
• One of North America’s largest, full-service dental distributors
• Estimated 33% market share of estimated $6.8 billion market
• Virtually complete range of consumable supplies
• #1 distributor of dental equipment with nearly 50% market share
• The leading provider of CAD/CAM and digital technology equipment
• Extensive offerings of value-added services
• Industry’s largest sales force with over 1,500 field representatives
• Nearly 100 sales locations spanning U.S. and Canada
Webster Veterinary
• Leading national distributor of companion-pet veterinary supplies, equipment, software and pharmaceuticals
• Estimated 21% market share of $3.2 billion U.S. market
• Single-source, full-service capabilities
• Serves market with over 240 sales representatives in 18 branches nationwide
• Offers widest selection of consumables in industry
• Equipment, technical service and other value-added services
• Growing range of technology solutions
• Highest customer service rating in independent survey
Patterson Medical
• World’s #1 distributor of rehabilitation supplies, equipment and assistive living products
• Estimated 12% share of fragmented $5-$6 billion global market
• 3x-4x larger than nearest competitor
• Only single-source of supply and technical service in rehabilitation industry
• Global sales with operations in North America, U.K., France and Australia
• Owns/manufactures many leading brands
• Over 280 sales representatives in 18 branches
• Industry consolidator
Financial Highlights
(dollars in thousands, except per share amounts)
Fiscal Years
2012 2011 2010
Net sales
Gross profit
Operating income
Net income
Earnings per share-diluted
Cash and cash equivalents
Working capital
Total assets
Total long-term debt
Stockholders’ equity
$ 3,535,661
1,162,514
358,009
212,815
$ 1.92*
$ 573,781
873,865
2,739,368
725,000
1,375,202
$ 3,415,670
1,144,225
376,008
225,385
$ 1.89
$ 388,665
863,278
2,564,968
525,000
1,560,540
$ 3,237,376
1,089,401
355,291
212,254
$ 1.78
$ 340,591
785,407
2,422,969
525,000
1,441,511
* Includes incremental expense of $23 million or $0.13 per diluted share related to the Company’s Employee Stock Ownership Plan
(ESOP). See Item 7, Managment’s Discussion and Analysis of Financial Condition and Results of Operations, in fiscal 2012 Form 10-K.
Fiscal 2012
Sales Mix
Free Cash Flow
($ in millions)
Patterson Dental
$2.3 billion
65%
21% 14%
$292
$236
$226
$300
$200
$100
Webster Veterinary
$734 million
Patterson Medical
$513 million
$0
2010 2011 2012
Cash Returned to
Shareholders
($ in millions)
$400
$300
$200
$100
$0
$400
$149
$12
2010 2011 2012
1
To Our Shareholders
2012 marks Patterson’s twentieth year as a publicly-traded company. Back in 1992, Peter L. Frechette, then Patterson’s
president and chief executive officer and now chairman of the board, led the initial public offering of a company with
sales of $277 million, generated entirely by the U.S. dental supply market. Over the ensuing 20 years, Patterson added
companion-pet veterinary and rehabilitation distribution units to its line-up…built sustainable competitive advantages at
its units through a full-service, value-added business model…established leading positions in each of its served markets…
and ended fiscal 2012 with sales of over $3.5 billion. We are proud of this dynamic history, but more important than what
we have already accomplished is what Patterson will achieve going forward. And we are pleased to report that your
company is fully prepared… from the standpoint of people, strategies and financial strength…to fully capitalize upon the
growing array of opportunities facing our businesses. For this reason, we are confident of Patterson’s future as we move
deeper into the twenty-first century.
Financial Review
Consolidated sales totaled $3,535,661,000 for the fiscal year ended April 28, 2012, an increase of 4% from $3,415,670,000 in
fiscal 2011. The additional sales week in the first quarter of fiscal 2011, which made that year a 53-week period, negatively
affected fiscal 2012 sales growth by approximately two percentage points. Net income in fiscal 2012 of $212,815,000 or $1.92
per diluted share included incremental expense of $0.13 per diluted share related to our Employee Stock Ownership Plan or
ESOP. Excluding this expense, earnings were $2.05 per diluted share. Earnings in fiscal 2011 were $225,385,000 or $1.89 per
diluted share.
We repurchased approximately 12 million shares of our common stock in fiscal 2012 under our 25 million share buyback
authorization that expires in 2016. Roughly 11 million shares remain available for repurchase under this authorization. In
addition, Patterson’s quarterly cash dividend was increased 17% to $0.14 per share in March 2012, bringing the annual
dividend rate to $0.56 per share. Including share repurchases and quarterly dividends,
we returned over $400 million to our shareholders in fiscal 2012, reflecting our ongoing
commitment to generate value for our owners.
Paul A. Guggenheim,
President Patterson Dental
Substantial potential exists for our technology
offerings, and our highly trained field sales
force will continue to drive the trend toward
digital dentistry by educating practitioners
about the manifold benefits of new technology
equipment.
Patterson Dental
Sales of Patterson Dental, our largest business, increased
moderately to $2.3 billion in fiscal 2012 as the sluggish
North American economy presented this unit with a
challenging operating environment. Even so, sales of
consumable supplies increased every quarter, with
patient levels steadily increasing throughout the year.
We view this pattern as an indication of the gradual
Becomes a publicly traded company
sales of $277 million
Enters Canadian dental supply market
with Healthco Canada acquisition
Acquires EagleSoft Inc.
(dental practice software)
2
199219931997 strengthening of the dental market. Reflecting this progress,
sales of digital technology equipment posted significant
sales gains in the second half of the year. This was particularly
true of our CEREC® line of dental restorative products, which
registered strong double-digit sales growth during this
period.
The digitization of dentistry represents a profound and
ongoing trend sweeping through the dental market. The
growing clinical acceptance of our industry-leading range of
digital technology offerings is based upon the recognition
that these products enable dentists to strengthen their
productivity, generate additional income and improve
clinical outcomes. However, digitization is still at an early
stage. We estimate that fewer than 50% of North American
dental offices have deployed digital x-rays, while the market
penetration of CEREC technology is only about 13% and
that of cone beam 3D systems is less than 5%. As a result,
substantial upside potential exists for our technology
offerings, and our highly trained field sales force will continue
to drive the digitization trend by educating dentists about the manifold benefits of technology for their practices.
The growing clinical acceptance of our industry-leading range of digital technology
offerings is based upon the recognition that these products enable dentists to
strengthen their productivity, generate additional income and improve clinical
outcomes.
Reflecting this emphasis, we opened a new 100,000-square-foot facility for our Patterson Technology Center (PTC) in the
second quarter. Serving all three of our businesses, the PTC provides software development, integration and customer
support services for the technology investments that our customers are making in their practices. Our new state-of-the-art
facility is allowing us to achieve an even higher level of service for our customers by providing the PTC staff with the tools
Dental Technology
Sales Growth
(in millions)
$500
$400
$300
$200
$100
$0
$498
$455
$422
2010 2011 2012
and functionality required for maximizing the technology investments of our customers.
For this reason, we believe the PTC provides Patterson with an unparalleled competitive
advantage. In another strategic development, Sirona, the manufacturer of CEREC systems
and Schick® digital sensors, and unargued leader in dental digital technology, recently
expanded our exclusive North American marketing agreement to include its complete
product line, including digital panoramic and cone beam x-rays. This move further
strengthens Patterson’s leadership position in the distribution of dental technology and
other equipment.
Technology is also playing an important role in Patterson’s consumables business. During
the past year, we deployed new customer service and order management systems to
better support the growth of this business and address the changing needs of our dental
customers. We also developed an updated Patterson Dental web site and launched a social
media initiative, both designed to facilitate product knowledge and ordering. In addition,
we opened our fifth consolidated distribution center for handling the products of our three
businesses. This ongoing, multi-year consolidation process should allow us to double our
overall consumables business without significant additional investments in distribution
capacity.
Reaches $1 billion in sales
Acquires J. A. Webster, Inc.
(Webster Veterinary)
Establishes
Patterson Technology Center
3
200020012002
Webster Veterinary
We were very encouraged by Webster Veterinary’s strong year.
Sales increased 9% to $734 million in fiscal 2012, reflecting solidly
improved sales of both consumables and equipment. To further
strengthen its market position, Webster acquired American
Veterinary Supply Corporation (AVSC) in August 2011, a full-
service veterinary distributor located on Long Island that served
approximately 2,000 companion-pet veterinary practices and
hospitals in the New York metropolitan area. AVSC, which had
sales of approximately $25 million at the time of its acquisition, is
now operating as Webster’s eighteenth branch office.
George L. Henriques,
President Webster Veterinary
Webster’s strong emphasis on
technology will help drive our future
growth by enhancing the profitability
and productivity of veterinary practices,
forging stronger relationships between
pet owners and veterinarians, and
improving clinical outcomes.
Since pets are considered part of the family in many households,
owners are spending more on pet health care, products and services. To strengthen the productivity of veterinary
practices and enable veterinarians to meet the growing needs and expectations of their customers, Webster is offering an
expanding range of new technologies as a key component of its full-service platform.
Intravet® is a leading brand of practice management software for veterinary offices.
Through the ePetHealth™ portal, which was acquired in fiscal 2011, customers of
veterinarians have 24/7 access to their pets’ medical records as well as to our DIA®
(Diagnostic Imaging Atlas), an advanced 3D education tool that provides detailed
information about pet health issues and treatment options. In addition, clients can
place orders with their veterinarian for medications through ePetHealth, which has
been integrated into the home delivery service of VetSource®, in which Patterson
holds an equity investment. VetSource also has been integrated into EquiHealth®, a
recently launched Internet portal that enables the clients of veterinarians to access
equine medical information as well as descriptive, easy-to-understand resources and
educational materials with 3D graphics. During the past year, Webster also started
providing technical service for veterinary equipment in 14 markets, with the goal of
extending this value-
added capability to 35
markets by the end of
fiscal 2013.
Webster Equipment and
Technology Sales
(in millions)
2010 2011 2012
$30
$20
$10
$40
$0
$38
$34
$29
Webster’s strong emphasis on technology will help
drive future growth by enhancing the profitability and
productivity of veterinary practices, forging stronger
relationships between pet owners and veterinarians, and
improving clinical outcomes. We believe Webster’s near
and longer-term prospects are highly positive.
Since pets are considered part of the family in many households, owners are
spending more on pet health care, products and services.
Acquires AbilityOne Products Corp.
(Patterson Medical)
Starts to consolidate distribution
Attains $2 billion in sales
North American CEREC exclusivity
with Sirona extended to 2017
4
200320042005 Patterson Medical
Sales Growth
(in millions)
$600
$500
$400
$300
$200
$100
$0
$505
$513
$426
$138
$149
$85
2010 2011 2012
Total Sales
International Sales
Patterson Medical
Sales of Patterson Medical
increased 2% to $513 million
in fiscal 2012. While sales of
consumable supplies were
at planned levels during the
year, the unit’s equipment
business was adversely
affected by uncertainties
caused by proposed
changes in the U.S. health
care system. We believe this
situation will likely persist
until these uncertainties are
resolved.
The rapid growth of the over-65 age population, which is
forecasted to hit the one billion mark by 2030, is fueling
the growth of the global rehabilitation market.
The rapid growth of the over-65 age population, which is forecasted to hit the one billion
mark by 2030, is fueling the growth of the global rehabilitation market. To capitalize
upon this large and growing opportunity, Patterson Medical embarked on an expanded
global strategy in 2009 with the acquisition of Mobilis Healthcare Group, one of the U.K.’s leading value-added distributors
of physical therapy, sports medicine and podiatry products. This was followed in 2010 by acquiring DCC Healthcare’s
rehabilitation businesses, leading providers of assistive living products and rehabilitation equipment and supplies in the U.K.,
continental Europe, Australia and New Zealand. Then, in April 2012, Patterson Medical acquired Australian-based Surgical
Synergies Pty Ltd., a distributor of physiotherapy, rehabilitation and mobility products that has strengthened our positions in
the Australian and New Zealand markets.
To support its global business strategy, Patterson Medical has launched an initiative that will bring greater uniformity and
consistency to all of its products across the unit’s entire spectrum of global markets. This strategy, which encompasses such
areas as sourcing, quality control, packaging and national regulatory requirements, will result in enhanced efficiencies and a
strengthening of the Patterson Medical brand.
As the industry’s only full-service, value-added distributor, Patterson
Medical is uniquely positioned to take maximum advantage of the
favorable demographic trends driving the global rehabilitation
market. For this reason, we are optimistic about Patterson Medical’s
long-term future.
David P. Sproat,
President Patterson Medical
As the industry’s only full-service, value-
added distributor, Patterson Medical is
uniquely positioned to take maximum
advantage of the favorable demographic
trends driving the global rehabilitation
market.
Establishes Patterson Medical
branch system
Webster Veterinary acquires Columbus Serum
Company Reaches $3 billion in sales
Patterson Medical expands global
strategy with Mobilis acquisition
5
200620082009 Looking Ahead
We are optimistic that fiscal 2013 should be another year of
improved sales and earnings for Patterson, as each of our
businesses is forecasted to grow faster than their served
markets.
Scott P. Anderson
President and Chief Executive
Officer
We expect the North American dental market to continue
strengthening, which is contributing to our favorable
outlook for both dental consumables and equipment.
Equally important, Patterson Dental’s sales force will
continue to drive the evolution toward digital dentistry
by educating dentists about the productivity enhancing
and clinical benefits of our industry-leading technology
offerings. To enable companion-pet veterinarians to meet
the growing needs of pet owners, Webster will continue
to focus on productivity-boosting technology solutions as
well as further expanding its equipment offerings and service capabilities. Although
Patterson Medical’s equipment business will likely be affected by uncertainties in the
U.S. health care market, this unit should continue gaining share from its competitors
by taking optimum advantage of its global reach and full-service capabilities.
Through the increased sales that we are forecasting in fiscal 2013 and our strong
focus on expense control, we believe we can attain our goal for improving operating
margins during the coming year. We also intend to continue generating value for our
shareholders in the form of cash dividends and opportunistic share repurchasing, but the first priority of our strong
operating cash flows will remain investing in our businesses, internally and through strategic acquisitions.
R. Stephen Armstrong
Executive Vice President and
Chief Financial Officer
As always, we extend our sincere thanks to our outstanding employees for their dedicated efforts on behalf of our
customers. We also appreciate the continued support of our shareholders, customers and vendor business partners.
Sincerely,
Scott P. Anderson
President and Chief Executive Officer
Quarterly cash dividend instituted
Invests in new facility for
Patterson Technology Center
Sales cross $3.5 billion mark
6
201020112012 Selected Consolidated Financial and Operating Data
(dollars and shares outstanding amounts in thousands, except per share amounts)
Statement of Operations Data:
Net sales
Cost of sales
Gross margin
Operating expenses
Operating income
Other expense – net
2012
2011
2010
2009
2008
Fiscal Years
$3,535,661
2,373,147
1,162,514
804,505
358,009
(28,197)
$3,415,670
2,271,445
1,144,225
768,217
376,008
(20,121)
$3,237,376
2,147,975
1,089,401
734,110
355,291
(16,250)
$3,094,227
2,050,703
1,043,524
697,298
346,226
(26,575)
$2,998,729
1,967,004
1,031,725
672,522
359,203
(1,775)
Income before income taxes
Income taxes
329,812
116,997
355,887
130,502
339,041
126,787
319,651
120,016
357,428
132,570
Net income
$ 212,815
$ 225,385
$ 212,254
$ 199,635
$ 224,858
Diluted earnings per share
$ 1.92
$ 1.89
$ 1.78
$ 1.69
$ 1.69
Weighted average shares and potentially
dilutive shares outstanding
110,846
119,066
119,202
118,355
132,910
Dividends per share
$ 0.50
$ 0.42
$ 0.10
—
—
Balance Sheet Data:
Working capital
Total assets
Total debt
Stockholders’ equity
Operating Data:
(as of fiscal year-end)
Number of sales representatives
Number of employees
Number of service technicians
$ 873,865
2,739,368
850,000
1,375,202
$ 863,278
2,564,968
525,000
1,560,540
$ 785,407
2,422,969
525,000
1,441,511
$ 603,295
2,133,620
547,000
1,186,320
$ 518,974
2,076,373
655,034
1,004,787
2,075
7,059
1,057
2,045
7,116
1,047
1,977
6,890
1,108
1,934
7,018
1,137
1,998
6,857
1,217
See the Notes to the Consolidated Financial Statements included in Item 8. of the Annual Report on Form 10-K.
Market Information
The Company’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 the
Company’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.
Fiscal 2012
High
Low
1st Quarter $36.93 $30.43
2nd Quarter $32.66 $26.19
3rd Quarter $32.36 $27.48
4th Quarter $34.03 $30.45
Dividends
$0.12
$0.12
$0.12
$0.14
Fiscal 2011
High
Low
Dividends
1st Quarter $32.22 $24.13
2nd Quarter $29.02 $24.88
3rd Quarter $33.29 $27.54
4th Quarter $34.80 $30.42
$0.10
$0.10
$0.10
$0.12
Unaudited Quarterly Results
(In thousands, except per share amounts)
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 first quarter of fiscal 2011, which included 14 weeks. The following table summarizes results for fiscal 2012 and 2011.
Quarter
Net sales
Gross profit
Operating income
Fourth
$936,334
313,721
102,851
Fiscal 2012
Third
Second
First
Quarter
$895,030
289,534
89,906
$856,875
280,983
83,259
$847,422
278,276
81,993
Net sales
Gross profit
Operating income
Fourth
$883,819
303,949
104,125
Fiscal 2011
Third
Second
First
$824,650
280,875
92,707
$857,414
279,201
90,152
$849,787
280,200
89,024
Net income
62,143
53,108
48,954
48,610
Net income
62,707
55,396
53,357
53,925
Earnings per share
basic
diluted
$ 0.59
$ 0.58
$ 0.50
$ 0.50
$ 0.43
$ 0.43
$ 0.42
$ 0.42
Earnings per share
basic
diluted
$ 0.52
$ 0.52
$ 0.47
$ 0.47
$ 0.45
$ 0.45
$ 0.45
$ 0.45
7
Corporate Headquarters
1031 Mendota Heights Road
St. Paul, MN 55120-1419
651/686-1600
www.pattersoncompanies.com
Independent Auditors
Ernst & Young LLP
Minneapolis, MN
Legal Counsel
Briggs and Morgan, P.A.
Minneapolis, MN
Stock Transfer Agent
and Registrar
Wells Fargo Bank, N.A.
Mendota Heights, MN
Investor Relations Counsel
Equity Market Partners
Amelia Island, FL
Annual Meeting
The annual meeting of shareholders will
be held at 4:30 p.m. on September 10,
2012 at the corporate headquarters, 1031
Mendota Heights Road, St. Paul, MN
Form 10-K
A copy of our annual report on
Form 10-K is available to
shareholders without charge in the
investor relations section of the Patterson
website
(www.pattersoncompanies.com)
or by writing to: R. Stephen Armstrong,
Executive Vice President and Chief
Financial Officer
Directors
Scott P. Anderson
President and Chief Executive Officer
Patterson Companies, Inc.
Executive Officers
Peter L. Frechette
Chairman
Scott P. Anderson
President and Chief Executive Officer
R. Stephen Armstrong
Executive Vice President, Chief Financial
Officer and Treasurer
Corporate Officers and
Officers of Operating Units
Ann B. Gugino
Vice President
Strategy and Planning
Ranell M. Hamm
Vice President
Chief Information Officer
Matthew L. Levitt
Secretary and General Counsel
Jerome E. Thygesen
Vice President
Human Resources
Paul A. Guggenheim
President
Patterson Dental
George L. Henriques
President
Webster Veterinary
David P. Sproat
President
Patterson Medical
John D. Buck (1), (3)
Chief Executive Officer
Whitefish Ventures, LLC
Jody H. Feragen (1), (3)
Executive Vice President and
Chief Financial Officer
Hormel Foods Corp.
Peter L. Frechette
Chairman
Patterson Companies, Inc.
Andre B. Lacy (2), (3)
Chairman
LDI Ltd., LLC
Charles Reich (2), (3)
Executive Vice President (retired)
3M Company
Ellen A. Rudnick (2), (3)
Executive Director
Michael P. Polsky Center for
Entrepreneurship
University of Chicago
Booth School of Business
Dr. Harold C. Slavkin (1), (3)
Professor of Dentistry and
former Dean
School of Dentistry
University of Southern California
Brian S. Tyler, Ph.D. (2), (3)
President
McKesson U.S. Pharmaceutical
Division of McKesson Corporation
Les C. Vinney (2), (3)
Former President and
Chief Executive Officer
STERIS Corporation
James W. Wiltz
President and Chief Executive Officer
(retired)
Patterson Companies, Inc.
(1) Member of Audit Committee
(2) Member of Compensation Committee
(3) Member of Governance Committee
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended April 28, 2012
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-20572
PATTERSON COMPANIES, INC.
(Exact name of registrant as specified in its charter)
Minnesota
(State or other jurisdiction of
incorporation or organization)
41-0886515
(I.R.S. Employer
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: Common Stock, par value $.01
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. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act
Yes No
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. Yes 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). Yes 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
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 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
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 29, 2011, was approximately $3,447,000,000. (For purposes of this
calculation all of the registrant’s officers, directors, presidents of operating units and 10% owners known to Patterson are deemed
affiliates of the registrant.)
As of June 22, 2012, there were 110,248,829 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 28, 2012 are incorporated by reference into Part III.
FORM 10-K INDEX
Page
PART I .................................................................................................................................................................................................
Item 1. BUSINESS ....................................................................................................................................................................
Item 1A. RISK FACTORS ...........................................................................................................................................................
Item 1B. UNRESOLVED STAFF COMMENTS ........................................................................................................................
Item 2.
PROPERTIES................................................................................................................................................................
Item 3.
LEGAL PROCEEDINGS..............................................................................................................................................
Item 4. MINE SAFETY DISCLOSURES .................................................................................................................................
3
3
21
24
24
26
26
PART II ................................................................................................................................................................................................ 27
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES ............................................................................................. 27
SELECTED FINANCIAL DATA............................................................................................................................... 29
Item 6.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS........................................................................................................................................................ 30
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ........................................... 38
Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................................................................ 39
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE........................................................................................................................................................ 64
Item 9A. CONTROLS AND PROCEDURES............................................................................................................................ 64
Item 9B. OTHER INFORMATION ........................................................................................................................................... 65
PART III .............................................................................................................................................................................................. 66
66
66
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE ........................................................
Item 11. EXECUTIVE COMPENSATION...................................................................................................................................
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS ................................................................................................................
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.............
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES .................................................................................................
66
66
66
PART IV .............................................................................................................................................................................................. 67
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES .......................................................................................... 67
SIGNATURES...................................................................................................................................................................................... 70
SCHEDULE II ...................................................................................................................................................................................... 71
INDEX TO EXHIBITS......................................................................................................................................................................... 72
2
Item 1.
BUSINESS
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 Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—
Factors that May Affect Future Operating Results, 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.
General
Patterson is a value-added distributor serving three major markets:
• North American dental supply;
• U.S. companion animal (dogs, cats and other common household pets) and equine 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 the dental supply business of a subsidiary of The Beatrice Companies, Inc. 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 retained 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, Webster Veterinary and Patterson Medical.
Our three reportable segments, dental supply, veterinary supply and rehabilitation supply, are strategic business units that offer
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.
Dental Supply
Overview
As Patterson’s largest business, Patterson Dental is one of the two largest distributors of dental products in North America. Our
dental business has operations in the United States and Canada. Patterson Dental, a full-service, value-added supplier to dentists,
dental laboratories, institutions, and other healthcare professionals, provides consumable products (including x-ray film, restorative
materials, hand instruments 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 including more than 96,000 stock keeping units (“SKUs”) of which approximately 5,000 are private-label products
sold under the Patterson brand. Patterson 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 1,500 direct sales representatives, of which approximately 300 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 $2.3 billion in fiscal 2012 and profitability has
increased from an operating loss in fiscal 1986 to operating income of $246.7 million in fiscal 2012.
We estimate the dental supply market we serve to be approximately $6.8 billion annually and that our share of this market is
approximately 33%. The underlying structure of the dental supply market consists of a sizeable geographically dispersed number of
fragmented dental practices and is attractive for our Company’s role as a value-added, full-service distributor. According to the
American Dental Association, there are over 186,000 dentists practicing in the United States. According to the Canadian Dental
Association, there are approximately 20,000 licensed dentists in Canada. The average general practitioner generated approximately
$728,000 in annual revenue in 2009, while the average specialty practitioner produces about $1,005,000. We believe that most dentists
use between 5% and 7% of their annual revenue to purchase consumable supplies used in the daily operations of their practice. This
translates into between $36,000 and $51,000 of supplies purchased by the average practice each year. We believe the average dental
practitioner purchases about 40% of their supplies from their top supplier.
3
Total expenditures for dental services in the United States increased from $31 billion in 1990 to $104.8 billion in 2010. We
believe that the demand for dental services, equipment and supplies will continue to be influenced by the following factors:
• Demographics. The U.S. population grew from 235 million in 1980 to 309 million in 2010, 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 100,000 persons 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 objective is to remain a leading national distributor of supplies, equipment and related services in the market while
continuing to improve our profitability and enhance our value to customers. To achieve this objective, we have adopted a strategy of
emphasizing our 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 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 systems designed to meet the varying needs of our customers. We believe that computerized order entry systems help
establish relationships with new customers and increase loyalty among existing customers by permitting customers to place orders
from their offices directly to Patterson Dental 24 hours a day, seven days a week.
Today we offer four convenient ordering systems to the dental supply segment, eMAGINE®, REMOSM, PDXpress® and
www.pattersondental.com, which we launched in fiscal 2012 to provide our customers with better search capabilities, easier access to
their order history, customized purchase reports, and fingertip access to Patterson Advantage, the segment’s customer loyalty program.
Customers, as well as our sales force, use these systems. Over the years, the number of orders transmitted electronically has grown
steadily to approximately 74% of our consumable dental product volume or $960 million in fiscal year 2012. 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 customers and to call on additional customers.
4
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-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 radiography. This technology, which we
expect to install in most dental offices, has a current market penetration of approximately 50%. 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 with digital information from the clinical x-ray, intra-oral
camera, CEREC® system and other digital equipment. Patterson Dental offers our EAGLESOFT® practice management software at no
cost to customers with a subscription to support services. The local sales branch, in conjunction with the PTC, will network the digital
x-ray system throughout the entire office, offers all required custom computer hardware for the system, and provides installation and
customer training. The PTC has a call center that troubleshoots customer problems and arranges for local service when needed.
Software and digital radiography customers also have access to the PTC’s support capabilities. The PTC provides support for
Patterson’s proprietary products as well as select branded product from manufacturers, 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 service 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 2012, 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 opening additional sales offices,
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. 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 October 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 July 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 and are located in Effingham, Illinois. In December 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.
5
•
•
In May 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 December 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 believe 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:
Consumable and printed products ........................................................................................
Equipment and software .......................................................................................................
Other (1)..................................................................................................................................
Total ............................................................................................................................
2012
55%
34
11
100%
2011
56%
33
11
100%
2010
56%
34
10
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); 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 own 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 margins for Patterson.
Printed Office Products. Patterson Dental, through Patterson Office Supplies (POS) 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. We offer a wide range
of dental equipment products including radiography equipment, high and low-speed hand pieces, 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 tools to improve productivity 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 line 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.
6
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, 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 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, hardware and networking. The goal of this
group, which is comprised of both local service technicians and the PTC, is to help customers integrate 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 2012, we originated approximately $287.6 million of
equipment finance contracts in the United States. Patterson Dental, or our third party vendor, financed approximately 42% of the
equipment purchased by our customers during fiscal 2012.
Since November 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. Currently this service is provided by Wells Fargo Practice
Finance, a division of Wells Fargo Bank N.A. Patterson receives referral fees under this agreement, and Wells Fargo extends credit
and services the accounts.
Patterson Dental 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 28,
2012, 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 $75 million.
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 16% 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 2012, Patterson Dental sold products or services to over 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 1% of sales during fiscal 2012, 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.
7
Patterson Dental has over 90 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, 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 approach 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 over 35,000 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 90 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. We have a program to effectuate electronic data interchange (EDI) with our major vendor partners. In fiscal 2012, we
processed approximately 63% of our invoices from dental vendors using EDI capabilities. In addition, approximately 67% of our
dental purchase order volume was conducted through EDI. Utilizing EDI 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 product. We are also the only national dealer for A-dec equipment,
including chairs, units and cabinetry. A-dec Inc., is the largest manufacturer of dental equipment in the U.S.
8
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 45% and 43% of the cost of dental products sold in both fiscal 2012 and 2011. Of these ten, the top two
vendors accounted for 13% and 11% of both fiscal 2012 and fiscal 2011 cost of sales, respectively.
Competition
The highly competitive U.S. dental products distribution industry consists principally of national, regional and local full-service
and mail-order distributors. The dental supply market is extremely fragmented. In addition to Patterson Dental and one other national,
full-service firm, Sullivan-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, some manufacturers sell directly to end users.
We approach our 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, experienced
service technicians, an extensive breadth and mix of products and services, accurate and timely delivery of product, strategic location
of sales offices and distribution centers, and competitive pricing.
Patterson Dental also experiences competition in Canada in the dental supply market. The principal competitor is a national,
full-service dental distributor, Henry Schein Ash Arcona, a unit of Henry Schein, Inc. We believe we compete in Canada on
essentially the same basis as in the United States.
Veterinary Supply
Overview
Webster Veterinary, or “Webster”, is a leading distributor of veterinary supplies primarily to companion-pet (dogs, cats and
other common household pets) and equine veterinary clinics across the United States. Webster provides products and services used for
the diagnosis, treatment and/or prevention of diseases in companion animals and equine. Originally founded in 1946 and
headquartered in Massachusetts, Webster has developed a strong brand identity as a value-added, full-service distributor with a
comprehensive offering of pharmaceuticals, vaccines, parasiticides, diagnostics, veterinary diets, nutritionals, consumable supplies,
equipment, and software. Webster’s product offering, totaling more than 36,000 items, is sold by approximately 214 field sales
representatives.
Net sales by Webster in fiscal 2012 were $734.4 million and operating income totaled $38.8 million. In addition to our core
business of distributing veterinary products, Webster has a significant agency commission business with several pharmaceutical
manufacturers. Under the agency relationships, Webster receives orders for products from customers, transmits these orders to
vendors who then pick, pack, and ship the products. These vendors then invoice and collect payment from our customers. Webster
receives a commission payment for soliciting the order and for providing other customer service activities. The agency commissions
that Webster earns range from 3% to 6%, a portion of which is shared with the field sales and customer service representatives.
Webster’s agency commissions accounted for less than 1% of our net sales in fiscal 2012.
We estimate the market for pharmaceuticals and supplies sold to companion animal and equine veterinarians through
distribution is approximately $3.2 billion on an annual basis. Based upon the estimated $3.2 billion market, 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, 2011, according to the American Veterinary Medical Association, or AVMA, there were more than
63,000 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 $120,000 and $140,000
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 consumables by
the veterinary practice is noticeably higher than that of the dental practitioner due predominately to pharmaceutical products, which
are administered and dispensed by veterinarians.
Historically, the demand for veterinary services 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. Today, the percentages of U.S. households owning dogs, cats and
horses are 46.3%, 38.9%, and 2.4%, respectively.
Veterinary expenditures per household. The amount pet owners are willing to spend caring for their pets is increasing
substantially. The American Pet Products Manufacturers Association estimates that pet owners will spend $53 billion in
2012 to care for the American pet population, a significant increase compared to $41.2 billion spent in 2007.
•
9
•
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.
Strategy
Webster’s objective is to build a leading national position in the companion animal veterinary market 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 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 Webster is well positioned to take advantage of expected continued consolidation in the veterinary distribution market.
Over the past 10 years Webster has made a number of acquisitions, including the following:
Veterinary distribution acquisitions
•
•
Since 2004, Webster 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 specializing in the U.S. equine veterinary
supply market, and selected local and specialty distributors. Most recently, in August 2011, Webster 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 practices and hospitals in the New York
metropolitan area.
In April 2010, Webster 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.
Software Acquisitions
•
•
•
In December 2005, Webster acquired Intra Corp., one of the nation’s leading developers of veterinary practice
management software that is marketed under the INTRAVET® brand name. INTRAVET® had more than 1,600 software
installations nationwide.
In October 2008, Webster 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 January 2011, Webster acquired ePet Records, LLC. Rebranded as ePETHEALTH™, this 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. Webster 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. Webster’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, client education and communication software, and our
home delivery service offering. Our experienced service technicians perform equipment installation, maintenance and repair services,
including service on products or equipment not purchased through Webster.
Continuing to Improve Operating Efficiencies. Webster 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.
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In June 2011, Webster 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.
Expanding our Services. Webster continuously seeks to broaden our service offerings to maximize sales opportunities within
our existing customer base while strengthening and enhancing practice and pet health.
Technical Service. In October 2011, Webster launched onsite preventative maintenance and repair services in select markets
covering a wide range of equipment. Our experienced service technicians perform equipment installation, maintenance and repair
services including services on products not purchased through Webster.
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. Our premier client education software for companion animal and equine practices. Provides over 3,000 illustrations,
animations, clinical images, radiographs and other diagnostic images cover a wide range of medical conditions. Additionally, DIA
Reception provides high definition footage and animations to better explain common pet health issues conditions to pet owners.
Webster 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.
Webster Veterinary University. Webster’s exclusive training course for veterinary office managers and veterinarians provides
practice management tools and solutions with four in-depth courses covering human resources, inventory, marketing, and finance.
Additionally, a program has been developed for veterinary hospital receptionists.
Dental Wet Labs. Webster offers dental wet labs throughout the United States providing approved continuing education credits
to attendees through lecture and hands-on labs for companion animal dental techniques.
National Handpiece Repair. In February 2012, we launched Webster’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 to
veterinary segment customers:
Consumable and printed products ...........................................................................................
Equipment and software ..........................................................................................................
Other ........................................................................................................................................
Total ...............................................................................................................................
93%
5
2
100%
2012
2011
94%
5
1
100%
2010
94%
5
1
100%
Consumable and Printed Products
Webster offers our customers a broad selection 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. Many of the office supply products sold by Patterson Office
Supplies are also offered to the veterinary supply market.
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Equipment and Software
Veterinary Equipment. Webster sells equipment for hospital, laboratory and general surgical use within the veterinary practice.
We also offer innovative, quality equipment that differentiates Webster from the competition including anesthesia machines, surgical
monitors, diagnostic equipment, ultrasound, dental power units, cages, lights, digital x-ray systems and x-ray machines.
Approximately 50% of veterinary equipment orders are drop shipped directly to the customer from the manufacturer. The remaining
half of veterinary equipment is distributed in a manner similar to consumable supplies.
Practice Management Software. Webster develops and markets our own proprietary line of practice management software,
INTRAVET®, for veterinary professionals, including software for scheduling, billing, charting and capture/storage/retrieval of digital
images.
Client Education Software. Webster also develops and markets our own proprietary client education software, DIA®, for
veterinary professionals. DIA encompasses over 3000 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. Webster 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 agency sales, equipment repair revenues, software maintenance
contract revenue and freight recovery on shipments to customers.
Sales and Marketing
During fiscal 2012, Webster sold products or services to over 22,000 customers in the U.S. who made one or more purchases
during the year. Our customers include veterinarians, laboratories, institutions and other animal health professionals. No single
customer accounted for more than 1% of sales during fiscal 2012, and Webster 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 field sales and customer service representatives and frequent direct marketing contact, which underscores our
value-added approach.
Webster currently has 18 local offices throughout the U.S. so that we can provide a presence in the market and decision making
near the customer. These offices, or branches, are staffed with a complete complement of Webster’s capabilities, including sales,
customer service and technical service personnel, as well as a local manager who has broad decision making authority with regard to
customer related transactions and issues.
Field Sales Representatives. A primary component of Webster’s value-added approach is our sales force. Due to the fragmented
nature of the veterinary 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 Webster employees and are generally
compensated on a commission basis, with some, less experienced, representatives receiving a base salary and commission.
Customer Service Representative. We support our field sales representatives and direct marketing efforts with customer service
representatives in ten call centers covering the United States. As of April 28, 2012, we had 135 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. Customer service representatives utilize
our
customized order entry system to process customer orders, access pricing, determine product availability, provide promotional
information about products, research customer preferences, and review order histories.
Direct Marketing. To assist our sales representatives, Webster publishes a catalog containing product and service information.
Webster customers receive a full-line product catalog containing over 11,000 inventoried items. The catalog includes pictures of
products, detailed descriptions and specifications of products and is used by practitioners as a reference source. We also promote
selected consumable products, our value-added program and services, new products, specially priced items and high demand items
through our monthly magazine, Insight. Additional direct marketing tools that we utilize include equipment catalogs, customer loyalty
programs, specific product and vendor programs, flyers, faxes, 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.
12
E-Commerce Platform. Webster’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, build a
“shopping list” of frequently purchased items and track their order status.
Distribution
Webster believes that responsive delivery of quality supplies and equipment is key to customer satisfaction. We ship veterinary
consumable supplies from 11 strategically located distribution centers in the United States. Orders for veterinary consumable supplies
can be placed through our field sales force, 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 Webster’s consumable orders are received by the
customer the next business day.
In order to assure the availability of Webster’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 and pharmaceutical products. 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.
Sources of Supply
Webster obtains products from nearly 600 vendors. While Webster 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 2012 and 2011, Webster’s top 10 veterinary supply manufacturers comprised 67%, and the single largest supplier comprised
13%, of the total cost of veterinary supply sales.
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 order is then picked, packed,
shipped and billed by us to our customer.
We also process orders from our customers under “agency agreements” with 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 order to the
vendor who then picks, packs, and ships the products. The vendor then invoices and collects payment from our customer. We receive
a commission payment for soliciting the order and for providing other customer service activities.
Competition
The distribution and manufacture of veterinary products is highly competitive. In addition to two other national, full-service
firms, Butler Schein Animal Health, Inc. and MWI Veterinary Supply, Inc., Webster competes with several full-service distributors
that operate on a regional level and numerous smaller local and specialty distributors and to lesser extent, mail order distributors or
buying groups. Webster also competes directly with pharmaceutical companies who sell certain products directly to the customer.
Webster approaches its markets by emphasizing and delivering a value-added model to the practitioner. To differentiate our self
from our competition we deploys 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.
Rehabilitation Supply
Overview
Patterson Medical is headquartered in Bolingbrook, Illinois, and is the world’s leading value added distributor of rehabilitation
medical supplies and equipment. We believe Patterson Medical offers 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.
13
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 the category’s most efficient customer service and distribution operations. Major channels
of distribution are acute care hospitals, long-term care facilities, rehabilitation clinics, dealers and schools. In addition, we believe
Patterson Medical’s reputation, global market presence and highly transferable business model will facilitate entry into new markets.
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
each 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 branch offices in the U.S., and buying and integrating distributors in the
U.K., France, and Australia. Patterson Medical also uses a robust international dealer network to service customers in countries where
we do not have an established direct presence. Approximately 65% of Patterson Medical’s revenue originates in North America.
Patterson Medical manufactures or has exclusively manufactured for us products representing approximately 35% of our 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., France, the U.K. Australia, and Thailand, and has a China sourcing office. Patterson
Medical is a distributor for the other 65% of our 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 in 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, are 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 percent of PTs were employed in either hospitals or offices of physical therapists. The remaining 40
percent 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.
14
•
•
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 the 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 the available funds. This has resulted in governments changing
funding methods, allocations, and rules to try and 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 international operations are based in the United Kingdom (“U.K.”) and are made up of Patterson Medical
International (PMI) in the U.K., Kinetec and Sacedi in France, and Patterson Medical/Ausmedic in Australasia. Our international
domestic operations broadly reflect the same business model as used in the North American market. In the U.K., France and Australia,
operations include sales and marketing, customer service, distribution, purchasing and administration. France also includes a self
contained manufacturing unit. Outside of these countries, PMI uses a network of over 200 distributors to reach its customers.
PMI 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 PMI 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.
PMI’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 April 2009, PMI 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 June 2010, PMI 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 Zealand and other international markets.
Kinetec consists of two operations, the manufacturing and distribution of Continuous Passive Motion machines (“CPMs”) for
sale on a worldwide basis and the sale 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. We intend to continue Patterson Medical’s growth through internal expansion and acquisitions in both
rehabilitation and related products.
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.
15
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 respond to the diverse needs of our customers, while
focusing on niches, worldwide, where our capabilities, reputation 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. Over the past four years, we have made investments in new sales and marketing programs as a part of our
accelerated adoption of Patterson’s value-added strategy, including the expansion of our sales force and the establishment of a branch
office structure. We believe these investments will result in additional sales and operating efficiencies into the future.
As of April 2012, Patterson Medical is distributing products from four shared distribution facilities that distribute products for
two or all three of our operating units. As of April 2012, Patterson Medical now shares eight branch facilities with other business
units, allowing the two business units to share in certain common expenses.
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 very favorable costs and at high levels of quality from China,
which has resulted in meaningful cost savings. We believe our business model is transferable to other countries, and are using PMI to
cultivate new relationships through an enhanced product array, sales effort, distribution capabilities and catalog expertise.
In May 2004, Patterson Medical acquired the assets of Medco Supply Company, Inc., or “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 business, Medco sells first aid, safety and medical consumable products to
commercial and institutional customers, as well as consumable supplies and equipment to podiatrists. The complete product offering
includes approximately 10,000 SKUs that are sold through direct mail catalogs and 11 territory sales people. Medco markets to
athletic trainers, schools and school nurses, daycare providers and healthcare professionals including podiatrists, chiropractors and
physical therapists.
Over the past five years, Patterson Medical has opened eighteen branch offices through acquisitions and internal start-ups in
desirable locations throughout the U.S. In November 2007, Patterson Medical acquired PTOS software, a leading line of practice
management software for physical therapists.
In April 2009, Patterson Medical acquired Mobilis Healthcare, a U.K.-based business with sales of $28 million. Mobilis serves
12,000 customers in the U.K. and France and owns several leading brands that are sold into its primary markets.
In June 2010, Patterson Medical acquired the rehabilitation business of Empi Therapy Solutions, with sales of approximately
$30 million.
In June 2010, Patterson Medical acquired the rehabilitation business of DCC Healthcare, with combined 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:
Consumables ................................................................................................................................
Equipment and software ...............................................................................................................
Other .............................................................................................................................................
Total ....................................................................................................................................
71%
24
5
100%
2012
2011
69%
26
5
100%
2010
71%
24
5
100%
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Consumables
Patterson Medical offers a large selection of supply products that can be categorized as follows:
• Aids to Daily Living—dressing devices, toileting, dining, bathing aids and grooming devices
• Orthopedic 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, stationary bicycles and CPMs. The November 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 that were previously unavailable to Patterson
Medical.
Other
Other products and services 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 products 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 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.
A key priority has been the expansion of our field sales force, which has grown by more than 100 sales representatives since late
in fiscal 2006 and now totals nearly 280 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 began developing a branch office structure in fiscal 2007 through a combination of internal start-ups and
dealer/distributor acquisitions. Similar to Patterson Dental’s branches, these offices have a showroom, commissioned sales staff and
service department that provides equipment installation, repair and warranty service for equipment manufacturers. As of April 2012,
eighteen branches had been established.
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 integrated 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.
17
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 two full service, shared Patterson distribution
centers, one in Mt. Joy, Pennsylvania, and the other in Dinuba, California. Patterson Medical also uses two additional shared facilities,
in Jacksonville, Florida, and Ft. Worth, Texas, to provide local distribution of high volume items to those regions. Approximately 95%
of the small packages in the U.S. ship via UPS.
Patterson Medical uses a branch structure to more effectively distribute equipment to our customers. Large equipment can be
shipped to our branches, inspected for damage, and then put on Patterson Medical trucks for consolidated delivery and installation at
customers’ facilities.
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 Internet websites. The combination of in-house staff
and web ordering options provides customers with 24 hours a day, seven days a week ordering capabilities. Approximately 36% of
customer orders are through the web or EDI, 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 5% of Patterson Medical’s total
purchases in fiscal 2012, 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. Patterson Medical intends to pursue expansion opportunities when prudent in order to
add products, customers and capabilities, which will further differentiate Patterson Medical from our competition.
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 provides us with a favorable cost position and strong pricing trends 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 document and Note 11 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 28, 2012, 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 28, 2012, we have 13 shared locations, and we plan to leverage additional branch sharing between two
or three business units in select markets in fiscal 2013 and beyond.
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 and certain of our patient education
products takes place at the PTC. In addition to the PTC, technology support is provided to customers through our some of our business
unit’s sales branches, which provide network installation and customer training.
18
Patterson Companies, Inc.
Trademarks and Patents
Our products and services are sold under numerous trademarks including “PATTERSON®,” “EAGLESOFT®,“ “CASEY®,”
“SAMMONS PRESTON®,” “KINETEC®,” “TUMBLE FORMS, ®” “INTRAVET®,” and “DIA®,”. Because we believe our trademarks
are well-recognized within their respective industries and valuable assets, we protect them against infringement. Some of our
proprietary software in the orthodontia field is protected by patents, which have varying terms, generally of 17-20 years.
Employees
As of April 28, 2012, we had approximately 7,059 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. None of our employees are subject to collective
bargaining agreements or represented by a union. We believe our relations with employees to be good.
Website
Our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those
reports are made available on our website as soon as reasonably practicable after the material is electronically filed with or furnished
to the Securities and Exchange Commissions. This material may be accessed by visiting the Investor Relations section of our website
at www.pattersoncompanies.com.
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 our 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 we are 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 we are 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.
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 require we are 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 we conduct business.
While we believe we are in substantial compliance with the laws and regulations which regulate our business, and that we
possess the licenses required in the conduct of our business, our failure to comply with any of applicable laws or regulations, or the
imposition of new laws or regulations, could negatively impact our business.
19
Executive Officers of the Registrant
Set forth below is the name, age and position of the executive officers of Patterson as of June 27, 2012.
Scott P. Anderson............................ 45 President and Chief Executive Officer—Patterson Companies, Inc.
Peter L. Frechette ............................ 74 Chairman of the Board—Patterson Companies, Inc.
R. Stephen Armstrong..................... 61 Executive Vice President, Chief Financial Officer and Treasurer—Patterson Companies, Inc.
Ranell M. Hamm............................. 50 Chief Information Officer—Patterson Companies, Inc.
Jerome E. Thygesen ........................ 54 Vice President, Human Resources—Patterson Companies, Inc.
Paul A. Guggenheim ....................... 52 President—Patterson Dental Supply, Inc.
George L. Henriques ....................... 51 President—Webster Veterinary Supply, Inc.
David P. Sproat ............................... 45 President—Patterson Medical Supply, Inc.
Our officers are elected annually and serve at the discretion of the Board of Directors.
Background of Executive Officers
Scott P. Anderson became our Chief Executive Officer in April 2010 and was appointed to our Board of Directors in June
2010. Mr. Anderson had held the position of President of Patterson Dental Supply, Inc., since June 2006 and, prior to that, the
positions of Vice President, Sales and Vice President, Marketing of Patterson Dental Supply, Inc. Mr. Anderson joined Patterson in
1993 and currently serves on the board of directors of the Dental Trade Alliance, the trade association of dental manufacturers,
distributors and laboratories. Mr. Anderson has been a director of C.H. Robinson since 2012.
Peter L. Frechette currently serves as the Chairman of the Board and has held that position since May of 1985. He served as
Chief Executive Officer from September 1982 through May 2005 and as President from September 1982 to April 2003. He has been
one of our directors since March 1983. Prior to joining our Company, Mr. Frechette was employed by American Hospital Supply
Corporation for 18 years, the last seven of which he served as President of its Scientific Products Division.
R. Stephen Armstrong was elected Executive Vice President, Chief Financial Officer and Treasurer of Patterson effective July
1999. Before joining Patterson, Mr. Armstrong had been an Assurance Partner with Ernst & Young LLP. Ernst & Young LLP is
currently Patterson’s independent registered public accounting firm. Mr. Armstrong has been a director of Delphax Technologies, Inc.
since 2000.
Ranell M. Hamm became Chief Information Officer, in April 2011. Prior to joining us, Ms. Hamm was Senior Director of
Clinical Information Delivery for UnitedHealth Group. Prior to UnitedHealth Group she was employed by Assurant, Inc., where she
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. Prior to joining Patterson, Mr. Thygesen 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.
Paul A. Guggenheim became President 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 was named President of Webster 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.
David P. Sproat was named President of Patterson Medical Supply, Inc. in September 2005. Mr. Sproat joined our Company in
1997 and has served in various sales and marketing capacities, including Vice President, Sales of Patterson Dental Supply, Inc. from
June 2004 through September 2005.
20
Item 1A. RISK FACTORS
The statements in this section describe the major risks to our business and should 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, individually 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.
Continuing uncertain economic conditions and volatility in the financial markets could adversely affect our operating results
and financial condition.
Continued recessionary trends in the U.S. or global economy, or an uncertain economic outlook, could materially adversely
affect our operating results and financial condition. Unfavorable 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. Unfavorable 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 revenues from equipment sales would be lower.
The dental supply, veterinary supply, and rehabilitation and assistive products 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-
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-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
our role and that of other distributors. 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. Our failure to compete effectively may limit and/or reduce our revenue, profitability and
cash flow.
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. 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.
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.
In addition, our acquisitions may not result in the benefits and revenue growth we expect because of difficulties integrating the
acquired businesses, including their personnel, customers, operations and systems. As we operate in three distinct segments, we need
to 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.
21
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 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 2012 and 2011, Webster’s
top 10 veterinary supply manufacturers were both comprised of 67%, respectively, and the single largest supplier was comprised 13%,
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 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 are 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 and 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 over 100,000 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.
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 operations and financial condition.
We are subject to a variety of litigation incidental to our business, including product liability claims, intellectual property
claims, and employment claims. 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.
22
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 be in flux, 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
laws and regulations in the U.S. and abroad. Our failure to comply 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 that 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.
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 regulations can
be considerable.
23
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:
• maintain and manage worldwide systems to facilitate the purchase and distribution of thousands of inventory items from
numerous distribution centers;
receive, process and ship orders on a timely basis;
•
• manage the accurate billing and collections for thousands of customers; and
•
process payments to suppliers.
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; and
negative publicity resulting in reputation or brand damage with our customers, suppliers or industry peers.
Our results of operations could be adversely affected if our IS are interrupted, damaged by unforeseen events, cyber-attacks or
fail for any extended period of time.
Our governing documents 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. In addition, our bylaws divide our Board of
Directors into three classes serving staggered three-year terms. 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.
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 2012 fiscal year that remain unresolved, nor have we received any written comments regarding our reports from the
SEC within the past 180 days.
Item 2.
PROPERTIES
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.
24
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 sales and marketing business
segments.
As of April 28, 2012, PLSI operates 14 distribution centers totaling approximately 1,200,000 square feet of distribution space as
follows:
•
•
•
•
•
•
1 dental distribution center is located in Hawaii.
4 veterinary distribution centers are located in Alabama, Colorado and Texas.
1 rehabilitation distribution center is located in New York State.
1 distribution center is located in Texas, which stocks and distributes both dental and rehabilitation product.
3 distribution centers are located in Iowa, South Carolina and Washington state, which stock and distribute dental and
veterinary products; and,
4 distribution centers are located in California, Florida, Indiana and Pennsylvania, which distribute product for all three of
the business units.
Approximately 90% of the PLSI distribution 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.
Dental Supply
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 sales operations in Canada are supported by distribution centers located in Quebec and Alberta,
Canada.
The dental supply segment is headquartered in our principal executive offices, which is an owned facility. This segment also
maintains sales and administrative offices inside the U.S. at approximately 75 locations in over 40 states and at 10 locations in
Canada. The majority of these locations are leased.
Veterinary Supply
Webster’s headquarters is a leased facility in Devens, Massachusetts. Our veterinary sales personnel generally reside within
branch locations shared with the dental supply segment.
Rehabilitation Supply
Patterson Medical is headquartered in a leased facility in Bolingbrook, Illinois. Domestically, the rehabilitation supply segment
maintains manufacturing facilities in Wisconsin, New York and South Carolina. Eighteen branch office locations include six 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.
25
Item 3.
LEGAL PROCEEDINGS
We are involved in various product-related, employment-related and other legal proceedings arising in the ordinary course of
our business. Some of these proceedings involve product liability claims arising out of the use of products we distribute. Product
liability indemnification is generally obtained from suppliers. However, in the event a supplier of a defective product is unable to pay
a judgment for which we may be jointly liable, we may be liable for the entire judgment.
We maintain product liability insurance coverage for any potential liability for claims arising out of products we sell. While we
believe our insurance coverage is adequate, there can be no assurance that the insurance maintained is sufficient or will be available to
us in adequate amounts or at reasonable costs in the future. Also, there can be no assurance that the indemnification agreements we
have with our suppliers will provide us with adequate protection. In addition, future claims brought against us could involve claims
not covered by insurance or indemnification agreements and could have a material adverse effect on our business or financial
condition.
As of April 28, 2012, we had accrued our best estimate of potential losses relating to product liability and other claims likely to
result in liability and for which it is possible to reasonably estimate a loss. This accrued amount, as well as related expenses, was not
material to our financial position, results of operations or cash flows. Our method for determining estimated losses considers currently
available facts, presently enacted laws and regulations and other external factors, including probable recoveries from third parties.
Item 4.
MINE SAFETY DISCLOSURES
26
PART II
Item 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
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.
Fiscal 2012
First Quarter........................................................................................................ $
Second Quarter ................................................................................................... $
Third Quarter ...................................................................................................... $
Fourth Quarter..................................................................................................... $
Fiscal 2011
First Quarter........................................................................................................ $
Second Quarter ................................................................................................... $
Third Quarter ...................................................................................................... $
Fourth Quarter..................................................................................................... $
High
Low
Dividends
per share
36.93
32.66
32.36
34.03
High
32.22
29.02
33.29
34.80
$
$
$
$
$
$
$
$
30.43
26.19
27.48
30.45
Low
24.13
24.88
27.54
30.42
$
$
$
$
$
$
$
$
0.12
0.12
0.12
0.14
0.10
0.10
0.10
0.12
On June 22, 2012, the number of holders on record of common stock was 2,494. 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 did not pay any cash dividends on our common stock since its initial public offering in 1992 until the fourth quarter of fiscal
2010, at which time a $0.10 per share cash dividend was paid. In fiscal 2012 a quarterly cash dividend of $0.12 per share was paid
throughout the year, except in the fourth quarter when the dividend was increased to $0.14 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.
For information relating to securities authorized for issuance under equity compensation plans, see Part III, Item 12.
In December 2007, Patterson’s Board of Directors expanded a share repurchase program to allow for the purchase of up to 25
million shares of common stock in open market transactions. As of March 2011, approximately 20.5 million shares had been
repurchased under this authorization. At that time, the Board of Directors replaced the existing share repurchase program with a new
authorization to repurchase an additional 25 million shares of common stock. As of April 28, 2012, 11,136,742 shares remain
available under the repurchase authorization, which expires on March 15, 2016.
The following table presents activity under the stock repurchase program during the fourth quarter of fiscal 2012 ended
April 28, 2012.
Total Number
of Shares
Purchased
Average
Price Paid
per Share
January 29, 2012 to February 25, 2012.....................................
February 26, 2012 to March 24, 2012.......................................
March 25, 2012 to April 28, 2012.............................................
—
—
1,200,160
1,200,160
$
32.98
32.98
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
—
—
1,200,160
1,200,160
Maximum Number
of Shares That May
Be Purchased Under
the Plan
12,336,902
12,336,902
11,136,742
The graph below compares the cumulative total shareholder return on $100 invested at the market close on April 28, 2006, the
last trading day before the beginning of the 2007 fiscal year, through the end of fiscal 2012 with the cumulative return of the same
time period on the same amount invested in the S&P 500 Index and a Peer Group Index, consisting of 9 companies (including
Patterson) based on the same Standard Industrial Classification Code.* The chart below the graph sets forth the actual numbers
depicted on the graph.
27
Company/Market/Peer Group
Patterson Companies Inc...............................................................................
S&P 500 ........................................................................................................
Peer Group ....................................................................................................
4/28/12
4/28/07
90.64
96.84
97.31
100.00
85.61 100.36 105.13
100.00
100.00 100.18 69.22 104.53 121.67 120.55
92.36 54.85
95.32 61.66
4/25/08
4/30/11
Fiscal Year Ending
4/24/10
4/25/09
* The current composition of SIC Code 5047—Medical, Dental & Hospital Equipment & Supplies—is as follows:
Chindex International, Inc., Discount Dental Materials, Inc., Henry Schein, Inc., Modern Mobility Aids Inc., MWI Veterinary Supply,
Inc., Owens & Minor, Inc., Patterson Companies, Inc., PSS World Medical, Inc., and Vertical Health Solutions, Inc.
28
Item 6.
SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except per share amounts)
April 28,
2012
April 30,
2011
Fiscal Year Ended
April 24,
2010
April 25,
2009
April 26,
2008
Statement of Operations Data:
Net sales ..............................................................................
Cost of sales ........................................................................
Gross margin .......................................................................
Operating expenses .............................................................
Operating income ................................................................
Other income – net ..............................................................
Income before income taxes ...............................................
Income taxes .......................................................................
Net Income ..........................................................................
Diluted earnings per share...................................................
Weighted average shares and potentially dilutive
$
shares outstanding ..........................................................
Dividends per common share..............................................
Balance Sheet Data:
Working capital...................................................................
Total assets ..........................................................................
Total long-term debt............................................................
Stockholders’ equity ...........................................................
$
$
$ 3,535,661 $ 3,415,670 $ 3,237,376 $ 3,094,227 $ 2,998,729
1,967,004
1,031,725
672,522
359,203
(1,775)
357,428
132,570
224,858
1.69
2,373,147
1,162,514
804,505
358,009
(28,197)
329,812
116,997
212,815 $
1.92 $
2,050,703
1,043,524
697,298
346,226
(26,575)
319,651
120,016
199,635 $
1.69 $
2,271,445
1,144,225
768,217
376,008
(20,121)
355,887
130,502
225,385 $
1.89 $
2,147,975
1,089,401
734,110
355,291
(16,250)
339,041
126,787
212,254 $
1.78 $
$
110,846
0.50 $
119,066
0.42 $
119,202
0.10
118,355
0
132,910
0
873,865 $
2,739,368
725,000
1,375,202
863,278 $
2,564,968
525,000
1,560,540
785,407 $
2,422,969
525,000
1,441,511
603,295 $
2,133,620
547,000
1,186,320
518,974
2,076,373
655,034
1,004,787
Note: See the Notes to the Consolidated Financial Statements included in Item 8. of this Annual Report on Form 10-K.
29
Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
Our fiscal 2012 financial information is summarized in this Management’s Discussion and Analysis, Consolidated Financial
Statements, and related Notes. The following background is essential to more fully understand our Company’s financial information.
Patterson operates a 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, we expanded our strategy to take advantage of a parallel
growth opportunity in the veterinary supply market by acquiring the assets of J. A. Webster, Inc. on July 9, 2001. Patterson added a
third component to our business platform in fiscal 2004 when it entered the rehabilitation supply market with the acquisition of
AbilityOne Products Corp. (“AbilityOne”) on September 12, 2003. AbilityOne is now known as Patterson Medical.
Operating margins of the veterinary business are considerably lower than the dental and rehabilitation supply businesses. While
operating expenses run at a lower rate in the veterinary business, their gross margin is substantially lower.
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” 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.
There are two matters that have an overriding impact on our financial results for fiscal 2012. First, we operate with a 52-53
week accounting convention with our fiscal year ending on the last Saturday in April. Fiscal year 2011 included 53 weeks, with an
additional, or fourteenth, week included in the first quarter ended July 31, 2010. Fiscal 2012 ending April 28, 2012 included 52 weeks,
and the first quarter operations included thirteen weeks of activity compared to the prior year period which contained 14 weeks. It is
difficult to precisely quantify the impact of the extra week, but estimates have been provided in those areas where it is possible to
make reasonable approximations. We estimate that the impact of the extra week reduced sales growth by one or two percentage points
in fiscal 2012 as compared to fiscal 2011.
The second matter involves the level of expense associated with our Employee Stock Ownership Plan (“ESOP”). For the past
twenty years allocations of shares to employees have been made almost entirely from shares of Company stock acquired by the ESOP
in 1990 (“the 1990 Shares”). Although the accounting standards in effect in 1990 were subsequently revised, the accounting for the
1990 shares was grandfathered under the revised standards and called for the expensing of the shares released for allocation to
employees to be based on the original cost of the shares.
The revised standards require the expensing of shares released to be based on fair value of the shares at the time they are
committed to be released and since the revision of the accounting standards, the ESOP has acquired approximately 4.5 million
additional shares, nearly all of which are still held for future allocation to employees. As the final allocation of the 1990 shares was
made at the end of fiscal 2011, the ESOP shares that have been subsequently acquired will be released and allocated to employees in
fiscal 2012 and beyond. When these shares are committed to be released to employees, it will result in a non-cash expense equal to the
average fair value of the shares committed to be released.
The ESOP expense increased our operating expenses by approximately $24 million and $0.13 per diluted share in fiscal 2012 as
compared to fiscal 2011. This change from historical cost to fair value in recognizing ESOP expense creates a comparability
discrepancy between our past and foreseeable future operating results.
The following table presents the ESOP expense reconciliation for comparability purposes:
Three Months Ended
April 30,
2011
April 28,
2012
Twelve Months Ended
April 30,
2011
April 28,
2012
Net Income ............................................................................................................. $ 62,143 $ 62,707 $ 212,815 $ 225,385
Incremental ESOP expense ....................................................................................
—
Adjusted Net Income (non-GAAP)........................................................................ $ 65,639 $ 62,707 $ 226,682 $ 225,385
Diluted Earnings Per Share .................................................................................... $
1.89
Incremental ESOP expense ....................................................................................
—
Adjusted Earnings Per Share (non-GAAP)............................................................ $
1.89
1.92 $
0.13
2.05 $
0.58 $
0.03
0.61 $
0.53 $
—
0.53 $
13,867
3,496
—
30
In fiscal 2012, we made a cash contribution of approximately $24 million to the ESOP, which was then used by the ESOP to
acquire shares through open market purchases. We instructed the ESOP trustee to hold these shares in suspense for allocation to
employees at the end of the current ESOP fiscal year. Since the fiscal 2012 contribution to the ESOP was made in cash as opposed to
using shares previously acquired by the ESOP, the expense for the current fiscal year will be a cash expense to us.
During fiscal 2012, we repurchased approximately 12 million shares of our common stock at a cost of approximately $361
million. Through these repurchases and the cash dividends, we returned nearly $400 million of value to our shareholders.
Results of Operations
The following table summarizes our consolidated results of operations over the past three fiscal years as a percent of sales:
Net sales ...........................................................................................................................
Cost of sales......................................................................................................................
Gross margin ....................................................................................................................
Operating expenses...........................................................................................................
Operating income .............................................................................................................
Other income, net .............................................................................................................
Interest expense ................................................................................................................
Income before taxes..........................................................................................................
Income taxes.....................................................................................................................
Net income .......................................................................................................................
2012
100.0%
67.1%
32.9%
22.8%
10.1%
0.1%
0.9%
9.3%
3.3%
6.0%
2011
100.0%
66.5%
33.5%
22.5%
11.0%
0.2%
0.8%
10.4%
3.8%
6.6%
2010
100.0%
66.3%
33.7%
22.7%
11.0%
0.3%
0.8%
10.5%
3.9%
6.6%
Fiscal 2012 Compared to Fiscal 2011
As described in the Overview section above, the first quarter of fiscal 2011 included an extra week due to the Company’s fiscal
year convention. Accordingly, the fiscal year ended April 30, 2011 included 53 weeks while the fiscal year ended April 28, 2012
included 52 weeks. As noted above, we estimate that the impact of the extra week reduced sales growth by one to two percentage
points in fiscal 2012 as compared to fiscal 2011.
Net Sales. Consolidated net sales in fiscal 2012 were $3,535.7 million, an increase of 3.5%, from $3,415.7 million in fiscal
2011. The growth in sales includes a 0.6% contribution from acquisitions and a 0.2% favorable impact of changes in foreign currency
translation rates. Excluding the impact of the extra week, consolidated sales grew an estimated 5.1%.
Dental segment sales in fiscal 2012 rose 3.7% to $2,287.9 million from $2,236.1 million in fiscal 2011. The impact of currency
translation rates was a favorable 0.1%. Consumable sales increased 2.6%, although they remained sluggish due to continuing weak
general economic trends, low consumer confidence and high unemployment.
Dental equipment and software sales increased 5.3% in fiscal 2012 to $768.6 million. Sales of technology oriented equipment,
including digital radiography and CAD/CAM products, accounted for the growth. Revenues from the sale of basic dental equipment
infrastructure, primarily consisting of chairs, power units and cabinetry, continued to be soft in fiscal 2012, as practitioners focused
purchases on products that they believed gave them higher returns in the near term.
Other dental sales, consisting primarily of technical service parts and labor, software support services and artificial teeth,
increased 4.1% in fiscal 2012.
Webster sales grew 12.6% to $734.4 million. Sales of consumables were 10.9% higher in fiscal 2012 and equipment and
software sales of $38.3 million represented an increase of 13.4% compared to fiscal 2011. Acquisitions added 1.5% to sales in fiscal
2012. Consumable sales in this segment have benefited from a higher percentage of pharmaceutical sales made under buy-sell versus
agency distribution agreements, and an earlier and more severe flea and tick season. We have been investing in the Veterinary
segment’s equipment and technical service offering to expand this unit’s full-service platform.
Patterson Medical sales of $513.3 million were 3.3% higher than fiscal 2011. Acquisitions, contributed 2.3% of sales growth.
The positive impact from foreign currency translation rates was 0.6% in fiscal 2012. The capital equipment portion of this segment
was negatively impacted by uncertainty in the market caused by regulatory changes in healthcare
Gross Margin. Consolidated gross margin was 32.9% in fiscal 2012 and 33.5% in fiscal 2011.
31
The Dental segment’s gross margin decreased 30 basis points to 36.2% in fiscal 2012. This decrease is mainly due to sales mix
as equipment growth outpaced consumable growth during the year.
Gross margin of the Veterinary unit was 18.3%, a decrease of 100 basis points from 19.3% in fiscal 2011. Sales mix was the
primary factor in the decline as a higher percentage of revenue came from pharmaceutical sales, which have a lower margin.
Patterson Medical’s gross margin declined 10 basis points to 39.0%. This was driven by a slight decrease in point of sale margin
and an increase in freight rates, both domestically and internationally.
Operating Expenses. The consolidated operating expense ratio in fiscal 2012 was 22.8%, or 30 basis points higher than fiscal
2011. On a comparable basis, after adjusting for the increase in the ESOP expense discussed above, the operating expense ratio would
have been 22.1%, or a decrease of nearly 40 basis points.
The Dental unit’s operating expense ratio increased 110 basis points as this unit absorbs the majority of the ESOP expense. In
addition, this segment was investing in training of sales personnel and deploying a new order entry system.
The ratio of the Veterinary unit’s operating expenses as a percent of sales decreased 80 basis in the current year largely due to
leverage of the higher sales levels.
Patterson Medical’s operating expense ratio decreased 100 in fiscal 2012. The segment benefited from further integration of
recent acquisitions and aggressive expense management.
Operating Income. Operating income was $358.0 million in fiscal 2012, compared to $376.0 million in fiscal 2011. Adjusting
for the ESOP expense impact, operating income would have increased year-over-year.
Interest Expense. Interest expense was $30.3 million in fiscal 2012 compared to $25.8 million in fiscal 2011. This increase is
due to the issuance of $325 million of debt in the third quarter of the current year. The Company made the decision to raise additional
debt capital to take advantage of the favorable rate environment.
Other Income, net. Other income, net of other expenses, was $2.1 million in fiscal 2012 compared to $5.7 million in fiscal 2011.
Interest income totaled $4.9 million in fiscal 2012, compared to $8.2 million in fiscal 2011. During fiscal 2011 the Company carried
higher average balances of finance contracts while we modified agreements with our funding sources in the period.
Income Taxes. The effective income tax rate was 35.5% in fiscal 2012 as compared to 36.7% in fiscal 2011. The effective tax
rate decreased in fiscal 2012 as compared to fiscal 2011 primarily due to an increase in the deductible dividends paid on shares held
by our Employee Stock Ownership Plan and the release of reserves resulting from expiring statute of limitations.
Net Income and Earnings Per Share. Net income decreased 6.0% to $212.8 million in fiscal 2012 due primarily to the increase
in operating expense as discussed above. Adjusting for the impact of the extra week on fiscal 2011 and the incremental ESOP expense
in fiscal 2012, net income would have increased approximately 3%. Earnings per diluted share and dilutive shares outstanding were
$1.92 and 110.8 million, respectively, in fiscal 2012 and $1.89 and 119.1 million, respectively, in fiscal 2011.
Fiscal 2011 Compared to Fiscal 2010
Net Sales. Consolidated net sales in fiscal 2011 were $3,415.7 million, an increase of 5.5% from $3,237.4 million in fiscal 2010.
The growth in sales includes a 2.1% contribution from acquisitions and a 0.4% favorable impact of changes in foreign currency
translation rates. Fiscal 2011 also included an additional or fifty-third week due to our fiscal year convention of ending on the last
Saturday in April. It is difficult to quantify the exact impact of this additional week, but estimates have been provided in those areas
where it is possible to make reasonable approximations. The impact of the extra week on consolidated sales is estimated to have been
approximately one and a half percent.
Dental segment sales in fiscal 2011 rose 3.2% to $2,236.1 million from $2,167.5 million in fiscal 2010. Acquisitions added
0.1% to sales and the impact of currency translation rates was a favorable 0.7%. Consumable sales increased 3.2%, although they were
affected by uneven patient demand for dental services as a result of the weak economy. While the economic recovery has been slow, it
is believed the fundamentals of the North American dental market continued to strengthen as fiscal 2011 progressed.
Dental equipment and software sales increased 3.6% in fiscal 2011 to $734.7 million. Sales of basic dental equipment and
software grew 5.4%, led by sales of digital sensors and cone beam and panoramic imaging systems. Sales of CEREC dental systems
declined 2.4%.
As market fundamentals have started to improve, dentists are believed to have gradually become more confident about investing
in their practices. In addition, additional marketing programs were implemented at the beginning of the fourth quarter of fiscal 2011.
These two factors helped in reaching sales growth of 11.2% in the fourth quarter.
Other dental sales, consisting primarily of technical service parts and labor, software support services and artificial teeth,
increased 2.0% in fiscal 2011.
32
Webster Veterinary sales grew 4.9% to $674.9 million. Sales of consumables were 4.0% higher in fiscal 2011 and equipment
and software sales of $34.3 million represented an increase of 16.8% compared to fiscal 2010. The Veterinary equipment business has
been growing at solid rates in recent quarters, and we intend to continue investing in this relatively new portion of Webster’s operation
that has expanded the unit’s full-service platform.
Patterson Medical sales of $504.7 million were 18.4% higher than fiscal 2010. Acquisitions, primarily that of the health care
business of DCC plc, contributed 15.3% of sales growth. Internally generated sales growth, which excludes the contribution of
acquisitions and a 0.4% negative impact from foreign currency translation rates, was 3.5% in fiscal 2011.
Gross Margin. Consolidated gross margin was 33.5% in fiscal 2011 and 33.7% in fiscal 2010.
The Dental segment’s gross margin decreased 30 basis points to 36.5% in fiscal 2011. Lower vendor rebates and a higher level
of promotional activities as compared to fiscal 2010 contributed to the decline.
Gross margin of the Veterinary unit was 19.3%, a decrease of 20 basis points from 19.5% in fiscal 2010. Price increases on a
line of pharmaceutical products by a manufacturer and lower vendor rebates were primary factors in the decline in gross margin.
Patterson Medical’s gross margin of its historical operations expanded during fiscal 2011; however, these improvements were
offset by the lower gross margins of the DCC Healthcare acquisitions. For the year, gross margin declined 10 basis points to 39.1%.
Operating Expenses. The consolidated operating expense ratio in fiscal 2011 was 22.5%, or 20 basis points lower than
fiscal 2010.
The Dental unit’s operating expense ratio decreased 30 basis points, reflecting expense controls and leverage gained from higher
sales on fixed costs.
The ratio of the Veterinary unit’s operating expenses as a percent of sales decreased 80 basis points, due to leverage on higher
sales and cost savings from the integration of the October, 2008 Columbus Serum acquisition. Those integration activities were
completed in fiscal 2010.
Patterson Medical’s operating expense ratio increased 80 basis points in fiscal 2011 due to the cost structure of the DCC
acquisition. Integration of the DCC entities has progressed throughout the year and is largely complete.
Operating Income. Operating income was $376.0 million in fiscal 2011, or 5.8% higher compared to $355.3 million in fiscal
2010. Operating margin was 11.0% in fiscal years 2011 and 2010, respectively.
Interest Expense. Interest expense was $25.8 million in fiscal 2011 compared to $25.7 million in fiscal 2010.
Other Income, net. Other income, net of other expenses, was $5.7 million in fiscal 2011 compared to $9.4 million in fiscal 2010.
The decrease was due to losses related to the Veterinary unit’s equity interest in VetSource. Interest income totaled $8.2 million in
fiscal 2011, compared to $8.6 million in fiscal 2010.
Income Taxes. The effective income tax rate was 36.7% in fiscal 2011 as compared to 37.4% in fiscal 2010. A portion of the
dividends paid on shares held by our Employee Stock Ownership Plan are deductible on our income tax return. As there were more
dividends paid in fiscal 2011 than in fiscal 2010, the deductible amount was larger, resulting in a lower effective income tax rate in
fiscal 2011.
Net Income and Earnings Per Share. Net income increased 6.2% to $225.4 million in fiscal 2011 due primarily to the increase
in operating income as discussed above. Earnings per diluted share and dilutive shares outstanding were $1.89 and 119.1, respectively,
in fiscal 2011 and $1.78 and 119.2 million, respectively, in fiscal 2010.
Liquidity and Capital Resources
Patterson’s operating cash flow has been our principal source of liquidity in the last three fiscal years. During fiscal 2012, we
used our revolving credit facility periodically as a source of liquidity in addition to operating cash flow.
Operating activities generated cash of $321.2 million in fiscal 2012, compared to $262.6 million in fiscal 2011 and $265.5
million in fiscal 2010. In fiscal 2012, 2011 and 2010, we invested in financing programs to support marketing efforts directed at the
equipment product lines, particularly in the Dental segment.
33
Capital expenditures were $29.7, $36.9 and $29.8 million in fiscal years 2012, 2011 and 2010, respectively. Significant
expenditures in these years included the purchase and expansion of distribution facilities to accommodate multiple business units, the
construction of a new facility for the Patterson Technology Center, the expansion of the general office building and continuing
investments in information systems. In fiscal 2012, a project to build-out a purchased building in Indiana was completed, the building
serves as a distribution facility used by all three business units. This facility is replacing several smaller distribution facilities. In
addition, the Patterson Technology Center facility in Illinois was completed in fiscal 2012. This 100,000 square foot state-of-the-art
facility replaced a nearby leased location and opened in the second quarter of fiscal 2012.
We expect to invest approximately $23 million in capital expenditures during fiscal 2013, our main investment is in information
systems.
Cash used for acquisitions and equity investments totaled $22.6 million in fiscal 2012, $52.2 million in fiscal 2011 and $53.7
million in fiscal 2010. The majority of the cash used for acquisitions in fiscal 2012 related to the acquisitions of AVSC and Surgical
Synergies. The Medical segment’s acquisition of the healthcare assets of DCC plc. accounted for the majority of the cash used in
fiscal 2011, while the acquisition of the rehabilitation business of Empi Therapy Solutions and the investment in Strategic Pharm—
dba VetSource accounted for the majority of the cash used in fiscal 2010.
In fiscal 2012 we entered in to a new debt agreement for $325 million; see Note 7 of the Consolidated Financial Statements,
“Long-term Debt.” footnote for further information. There were neither issuances of, nor payments on, debt during fiscal 2011. In
fiscal 2010, Patterson fully paid the $22 million that was outstanding under a revolving credit facility at the end of fiscal 2009. A
maximum of $300 million is available under this facility, which expires in fiscal 2013.
In the fourth quarter of fiscal 2010, we declared and paid an initial quarterly cash dividend of $0.10 per share, which was
increased to $0.12 per share in the fourth quarter of fiscal 2011 and the dividend continued at this rate through the third quarter of
fiscal 2012. The dividend was increased to $0.14 per share in the fourth quarter of fiscal 2012. Total dividends paid in fiscal 2012 and
fiscal 2011 were $54.7 million and $50.0 million, respectively. We expect to continue to pay a quarterly cash dividend for the
foreseeable future. In addition, during fiscal 2012 we repurchased approximately 12.0 million shares of common stock for
approximately $361 million. In fiscal 2011 we repurchased approximately 3.3 million shares of common stock for approximately $99
million. Under a share repurchase plan authorized by the board of directors, as of April 28, 2012, Patterson may repurchase up to an
additional 11 million shares of its common stock. This authorization remains in effect through March 15, 2016.
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 approximately $189 million in foreign bank accounts. None of which are subject to any withdrawal
restrictions. See Note 11, “Income Taxes” for further information regarding our intention to permanently reinvest these funds. We
expect to continue to obtain liquidity from the sale of equipment finance contracts. Patterson’s existing debt facilities are believed to
be adequate as a supplement to internally generated cash flows to fund anticipated expansion plans and strategic initiatives, including
acquisitions.
Patterson sells a significant portion of our finance contracts 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 flow 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 a party to two arrangements under which we have sold 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 make The Bank of Tokyo-Mitsubishi UFJ, Ltd.
(“BTMU”) the managing agent. As of April 28, 2012, the capacity under this agreement is $500 million, $300 million with BTMU
and the remainder with Royal Bank of Canada [RBC]. In August 2011, Fifth Third Bank [FTB] replaced U.S. Bank National
Association as the agent under the Contract Purchase Agreement, which has a capacity of $75 million as of April 28, 2012. Our
financing business is described in further detail in Note 6 of the Notes to the Consolidated Financial Statements in Item 8 of this Form
10-K. Note 6, “Customer Financing”, discusses the nature and business purpose of the arrangements and the activity under each
arrangement during fiscal 2012, including the amount of finance contracts sold and the holdback receivable owed to us.
34
Contractual Obligations
A summary of Patterson’s contractual obligations as of April 28, 2012 follows (in thousands):
Contractual Obligations
Long-Term Debt....................................................... $
Interest on Long-Term Debt.....................................
Operating Leases ......................................................
Total
850,000 $
210,639
71,119
Payment due by year
Less than
1 year
125,000 $
36,592
18,392
1-3 years
250,000
65,967
25,392
3-5 years
000,000
40,117
16,511
More than
5 years
475,000
67,963
10,824
Patterson is unable to determine its contractual obligations by year related to the provisions 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 total liability for
unrecognized tax benefits including interest and penalties at April 28, 2012, is $20.7 million.
For a more complete description of Patterson’s contractual obligations, see Notes 7 and 10 to the Consolidated Financial
Statements in Item 8 of this Form 10-K.
Outlook
Over the last ten years, we have been able to grow revenue and earnings through our strategy of emphasizing value-added, full-
service capabilities, using technology to enhance customer service, continuing to improve operating efficiencies, and growing through
internal expansion and acquisitions. While the weakness in the general economy that has existed during much of fiscal 2012 and 2011
is expected to continue to affect our performance for at least the near term, Patterson’s strategy will continue to focus on these key
elements. With strong operating cash flow and available credit capacity, we are confident that we will be able to financially support
our future growth. We believe that the strategic initiatives that we have implemented in the past several years, as well as those that
will be implemented in fiscal 2013 and beyond, will strengthen our operational platform and contribute to future growth. Given these
factors, we consider ourself well positioned to capitalize upon the growth opportunities in the dental supply, companion-animal
veterinary supply and the worldwide rehabilitation supply markets.
Asset Management
The following table summarizes Patterson’s days sales outstanding (DSO) and inventory turnover the past three fiscal years:
Days sales outstanding (1) ...............................................................................................................
Inventory turnover ( 2 )....................................................................................................................
2012
45
6.7
2011
48
6.9
2010
51
7.1
(1) Receivables as of April 28, 2012, April 30, 2011 and April 24, 2010 include approximately $20 million, $19 million and $63
million, respectively, of finance contracts received from customers related to certain financing promotions in fiscal 2012, 2011
and 2010. Patterson has sold contracts in fiscal 2012 and expects to sell the contracts held as of April 28, 2012 to outside
institutions under an existing agreement during fiscal 2013. If these finance contracts are excluded from the calculation of DSO,
the pro forma DSO would be 43, 46 and 44 as of April 28, 2012, April 30, 2011 and April 24, 2010.
(2) The inventory values used in this calculation are the LIFO inventory values for all inventories except for manufactured
inventories and foreign inventories, which are valued using FIFO inventory methods.
Foreign Operations
Foreign sales derive primarily from Patterson Dental and Patterson Medical operations in Canada and from Patterson Medical
operations in the U.K. and France. Fluctuations in currency exchange rates have not significantly impacted earnings. However,
changes in exchange rates enhanced net sales in fiscal 2012 and 2011, and adversely affected net sales in fiscal 2010. Without foreign
currency effects, net sales would have been $6.1 million lower, $12.4 million lower, and $11.5 million higher in fiscal years 2012,
2011 and 2010, 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.
35
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. 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 and final, 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.
Consumable product sales are recorded upon delivery, except in those circumstances where terms of the sale are FOB shipping
point.
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.
Revenue for arrangements with multiple deliverables meeting the criteria for a separate unit of accounting use the relative fair
value method and revenue is recognized for each deliverable in accordance with applicable revenue recognition criteria.
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.
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 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 is recognized as
contra-revenue in accordance with ASC Topic 605-50, “Revenue Recognition-Customer Payments and Incentives.” As of April 28,
2012, we believe we have sufficient experience with the program to reasonably estimate the amount of Patterson Advantage dollars
that will not be redeemed, 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 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) method for all inventories, except for foreign inventories and manufactured
inventories, which are valued using the first-in, first-out (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. Other indefinite-lived intangible assets include copyrights, trade names and trademarks.
Goodwill for each reporting unit is evaluated using a two-step impairment test at the reporting unit level. Patterson has three
reporting units at April 28, 2012, which are the same as our operating units. 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.
36
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 2012, management completed its annual goodwill and other indefinite-lived intangible asset
impairment tests and determined there was no impairment. 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, our tax return positions are 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.
To the extent that the provision for income taxes would have increased/decreased by 1 percent of income before taxes,
consolidated net income would have decreased/increased $3.3 million in fiscal 2012.
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 to net operating loss carryforwards of Mobilis Healthcare Group, acquired during Fiscal 2009 and principally based in the
United Kingdom.
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 Model and estimated forfeitures. 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.
37
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 its operating statement due to transactions denominated
primarily in Canadian Dollars, British Pounds, Euros, Australian Dollars and New Zealand Dollars. Although Patterson is not
currently involved with foreign currency hedge contracts, it continually evaluates 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 2012 net sales by approximately $30 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’s earnings are also affected by fluctuations in short-term interest rates through the investment of cash balances,
borrowings under LIBOR-based debt instruments and the practice of selling fixed rate equipment finance contracts under agreements
with both a commercial paper conduit and a group of banks that provide for pricing based on variable interest rates.
As of April 28, 2012, we had a $75 million variable-rate term note outstanding. We view our variable interest rate debt position
on a net basis that gives effect to our cash and cash equivalents balances.
When considering the exposure under the agreements whereby Patterson sells equipment finance contracts to both a commercial
paper conduit and a group of banks, 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 had been 10% higher during the year, the annual impact would have been to reduce
earnings before income tax by less than $1 million.
38
Item 8.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Board of Directors and Shareholders
Patterson Companies, Inc.
We have audited Patterson Companies, Inc. internal control over financial reporting as of April 28, 2012, based on criteria
established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (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 Report 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.
In our opinion, Patterson Companies, Inc. maintained, in all material respects, effective internal control over financial reporting
as of April 28, 2012, 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 28, 2012 and April 30, 2011, 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 28, 2012, and our report dated June 27, 2012, expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
June 27, 2012
39
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 28, 2012 and April 30,
2011, 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 28, 2012. Our audits also included the financial statement schedule
listed in Item 15(a)(2). These financial statements and the 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 28, 2012 and April 30, 2011, and the consolidated results of their operations and their
cash flows for each of the three fiscal years in the period ended April 28, 2012, 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 28, 2012, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated June 27, 2012, expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
June 27, 2012
40
PATTERSON COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
April 28,
2012
April 30,
2011
573,781 $
388,665
ASSETS
Current assets:
Cash and cash equivalents ..................................................................................................................... $
Receivables, net of allowance for doubtful accounts of $7,831 and $8,365 at April 28, 2012 and
April 30, 2011, respectively .............................................................................................................
Inventory................................................................................................................................................
Prepaid expenses and other current assets.............................................................................................
Total current assets.............................................................................................................
Property and equipment, net ...........................................................................................................................
Long-term receivables, net..............................................................................................................................
Goodwill..........................................................................................................................................................
Identifiable intangibles, net.............................................................................................................................
Other................................................................................................................................................................
465,170
336,094
40,780
1,230,709
189,583
90,285
795,616
227,216
31,559
Total assets ......................................................................................................................... $ 2,739,368 $ 2,564,968
464,869
319,952
44,911
1,403,513
195,465
92,049
810,252
212,557
25,532
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable................................................................................................................................... $
Accrued payroll expense .......................................................................................................................
Other accrued expense...........................................................................................................................
Current maturities of long-term debt.....................................................................................................
Total current liabilities .......................................................................................................
Long-term debt................................................................................................................................................
Deferred income taxes ....................................................................................................................................
Other................................................................................................................................................................
Total liabilities....................................................................................................................
207,915 $
66,386
130,347
125,000
529,648
725,000
81,856
27,662
1,364,166
210,033
56,575
100,823
—
367,431
525,000
78,239
33,758
1,004,428
Stockholders’ equity:
Common Stock, $.01 par value:
Authorized shares—600,000
Issued and outstanding shares—109,920 and 121,100 at April 28, 2012, and April 30, 2011,
1,211
respectively .......................................................................................................................................
Additional paid-in capital................................................................................................................................
0
Accumulated other comprehensive income (loss) ..........................................................................................
41,950
Retained earnings ............................................................................................................................................
1,632,497
Unearned ESOP shares ...................................................................................................................................
(115,118)
Total stockholders’ equity .....................................................................................................................
1,560,540
Total liabilities and stockholders’ equity .............................................................................................. $ 2,739,368 $ 2,564,968
1,099
0
32,455
1,456,233
(114,585)
1,375,202
See accompanying notes
41
Twelve Months Ended
April 30,
2011
$ 3,415,670
2,271,445
1,144,225
768,217
376,008
April 24,
2010
$ 3,237,376
2,147,975
1,089,401
734,110
355,291
5,719
(25,840)
355,887
130,502
225,385
1.91
1.89
118,290
119,066
0.42
225,385
18,782
(123)
244,044
$
$
$
$
$
$
9,444
(25,694)
339,041
126,787
212,254
1.79
1.78
118,443
119,202
0.10
212,254
32,281
(123)
244,412
$
$
$
$
$
$
2,146
(30,343)
329,812
116,997
212,815
1.93
1.92
110,121
110,846
0.50
212,815
(9,372)
(123)
203,320
PATTERSON COMPANIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
AND OTHER COMPREHENSIVE INCOME
(In thousands, except per share amounts)
April 28,
2012
Net sales ........................................................................................................................ $ 3,535,661
Cost of sales ..................................................................................................................
2,373,147
Gross profit ...................................................................................................................
1,162,514
Operating expenses .......................................................................................................
804,505
Operating income ..........................................................................................................
358,009
Other income and expense:
Other income, net ................................................................................................
Interest expense ...................................................................................................
Income before taxes ......................................................................................................
Income taxes .................................................................................................................
Net income .................................................................................................................... $
Earnings per share:
Basic .................................................................................................................... $
Diluted ................................................................................................................. $
Shares:
Basic ....................................................................................................................
Diluted .................................................................................................................
Dividends declared per common share ......................................................................... $
Comprehensive Income
Net Income .......................................................................................................... $
Foreign currency translation (loss) gain ..............................................................
Cash flow hedge ..................................................................................................
Comprehensive Income................................................................................................. $
See accompanying notes
42
PATTERSON COMPANIES, INC.
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS’ EQUITY
(Dollars in thousands)
Common Stock
Number
Amount
122,042,467 $ 1,220 $
— —
— —
— —
Additional
Paid-in
Capital
20,320 $
—
—
—
— —
—
1,394,599
14
— —
— —
123,437,066 $ 1,234 $
— —
— —
— —
12,557
8,826
—
41,703 $
—
—
—
— —
—
Accumulated
Other
Comprehensive
(Loss) Income
Retained
Earnings
Unearned
ESOP
Shares
Total
(8,867) $ 1,293,609 $ (119,962) $ 1,186,320
32,281
32,281
(123)
(123)
212,254
—
244,412
(11,978)
—
—
212,254
—
—
(11,978)
—
—
—
—
—
—
—
—
—
—
1,360
12,571
8,826
1,360
23,291 $ 1,493,885 $ (118,602) $ 1,441,511
18,782
18,782
(123)
(123)
225,385
—
244,044
(50,022)
—
—
225,385
—
—
(50,022)
—
—
(3,257,374)
(32)
— —
— —
121,099,850 $ 1,211 $
— —
— —
— —
(62,177)
10,481
—
0 $
—
—
—
— —
—
—
—
—
—
—
3,484
(36,751)
—
—
(98,960)
10,481
3,484
41,950 $ 1,632,497 $ (115,118) $ 1,560,540
(9,372)
(9,372)
(123)
(123)
212,815
—
203,320
(55,319)
—
—
212,815
—
—
(55,319)
—
—
Balance at April 25, 2009 ..................
Foreign currency translation ..............
Cash flow hedge.................................
Net income .........................................
Comprehensive income......................
Dividends declared.............................
Common stock issued and
related tax benefits ........................
Stock-based compensation .................
ESOP activity .....................................
Balance at April 24, 2010 ..................
Foreign currency translation ..............
Cash flow hedge.................................
Net income .........................................
Comprehensive income......................
Dividends declared.............................
Common stock issued and
Repurchase of Common
Stock..............................................
Stock-based Compensation ................
ESOP activity .....................................
Balance at April 30, 2011 ..................
Foreign currency translation ..............
Cash flow hedge.................................
Net income .........................................
Comprehensive income......................
Dividends declared.............................
Common stock issued and
related tax benefits ........................
920,158
9
9,993
—
—
—
10,002
related tax benefits ........................
778,856
8
27,167
—
—
27,175
—
—
—
(333,760)
—
—
(361,047)
533
32,455 $ 1,456,233 $ (114,585) $ 1,375,202
533
Repurchase of Common
Stock..............................................
Stock-based Compensation ................
ESOP activity .....................................
Balance at April 28, 2012 ..................
(11,954,257)
(120)
— —
109,924,449 $ 1,099 $
(27,167)
0 $
See accompanying notes
43
PATTERSON COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
April 28,
2012
Fiscal Year Ended
April 30,
2011
April 24,
2010
Operating activities:
Net income...........................................................................................................................
Adjustments to reconcile net income to net cash provided by operating activities:
$
212,815 $
Depreciation...............................................................................................................
Amortization ..............................................................................................................
Bad debt expense .......................................................................................................
Stock-based compensation.........................................................................................
Excess tax benefits from stock-based compensation .................................................
ESOP compensation ..................................................................................................
Deferred income taxes ...............................................................................................
Change in assets and liabilities net of acquired:
25,254
16,955
2,445
12,615
(1,371)
756
89
Decrease in receivables ....................................................................................
Decrease (increase) in inventory ......................................................................
(Decrease) increase in accounts payable..........................................................
Increase (Decrease) in accrued liabilities.........................................................
Increase in long-term receivables.....................................................................
Other changes from operating activities, net....................................................
Net cash provided by operating activities ...........................................................................
468
16,859
(6,847)
37,948
(1,766)
4,938
321,158
Investing activities:
Additions to property and equipment, net of acquisitions...................................................
Acquisitions and equity investments, net of cash................................................................
Net cash used in investing activities....................................................................................
(29,650)
(22,620)
(52,270)
Financing activities:
Dividends paid.....................................................................................................................
Payments on revolver ..........................................................................................................
Repurchases of common stock ............................................................................................
Other ....................................................................................................................................
Common stock issued, net...................................................................................................
Proceeds from issuance of long-term debt ..........................................................................
Excess tax benefits from stock-based compensation...........................................................
Net cash used in financing activities ...................................................................................
Effect of exchange rate changes on cash .............................................................................
Net increase in cash and cash equivalents ...........................................................................
Cash and cash equivalents at beginning of period...............................................................
Cash and cash equivalents at end of period.........................................................................
$
(54,741)
0
(362,379)
(931)
13,621
325,000
1,371
(78,059)
(5,713)
185,116
388,665
573,781 $
225,385 $ 212,254
24,613
16,726
3,409
10,481
(1,276)
2,113
17,170
3,784
(26,639)
9,664
(5,754)
(15,212)
(1,852)
262,612
(36,822)
(52,187)
(89,009)
25,692
13,782
4,579
8,826
(387)
1,726
251
24,185
(12,090)
9,215
3,680
(23,501)
(2,727)
265,485
(29,804)
(53,672)
(83,476)
0
(49,992)
(11,886)
(22,000)
0
(97,153)
1,360
707
12,184
11,940
0
0
387
1,276
(19,955)
(133,222)
20,472
7,693
182,526
48,074
340,591
158,065
388,665 $ 340,591
Supplemental disclosures:
Income taxes paid ................................................................................................................
Interest paid .........................................................................................................................
Repurchases of common stock with liability due to broker ................................................
$
81,959 $
24,868
475
112,840 $ 139,504
25,628
24,703
—
1,807
See accompanying notes
44
PATTERSON COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 28, 2012
(Dollars in thousands, except share and per share amounts)
1. Summary of Significant Accounting Policies
Description of Business
Patterson Companies, Inc., (referred to herein as “Patterson” or in the first person notations “we,” “our,” and “us”) is a value-
added distributor serving the dental, companion-animal veterinarian and rehabilitation supply markets. Patterson Companies has three
reportable segments: dental supply, veterinary supply and rehabilitation supply.
Basis of Presentation
The consolidated financial statements include the accounts of our wholly owned subsidiaries. Significant inter-company
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.
Fiscal Year End
We utilize a fifty-two, fifty-three week fiscal year ending on the last Saturday in April. Accordingly, fiscal year 2011 included
fifty-three weeks and fiscal years 2012 and 2010 included fifty-two 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.
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
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) method for all inventories, except for foreign inventories and manufactured inventories, which are valued using the
first-in, first-out (FIFO) method. Inventories valued at LIFO represent 81% and 82% of total inventories at April 28, 2012 and
April 30, 2011, respectively.
The accumulated LIFO reserve was $66,808 at April 28, 2012 and $61,385 at April 30, 2011. We believe that inventory
replacement cost exceeds the inventory balance by an amount approximating the LIFO reserve.
Property and Equipment
Property and equipment are stated at cost. Our Company calculates depreciation 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 data processing equipment, 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. Other indefinite-lived
intangible assets include copyrights, trade names and trademarks.
Goodwill for each reporting unit is evaluated using a two-step impairment test at the reporting unit level. We have three
reporting units as of April 28, 2012, which are the same as our operating units. 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
45
assumptions and to apply judgment to estimate industry and economic factors and the profitability of future business strategies. We
conduct impairment testing based on our current business strategy in light of present industry and economic conditions, as well as
future expectations. Additionally, in assessing goodwill for impairment, we consider the reasonableness of the implied control
premium based on market capitalizations and recent market transactions.
We assess other indefinite-lived intangible assets 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 2012, management completed its annual goodwill and other indefinite-lived intangible asset
impairment tests and determined there was no impairment. Although we believe our 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 our 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.
Financial Instruments
We account for derivative financial instruments under the provisions of ASC Topic 815, “Derivatives and Hedging.” Our use of
derivative financial instruments is generally limited to managing well-defined interest rate risks. Patterson does not use financial
instruments or derivatives for any trading purposes.
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 and final, 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.
Consumable product sales are recorded upon delivery, except in those circumstances where terms of the sale are FOB shipping
point.
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.
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. We also
maintain 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. See also Note 6, “Customer Financing”. The portion of receivable amounts that are not
expected to be collected during the next twelve months are classified as long-term.
We have a relatively 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 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
46
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 28, 2012, 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 we incur are included in cost of sales.
Advertising
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 $18,811, $20,630 and $21,368 for
fiscal years 2012, 2011 and 2010, respectively. Deferred direct-marketing expenses included in prepaid and other current assets on the
consolidated balance sheet as of April 28, 2012, and April 30, 2011 were $3,312 and $3,045, respectively.
Income Taxes
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)
Compensation expense related to our defined contribution ESOP is computed based on the shares allocated method.
Stock-based Compensation
We recognize stock-based compensation expense based on the grant-date fair value of awards estimated in accordance with
ASC Topic 718, “Stock Compensation”.
Comprehensive Income
Comprehensive income is computed as net income plus certain other items that are recorded directly to stockholders’ equity.
The only significant item included in comprehensive income is foreign currency translation adjustments. 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.
Earnings Per Share
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.
Denominator:
Denominator for basic earnings per share—weighted average shares ......................................... 110,121 118,290 118,443
Effect of dilutive securities—stock options, restricted stock and stock purchase plans ..............
759
Denominator for diluted earnings per share—adjusted weighted average shares........................ 110,846 119,066 119,202
776
725
2012
Fiscal Year
2011
(in thousands)
2010
Options to purchase 520, 559 and 932 shares of common stock during fiscal years 2012, 2011 and 2010, respectively, were
excluded from the calculation of diluted earnings per share because the effect would have been anti-dilutive. Unvested restricted stock
awards outstanding which were excluded from the calculation of diluted earnings per share during fiscal years 2012, 2011 and 2010
were 140, 173, and 60, respectively, because the effect would have been anti-dilutive.
47
Recent Accounting Pronouncements
In December 2011, the Financial Accounting Standards Board (“FASB”) issued ASU 2011-11 “Disclosures about Offsetting
Assets and Liabilities.” ASU 2011-11 enhances disclosures surrounding offsetting (netting) assets and liabilities. The standard applies
to financial instruments and derivatives and requires companies to disclose both gross and net information about instruments and
transactions eligible for offset in the statement of financial position and instruments and transactions subject to a master netting
arrangement. ASU No. 2011-11 is effective for interim and annual periods beginning on or after January 1, 2013. We are still
evaluating the effect this standard will have on our Consolidated Financial Statements, but do not believe that the adoption of this new
pronouncement will have a material effect on our Consolidated Financial Statements.
In September 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-08, Testing Goodwill for Impairment
(“ASU 2011-08”). Under ASU 2011-08, entities testing goodwill for impairment now have the option to perform a qualitative
assessment before having to calculate the fair value of a reporting unit. If an entity determines, on the basis of qualitative factors, that
the fair value of the reporting unit is more-likely-than-not less than the carrying amount, the existing quantitative impairment test is
required. Otherwise, no further impairment testing is required. This update is effective for fiscal years beginning after December 15,
2011, with early adoption permitted. We do not anticipate that the adoption of this provision will have a material impact on our
financial position, results of operations or cash flows.
In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income (“ASU 2011-05”), which requires an
entity to present the total of comprehensive income, the components of net income and the components of other comprehensive
income, either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-
05, which should be applied retrospectively, is effective for annual or interim periods beginning after December 15, 2011, with early
adoption permitted. We early adopted ASU 2011-05 effective at the beginning of fiscal 2012. This adoption did not have an impact on
our financial position, results of operations or cash flows, as it only requires a change in the format of our current presentation. We
have presented other comprehensive income in two consecutive statements in conjunction with our statement of income.
In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement: Amendments to Achieve Common Fair Value
Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”). ASU 2011-04 clarifies guidance on how to
measure fair value and is largely consistent with existing fair value measurement principles. This ASU also expands existing
disclosure requirements for fair value measurements and makes other amendments. This ASU was effective prospectively beginning
January 29, 2012, the first day of our fourth quarter of fiscal 2012. The adoption of this standard did not have a material impact on our
financial position, results of operations or cash flows.
2. Cash and cash equivalents
At April 28, 2012 and April 30, 2011, cash and short-term investments consisted of the following:
Cash on hand ............................................................................................................................ $
Cash equivalents:
Government securities ....................................................................................................
Money market funds .......................................................................................................
Total.......................................................................................................................................... $
April 28,
2012
251,849
0
321,932
321,932
573,781
April 30,
2011
200,443
76,137
112,085
188,222
388,665
$
$
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 28, 2012 are as
follows:
Dental supply .............................................................................................. $
Rehabilitation supply ..................................................................................
Veterinary supply ........................................................................................
Total ............................................................................................................ $
Balance at
April 30, 2011
132,670
537,995
124,951
795,616
Acquisition
Activity
Other
Activity
$
$
—
304
4,895
5,199
$
7 $
4,832
4,598
$ 9,437 $
Balance at
April 28, 2012
132,677
543,131
134,444
810,252
48
The increase in the acquisition activity column during the twelve month period ended April 28, 2012 primarily reflects the
preliminary purchase price allocations of the rehabilitation businesses of Surgical Synergies and the veterinary acquisition of AVSC,
which were acquired in fiscal 2012. The other activity column is comprised primarily of earn-out payments made related to
acquisitions completed prior to fiscal 2012 and foreign currency translation. The other activity column is comprised primarily of earn-
out payments made related to acquisitions completed prior to the adoption of the guidance in ASC 805 and foreign currency
translation.
Other intangibles acquired in the acquisitions in fiscal 2012 had a fair value of approximately $2.6 million and a weighted
average useful life of 10 years.
Balances of other intangible assets excluding goodwill are as follows:
Unamortized—indefinite lived:
Copyrights, trade names and trademarks .......................................................................................
$
76,464
$
76,422
April 28,
2012
April 30,
2011
Amortized:
Distribution agreement, customer lists and other .................................................................
Less: Accumulated amortization ..........................................................................................
Net amortized intangible assets...................................................................................
Total identifiable intangible assets, net ..........................................................................................
231,739
(95,646)
136,093
212,557
$
229,649
(78,855)
150,794
227,216
$
In 2006, we extended our exclusive North American distribution agreement with Sirona Dental Systems GmbH (“Sirona”) for
Sirona’s CEREC 3D dental restorative system. We paid a $100 million 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 10-year period 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 3D dental restorative systems.
Amortization expense in any year may differ significantly from other years. In early fiscal 2013, we expanded our 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.
With respect to the amortized intangible assets, future amortization expense is expected to approximate $19,915, $21,416,
$22,647, $24,449 and $27,028 for fiscal years 2013, 2014, 2015, 2016 and 2017, respectively. The preceding expected amortization
expense is an estimate. Actual amounts of amortization expense may differ from estimated amounts due to additional intangible asset
acquisitions, actual revenues generated from the sale of CEREC 3D dental restorative systems, changes in foreign currency exchange
rates, impairment of intangible assets, accelerated amortization of intangible assets and other events.
4. Acquisitions and Equity Investments
We completed smaller acquisitions during fiscal years 2012, 2011 and 2010. The operating results of each of these acquisitions
are included in our consolidated statements 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 these acquisitions since the effects of these business acquisitions were not
material either individually or in the aggregate. A listing of acquisitions completed during the periods covered by these financial
statements is presented below:
Entity
Fiscal 2012:
American Veterinarian Supply Corp. ................................................................................................. Veterinary supply
Surgical Synergies Pty Ltd. ................................................................................................................ Rehabilitation supply
Orthoplast ........................................................................................................................................... Rehabilitation supply
Segment
Fiscal 2011:
DCC Healthcare ................................................................................................................................. Rehabilitation supply
ePet Records LLC .............................................................................................................................. Veterinary supply
Fiscal 2010:
Therapeutic Technologies .................................................................................................................. Rehabilitation supply
Global Medical & Dental ................................................................................................................... Dental supply
Empi Therapy Solutions ..................................................................................................................... Rehabilitation supply
Summit Sports Medical ...................................................................................................................... Rehabilitation supply
49
In April 2010, we made a minority equity investment of 30.3% in VetSource, a leading North American provider of integrated
specialty pharmacy distribution, including home delivery capabilities. The investment in VetSource is being accounted for under the
equity method of accounting and is included in other long-term assets in the consolidated balance sheet.
5. Property and Equipment
Land...................................................................................................................................... $
Buildings ..............................................................................................................................
Leasehold improvements......................................................................................................
Furniture and equipment ......................................................................................................
Data processing equipment ..................................................................................................
Construction-in-progress ......................................................................................................
Accumulated depreciation ....................................................................................................
Property and equipment, net ....................................................................................... $
April 28,
2012
15,578
130,009
15,058
139,506
87,780
3,385
391,316
(195,851)
195,465
April 30,
2011
14,103
113,563
14,336
124,217
76,990
19,487
362,696
(173,113)
189,583
$
$
The variance of construction in progress from last year to this year is due to the new Patterson Technology Center facility in
Illinois. The facility was completed in the first half of fiscal 2012.
6. Customer Financing
As a convenience to our customers, we offer several different financing alternatives including both a Company sponsored
program and a third party program. For the third party program, Patterson acts as a facilitator between the customer and the third party
financing entity with no on-going involvement in the financing transaction. Under this sponsored program, equipment purchases by
customers with strong credit are financed to a maximum of $0.4 million for any one customer. We generally sell the customers’
financing contracts to outside financial institutions in the normal course of its business. Patterson currently has two arrangements
under which we have sold these contracts.
In fiscal 2003, Patterson initiated an agreement to sell our equipment finance contracts to a commercial paper conduit managed
by JPMorgan Chase Bank N.A. To participate in the commercial paper conduit, Patterson was required to establish a special purpose
entity (“SPE”), PDC Funding Company, LLC, a consolidated, wholly owned subsidiary. In December 2010, this agreement was
amended and restated and The Bank of Tokyo-Mitsubishi UFJ, Ltd. became the managing agent under the agreement.
We transfer financing contracts to the SPE and in turn, the SPE sells the contracts to the commercial paper conduits. The SPE
does not issue any debt. While there is no recourse to Patterson by the commercial paper conduits on the sale of contracts, we receive
only approximately 84% of the principal amount of the contracts upon the sale. The remaining 16% of the proceeds is held by the
conduit as security against the eventual performance of the portfolio. The deferred purchase price receivable from the conduit is
recorded as a non-current asset, which is carried at its estimated fair market value. As of April 28, 2012, the maximum outstanding
capacity of this arrangement with the conduits at any one time is $500 million.
Patterson also maintains an agreement with commercial banks whereby the banks purchase customers’ financing contracts.
Patterson has established another SPE, PDC Funding LLC II (“PDC II”), as a consolidated, wholly owned subsidiary, which sells
financing contracts to the banks. We receive a portion of the principal amounts of the contracts upon sale with the remaining portion
of the proceeds held by the banks as security against the eventual performance of the portfolio. The holdback receivable from the
banks is recorded as a non-current asset, which is carried at its estimated fair market value. The capacity under the agreement at
April 28, 2012 was $75 million. In the fourth quarter of fiscal 2010, this agreement was amended such that no additional contracts
were sold, but the remaining contracts previously sold and outstanding under the agreement will continue under the agreement. On
August 12, 2011, Fifth Third Bank replaced U.S. Bank National Association and the agreement was amended and restated. Under the
restated agreement, Fifth Third Bank is the agent and contracts are again being sold. Approximately $75 million of such contracts
were outstanding as of April 28, 2012.
These financing arrangements are accounted for as a sale of assets under the provisions of ASC Topic No. 860, “Transfers and
Servicing.” During fiscal 2012, 2011 and 2010, we sold approximately $287.6, $296.4 and $300.8 million, 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 by Patterson are considered adequate compensation for services rendered. Accordingly, no servicing asset
or liability has been recorded. The agreements require us to maintain a minimum current ratio and maximum leverage ratio. Patterson
was in compliance with the covenants at April 28, 2012.
50
Included in current receivables in the consolidated balance sheets are approximately $81.8 million, net of unearned income of
$7.4 million, and $78.5 million, net of unearned income of $3.6 million, as of April 28, 2012 and April 30, 2011, respectively, of
finance contracts not yet sold by Patterson. A total of $479.4 million of finance contracts receivable sold under the agreements were
outstanding at April 28, 2012. The residual receivable under the arrangements was approximately $78.9 and $78.0 million as of
April 28, 2012 and April 30, 2011, respectively. Since the internal financing program began in 1994, bad debt write-offs have
amounted to less than one-percent of the loans originated.
7. Long-Term Debt
Expected future minimum principal payments under our debt obligations are as follows: $125.0 million in fiscal year 2013;
$250.0 million in fiscal 2015; and $475.0 million in years thereafter.
In March 2008, Patterson issued fixed-rate senior notes with an aggregate principal amount of $450 million, consisting of
(i) $50 million 4.63% senior notes, due fiscal 2013; (ii) $250 million 5.17% senior notes, due fiscal 2015; and (iii) $150 million 5.75%
senior notes, due fiscal 2018.
Also in March 2008, we entered into a term loan agreement with a principal amount of $75 million, which matures in fiscal
2013. The term loan bears interest at a floating rate based on LIBOR plus a spread that can range from 0.50% to 1.25% based on our
leverage ratio, as defined in the agreement. During the years ended April 28, 2012 and April 30, 2011, the weighted average interest
rate of this term loan was 1.20% and 1.11%, respectively.
In December 2011, we issued fixed-rate senior notes with an aggregate principal amount of $325 million, consisting of (i) $60
million 2.95% senior notes, due fiscal 2018; (ii) $165 million 3.59% senior notes, due fiscal 2021; and (iii) $100 million 3.74% senior
notes, due fiscal 2023.
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 our revolving line of credit. The remaining proceeds are intended to retire the senior note and term loan due
fiscal 2013, or will be used for general corporate purposes. Debt issuance costs associated with the issuance of debt in March 2008 of
$1.8 million and in December 2011 of $1.8 million are being amortized to interest expense over the life of the related debt.
In addition, in March 2008 we entered into two forward starting interest rate swap agreements, each with notional amounts of
$100 million 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. Upon issuance of the hedged debt, Patterson
settled the forward starting interest rate swap agreements and recorded a $1.0 million increase, net of income taxes, to other
comprehensive income, which is being amortized against interest expense over the life of the related debt. The pre-tax amount
reclassified into earnings during fiscal years 2012, 2011 and 2010 was $0.2 million. The amount expected to be reclassified into
earnings during fiscal 2013 is also expected to be $0.2 million.
Patterson has available a $300 million 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 28, 2012 or April 30, 2011.
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 28, 2012.
Patterson’s debt consists of the following (in thousands):
4.63% senior notes due fiscal 2013 ................................................................................ $
5.17% senior notes due fiscal 2015 ................................................................................
5.75% senior notes due fiscal 2018 ................................................................................
2.95% senior notes due fiscal 2018 ................................................................................
3.59% senior notes due fiscal 2021 ................................................................................
3.74% senior notes due fiscal 2023 ................................................................................
Variable rate (LIBOR plus 1.25%) term loan due fiscal 2013 .......................................
Total debt........................................................................................................................
Less: current debt obligations.........................................................................................
Long-term debt ............................................................................................................... $
April 28, 2012
50,000
250,000
150,000
60,000
165,000
100,000
75,000
850,000
125,000
725,000
April 30, 2011
50,000
250,000
150,000
0
0
0
75,000
525,000
0
525,000
$
$
51
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 December 2, 2011 this agreement was amended on terms
consistent with the expiring agreement. These agreements are structured to expire at the end of a 364-day term, so effectively are
amended annually. The cap agreements provide a credit enhancement feature for the financing contracts sold by PDC Funding to the
commercial paper conduit and replace a minimum interest rate margin previously required under the sale agreement.
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 28, 2012, PDC Funding had
purchased two interest rate caps from a bank with combined notional amounts of $416 million and maturity dates of September 2018.
Patterson Companies, Inc. sold two identical interest rate caps to the same bank.
Similar to the above agreements, PDC Funding II and Patterson Companies, Inc. had entered into offsetting and identical
interest rate swap agreements with a notional amount of $110 million. During the second quarter of 2012, these agreements were
terminated and replaced with offsetting and identical interest rate cap agreements. As of April 28, 2012 these agreements had notional
amounts of $75 million and maturity dates of October 2017.
In addition to the identical purchased and sold interest rate contracts described above, we entered into two interest rate swap
agreements with banks to economically hedge the interest rate risk associated with our finance contracts. One agreement ended in
November 2011, and other matured in February 2012.
Our 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 in any period as income or expense during the period in which the change occurs.
In the first quarter of fiscal 2011, we entered into a foreign currency forward contract that was settled in the same quarter. This
contract served as an economic hedge and was not designated as a hedge for accounting purposes. The total gain on the contract was
$0.1 million.
In the second quarter of fiscal 2011, we entered into a foreign currency forward contract that served to manage foreign exchange
risk on a short-term intercompany loan. The forward contract and intercompany loan were both settled during the quarter. The loss on
the contract was $2.0 million that effectively was offset by the gain on the intercompany loan.
The following presents the fair value of interest rate contracts included in the consolidated balance sheets:
Derivative type
Interest rate contracts ................................................ Other noncurrent
Classification
assets
Assets
Fair Value
April 28,
2012
April 30,
2011
Liabilities
Fair Value
April 28,
2012
April 30,
2011
Classification
$
0.2 $
5.5 Other noncurrent
liabilities
$
0.2 $
5.6
The following presents the effect of interest rate and foreign currency contracts on the consolidated statements of income:
Gain (loss)
recognized on derivative
Fiscal Year
2011
2012
$0.0 ($ 0.1)
$0.0 ($ 1.9)
2010
($0.9)
$0.0
Derivative type
Interest rate contracts ....................................................... Other income (expense), net
Foreign currency contracts............................................... Other income (expense), net
Classification of gain (loss)
recognized on derivative
52
9. 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 28, 2012 is as follows:
Quoted
Prices in
Active
Markets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
(in millions)
Total
Significant
Unobservable
Inputs
(Level 3)
Assets:
Cash equivalents.................................................................................... $ 321.9 $ 321.9
Derivative instruments........................................................................... $
— $
Total assets ...................................................................................................... $ 322.1 $ 321.9 $
Liabilities:
0.2
Derivative instruments........................................................................... $
0.2
— $
0.2
0.2
0.2
—
—
—
—
Our hierarchy for assets and liabilities measured at fair value on a recurring basis as of April 30, 2011 is as follows:
Assets:
Cash equivalents .............................................................. $
Derivative instruments ..................................................... $
Total assets ................................................................................ $
Liabilities:
Derivative instruments ..................................................... $
Quoted
Prices in
Active
Markets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
(in millions)
Total
188.2 $
5.5
193.7 $
188.2
— $
188.2 $
5.6
— $
—
5.5
5.5
5.6
Significant
Unobservable
Inputs
(Level 3)
—
—
—
—
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.
Derivative instruments—Patterson’s derivative instruments consist of interest rate contracts. These instruments are valued using
inputs such as interest rates and credit spreads.
Certain assets are measured at fair value on a nonrecurring 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 2012, 2011 and 2010.
Patterson’s debt is not measured at fair value in the consolidated balance sheets. The estimated fair value of our debt as of
April 28, 2012 and April 30, 2011 was $869.7 million and $527.0 million, 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 Level 2 inputs under the fair value
measurements and disclosure guidance.
The carrying amounts of receivables, net of allowances, accounts payable, and certain accrued and other current liabilities
approximated fair value at April 28, 2012 and April 30, 2011.
53
10. Lease Commitments
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-cancelable operating leases are as follows at
April 28, 2012:
2013 ............................................................................................................................................................. $
2014 .............................................................................................................................................................
2015 .............................................................................................................................................................
2016 .............................................................................................................................................................
2017 .............................................................................................................................................................
Thereafter.....................................................................................................................................................
Total minimum payments required.............................................................................................................. $
18,392
14,116
11,276
9,226
7,285
10,824
71,119
Rent expense was $20,819, $20,459 and $19,238 for the years ended April 28, 2012, April 30, 2011 and April 24, 2010,
respectively.
11. Income Taxes
Significant components of the provision for income taxes are as follows:
Current:
Deferred:
Federal ................................................................................................ $
Foreign ................................................................................................
State ....................................................................................................
Total current ..............................................................................
Federal ................................................................................................
Foreign ................................................................................................
State ....................................................................................................
Total deferred ............................................................................
Provision for income taxes ........................................................................... $
2012
89,612
16,726
10,570
116,908
872
(895)
112
89
116,997
Fiscal Year
2011
$
$
87,315
14,548
11,469
113,332
14,938
310
1,922
17,170
130,502
$
$
2010
98,481
16,308
11,747
126,536
544
(360)
67
251
126,787
Deferred tax assets and liabilities are included in prepaid expenses and other current assets and in non-current liabilities on the
balance sheet. Significant components of Patterson’s deferred tax assets (liabilities) as of April 28, 2012 and April 30, 2011 are as
follows:
Deferred current income tax asset (liability):
Capital Accumulation Plan ................................................................................................. $
Inventory obsolescence.......................................................................................................
Bad debt allowance .............................................................................................................
LIFO reserve .......................................................................................................................
Other ...................................................................................................................................
Deferred net current income tax asset ..........................................................................................
Deferred long-term income tax (liability) asset:
Amortizable intangibles ......................................................................................................
Goodwill .............................................................................................................................
Property, plant, equipment..................................................................................................
Stock based compensation expense ....................................................................................
Net operating loss carryforwards ........................................................................................
Other ...................................................................................................................................
Valuation allowance ...........................................................................................................
Deferred net long-term income tax liability .................................................................................
Net deferred income tax liability.................................................................................................. $
54
2012
2011
4,045
2,124
2,022
(12,773)
17,544
12,962
(29,142)
(56,026)
(3,901)
7,897
7,656
(3,568)
(77,084)
(4,772)
(81,856)
(68,894)
$
$
4,048
3,455
2,424
(14,755)
14,229
9,401
(30,033)
(49,089)
(3,737)
6,146
9,431
(4,612)
(71,894)
(6,345)
(78,239)
(68,838)
At April 28, 2012, we had foreign net operating loss carryforwards (“NOLs”) of $31.5 million attributable to the fiscal 2009
acquisition of Mobilis Healthcare Group. A valuation allowance of $4.8 million has been recorded since we believe it is more likely
than not that the deferred tax asset of $7.7 million arising from the NOL’s will not be fully utilized due to uncertainties relating to
future taxable income from the acquired operations.
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 of undistributed earnings that would be subject to
federal income tax if remitted under existing law is approximately $228.0 million as of April 28, 2012. Determination of the
unrecognized deferred tax liability related to these earnings is not practicable because of the complexities with its hypothetical
calculation. Upon distribution of these earnings, we will be subject to U.S. taxes and withholding taxes payable to various foreign
governments. A credit for foreign taxes already paid would be available to reduce the U.S. tax liability.
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:
Tax at U.S. statutory rate................................................................................ $
State tax provision, net of federal benefit.......................................................
Effect of foreign taxes ....................................................................................
Other ...............................................................................................................
$
2012
115,434
7,277
530
(6,244)
116,997
Fiscal Year
2011
124,561
8,950
2,398
(5,407)
130,502
$
$
2010
118,664
8,103
1,411
(1,391)
126,787
$
$
We have adopted ASC Topic 740, “Income Taxes” related to accounting for the uncertainty in income taxes recognized in the
financial statements. These standards clarify 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 28, 2012 and April 30 2011, Patterson’s gross unrecognized tax benefits were $18.1 million and $19.0 million,
respectively. If determined to be unnecessary, these amounts (net of deferred tax assets of $5.0 million and $4.9 million, 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 28, 2012 and
April 30, 2011 are shown below:
Balances beginning of period ...................................................................................................... $
Additions for tax positions related to the current year ................................................................
Additions for tax positions of prior years....................................................................................
Reductions for tax positions of prior years .................................................................................
Statute expirations .......................................................................................................................
Settlements ..................................................................................................................................
Balance, end of period................................................................................................................. $
2012
18,963
2,288
474
(1,778)
(1,618)
(230)
18,099
2011
18,685
2,737
468
(1,309)
(1,504)
(114)
18,963
$
$
We also recognize both interest and penalties with respect to unrecognized tax benefits as a component of income tax expense.
As of April 28, 2012 and April 30, 2011, we had recorded $2.6 million and $2.9 million, 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 28, 2012, we recorded as
part of tax expense $.7 million 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.
During the year, our federal tax return for the year ended April 24, 2010 was audited by the Internal Revenue Service (“IRS”). The
outcome of this audit did not have a material adverse impact on our financial statements. Besides this audit, the IRS has either
examined or waived examination of all periods up to and including our fiscal year ended April 28, 2008. Periodically, state, local and
foreign income tax returns are examined by various taxing authorities. We do not believe the outcome of these various examinations
would have a material adverse impact on our financial statements.
55
12. Segment and Geographic Data
Patterson Companies, Inc. is comprised of three reportable segments: dental, veterinary, and rehabilitation supply. Our
reportable business segments are strategic business units that offer similar products and services to different customer bases. The
dental supply segment provides a virtually complete range of consumable dental products, clinical and laboratory equipment and
value-added services to dentists, dental laboratories, institutions and other dental healthcare providers throughout North America. The
veterinary supply segment provides consumable supplies, equipment, diagnostic products, biologicals (vaccines) and pharmaceuticals
to companion-pet veterinary clinics in the majority of regions throughout the United States. The rehabilitation supply segment
provides a comprehensive range 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 of home office support costs in areas such as informational technology, finance,
human resources and facilities. If these corporate expenses were allocated to the segments, the results would not be materially
different as the dental segment would absorb a significant portion of these expenses. The cost to operate the distribution centers are
allocated to the operating units based on the through-put of the unit.
The following table presents information about Patterson’s reportable segments:
2012
Fiscal Year
2011
2010
Net sales
Dental supply......................................................................................................... $ 2,287,875
Rehabilitation supply.............................................................................................
513,340
Veterinary supply ..................................................................................................
734,446
Consolidated net sales.................................................................................. $ 3,535,661
$ 2,236,056
504,734
674,880
$ 3,415,670
$ 2,167,495
426,297
643,584
$ 3,237,376
Operating income
Dental supply......................................................................................................... $
Rehabilitation supply.............................................................................................
Veterinary supply ..................................................................................................
Consolidated operating income ................................................................... $
Depreciation and amortization
Dental supply......................................................................................................... $
Rehabilitation supply.............................................................................................
Veterinary supply ..................................................................................................
Consolidated depreciation and amortization................................................ $
246,755
72,442
38,812
358,009
31,375
7,472
3,362
42,209
$
$
$
$
272,185
66,809
37,014
376,008
27,410
7,833
6,096
41,339
$
$
$
$
263,750
59,922
31,619
355,291
26,277
5,909
7,288
39,474
Total assets
Dental supply......................................................................................................... $ 1,502,672
Rehabilitation supply.............................................................................................
883,287
Veterinary supply ..................................................................................................
353,409
Consolidated total assets .............................................................................. $ 2,739,368
$ 1,359,659
863,930
341,379
$ 2,564,968
$ 1,331,510
773,732
317,727
$ 2,422,969
56
The following table presents sales information by product for Patterson and its reportable segments:
2012
Fiscal Year
2011
2010
Consolidated
Consumable and printed products .............................................................................
Equipment and software ............................................................................................
Other ..........................................................................................................................
Total .................................................................................................................
$ 2,312,309
930,601
292,751
$ 3,535,661
Dental supply
Consumable and printed products .............................................................................
Equipment and software ............................................................................................
Other ..........................................................................................................................
Total .................................................................................................................
$ 1,263,515
768,633
255,727
$ 2,287,875
Rehabilitation supply
Consumable and printed products .............................................................................
Equipment and software ............................................................................................
Other ..........................................................................................................................
Total .................................................................................................................
$
$
363,003
123,650
26,687
513,340
Veterinary supply
Consumable and printed products .............................................................................
Equipment and software ............................................................................................
Other ..........................................................................................................................
Total .................................................................................................................
$
$
685,790
38,319
10,337
734,446
$ 2,232,876
900,846
281,948
$ 3,415,670
$ 2,124,558
839,436
273,382
$ 3,237,376
$ 1,253,224
734,749
248,083
$ 2,236,056
$ 1,214,796
709,468
243,231
$ 2,167,495
$
$
$
$
348,641
131,776
24,317
504,734
631,011
34,321
9,548
674,880
$
$
$
$
303,044
100,583
22,670
426,297
606,718
29,385
7,481
643,584
The following table presents information about Patterson by geographic area. No individual country, except for the United
States, generated sales greater than 10% of consolidated net sales. There were no material sales between geographic areas.
2012
Fiscal Year
2011
2010
Net sales
United States....................................................................................................... $ 3,104,047
International........................................................................................................
431,614
Total .......................................................................................................... $ 3,535,661
$ 3,006,984
408,686
$ 3,415,670
$ 2,903,407
333,969
$ 3,237,376
Income before tax
United States....................................................................................................... $
International........................................................................................................
Total .......................................................................................................... $
286,215
43,597
329,812
$
$
316,293
39,594
355,887
$
$
298,061
40,980
339,041
Long-lived assets
United States....................................................................................................... $ 1,192,437
International........................................................................................................
143,418
Total .......................................................................................................... $ 1,335,855
$ 1,195,359
138,900
$ 1,334,259
$ 1,179,361
109,850
$ 1,289,211
57
13. Stockholders’ Equity
Dividends
We declared and paid cash dividends of
1
Fiscal year
0.12 $
2012 ................................................................................................................................
2011 ................................................................................................................................
0.10 $
2010 ................................................................................................................................
3
0.12 $
$
0.10 $
$
$ — $ — $ — $
2
0.12 $
0.10 $
Period
4
0.14
0.12
0.10
Prior to March 2010, Patterson had not declared or paid any cash dividends on its common stock since our initial public offering
in 1992. Patterson expects to continue paying a quarterly cash dividend into the foreseeable future.
Share Repurchases
During fiscal 2012, we repurchased and retired 11,954,257 shares of our common stock for $361,047, or an average of $30.20
per share. During fiscal 2011, Patterson repurchased and retired 3,257,374 shares of our common stock for $98,960, or an average of
$30.38 per share. There were no share repurchases in fiscal 2010.
In December 2007, Patterson’s Board of Directors expanded a share repurchase program to allow for the purchase of up to 25
million shares of common stock in open market transactions. As of March 2011, approximately 20.5 million 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 million shares of common stock. As of April 28, 2012, 11,136,742
shares remain available under the repurchase authorization, which expires on March 15, 2016.
Employee Stock Ownership Plan (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 1,000
hours of service during the plan year. The shares under the 1990 note were grandfathered from the accounting provisions of ASC
Topic 718-40, “Employer Stock Ownership Plans” (“ASC 718-40”) and therefore the provisions of the former SOP 76-3 apply.
Accordingly, the expense recognized when these shares were released and allocated to participants was based on the original cost to
acquire the shares. In fiscal 2011, the final payment on the 1990 note was made and all remaining shares were released for allocation
to participants. During fiscal 2011 and 2010, shares secured by the 1990 note with an aggregate cost of $1,635 and $1,615,
respectively, were committed for release and allocated to ESOP 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 665,978 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
665,978 shares issued in the transaction 97,810 were previously allocated to Thompson employees. The remaining 568,168 shares
began to be allocated in fiscal 2004. During fiscal 2012, 2011 and 2010, shares secured by the Thompson note with an aggregate fair
value of $298, $81 and $111, 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 million (the “2006 note”) for
the sole purpose of enabling the ESOP to purchase shares of our common stock. The ESOP purchased 3,159,645 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 principal
payments are due until September 10, 2026; however, prepayments can be made without penalty. During fiscal 2012 and 2011, shares
secured by the 2006 note with aggregate fair values of $458 and $397, respectively, were committed for release and allocated to ESOP
participants. No shares secured by the 2006 note were released prior to fiscal 2011.
58
At April 28, 2012, a total of 14,432,446 shares of common stock that have been allocated to participants remained in the ESOP
and had a fair market value of $490.6 million. Related to the shares from the Thompson transaction, committed-to-be-released shares
were 9,569 and suspense shares were 473,669. Finally, with respect to the 2006 note, committed-to-be-released shares were 14,730
and suspense shares were 3,131,694.
We anticipate the allocation of the remaining suspense, or unearned, shares to occur over a period of approximately 10 to 15
years. As of April 28, 2012, the fair value of all unearned shares held by the ESOP was approximately $122.5 million. 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.
14. Stock-based Compensation
The consolidated statements of income for fiscal years 2012, 2011 and 2010 include pre-tax stock-based compensation expense
of $12.6 million ($8.4 million after-tax), $10.5 million ($7.2 million after-tax) and $8.8 million ($6.2 million after-tax), respectively,
recorded in accordance with the provisions of ASC Topic 718 “Stock Compensation”. All pre-tax expense is included in operating
expenses within the consolidated statements of income. The consolidated statement of cash flows present the pre-tax stock-based
compensation expense as an adjustment to reconcile net income to net cash provided by operating activities. In addition, benefits
associated with tax deductions in excess of recognized compensation expense are presented as a cash inflow from financing activities.
For fiscal years 2012, 2011 and 2010, these excess benefits totaled $1.4, $1.3 and $0.4, respectively.
As of April 28, 2012, the total compensation cost, before income taxes, related to non-vested awards yet to be recognized was
$23.1 million, and it is expected to be recognized over a weighted average period of approximately 3.4 years.
Description of General Methods and Assumptions Used to Estimate Fair Value
Described below are 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 Plans
In June 1992, we adopted a Director Stock Option Plan. Options were granted at the fair market value of the underlying stock on
the date of grant, vest over one year, and are exercisable for a period of four years commencing one year after the date of grant. This
plan terminated during fiscal 2002.
In September 2001, we adopted a new Director Stock Option Plan. A total of 800,000 shares of common stock have been
reserved for issuance under this plan. Options are granted at fair market value of the underlying stock on the option grant date, vest
over one year, and are exercisable for a period of nine years commencing one year after the grant date.
In June 1992, we adopted the Patterson Dental Company 1992 Stock Option Plan, a plan for employees. Due to the expiration of
this plan in fiscal 2003, no options remain available for future issuance under this plan. In September 2002, we adopted a new
employee equity award plan. A total of 6,000,000 shares of common stock were reserved for issuance under the plan. In September
2004, our shareholders voted to approve the Amended and Restated 2002 Stock Option Plan, a restatement of the 2002 plan. Upon
approval, the Plan was renamed the “Patterson Companies, Inc. Equity Incentive Plan” (“Equity Incentive Plan”).
The Equity Incentive Plan amendments did not change the number of shares reserved for awards under the plan. The Equity
Incentive Plan authorizes various award types to be issued under the plan, including stock options, restricted stock and restricted stock
units, stock bonuses, cash bonuses, stock appreciation rights, performance 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 period for restricted stock and restricted stock units is three years, or one year in the case of performance-based awards.
59
April 24,
2010
—
32.7%
2.7%
8.3
Intrinsic
Value
Total Outstanding
Exercise
Price (a)
$ 25.24
20.76
12.36
33.15
$ 26.94
32.08
17.82
23.02
$ 29.82
33.90
24.11
29.64
$ 31.45 $ 4,453
$ 31.15 $ 4,161
$ 29.94 $ 3,479
Additionally, a plan amendment in September 2010 increased the maximum number of shares that may be issued pursuant to awards
of restricted stock, restricted stock awards and stock bonuses from 2,000,000 shares to 6,000,000 shares. Prior to fiscal 2006, only
stock option awards had been granted under the Equity Incentive Plan. During fiscal years 2012, 2011 and 2010, expense recognized
related to stock options was $1.6 million, $1.7 million and $2.0 million, respectively.
The fair value of stock options granted was estimated as of the grant date using a Black-Scholes option-pricing model with the
following weighted average assumptions during fiscal years 2012, 2011 and 2010:
Expected dividend yield.................................................................................................................
Expected stock price volatility .......................................................................................................
Risk-free interest rate .....................................................................................................................
Expected life of options (years) .....................................................................................................
1.5%
33.0%
2.5%
7.4
1.2%
38.0%
3.6%
8.8
Following is a summary of stock option activity for all plans during fiscal years 2012, 2011 and 2010:
April 28,
2012
April 30,
2011
Balance as of April 25, 2009.............................................................................................................
Granted ....................................................................................................................................
Exercised .................................................................................................................................
Canceled ..................................................................................................................................
Balance as of April 24, 2010.............................................................................................................
Granted ....................................................................................................................................
Exercised .................................................................................................................................
Canceled ..................................................................................................................................
Balance as of April 30, 2011.............................................................................................................
Granted ....................................................................................................................................
Exercised .................................................................................................................................
Canceled ..................................................................................................................................
Balance as of April 28, 2012.............................................................................................................
Vested or expected to vest as of April 28, 2012 ...............................................................................
Exercisable as of April 28, 2012 .......................................................................................................
(a) Weighted-average exercise price
Number
of
Options
1,898
86
(281)
(55)
1,648
51
(334)
(92)
1,273
64
(232)
(119)
986
863
576
The weighted average fair values of options granted during fiscal years 2012, 2011 and 2010 were $11.47, $14.07, and $8.95,
respectively. The weighted average remaining contractual lives of options outstanding and options exercisable as of April 28, 2012
were 3.3 and 2.3 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 $1.7, $5.6 and $0.4 million,
respectively, in fiscal 2012; $4.4, $6.1 and $1.2 million, respectively, in fiscal 2011; and $3.4, $3.5 and $1.3 million, respectively, in
fiscal 2010.
Restricted Stock and Performance Unit Awards
In 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 awards to employees generally vest over a five,
seven or nine-year period and are subject to forfeiture provisions. Certain restricted stock awards, which are held by line management,
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 board meeting. These awards vest over three years.
The performance unit 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 goals 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
60
method based on the outcome that is probable. During fiscal years 2012, 2011 and 2010, expense recognized related to restricted stock
and performance unit awards was $8.0 million, $5.5 million and $3.7 million, respectively. The total intrinsic value of restricted stock
awards that vested in fiscal 2012, 2011 and 2010 was $4.6 million, $3.5 million and $0.8 million, respectively. No performance units
were granted in fiscal 2011 or fiscal 2010 and none of the performance units that had been awarded prior to fiscal 2010 were
ultimately earned. Patterson granted performance units in fiscal 2012 which can be earned at the end of fiscal 2014, subject to the
achievement of certain financial objectives.
The following tables summarize information concerning non-vested restricted stock awards and performance unit awards for
fiscal years 2012, 2011 and 2010:
Outstanding at April 25, 2009 ..........................................................................................
Granted .............................................................................................................................
Vested ...............................................................................................................................
Forfeitures ........................................................................................................................
Outstanding at April 24, 2010 ..........................................................................................
Granted .............................................................................................................................
Vested ...............................................................................................................................
Forfeitures ........................................................................................................................
Outstanding at April 30, 2011 ..........................................................................................
Granted .............................................................................................................................
Vested ...............................................................................................................................
Forfeitures ........................................................................................................................
Outstanding at April 28, 2012 ..........................................................................................
Outstanding at April 25, 2009 ..........................................................................................
Forfeitures and cancellations............................................................................................
Outstanding at April 24, 2010 ..........................................................................................
Forfeitures and cancellations............................................................................................
Outstanding at April 30, 2011 ..........................................................................................
Granted .............................................................................................................................
Forfeitures and cancellations............................................................................................
Outstanding at April 28, 2012 ..........................................................................................
Restricted Stock Awards
Shares
537
451
(34)
(35)
919
406
(104)
(110)
1,111
272
(138)
(83)
1,162
$
$
$
$
Weighted Average
Grant-Date
Fair Value
35.77
20.35
(36.65)
(29.21)
28.42
31.91
(33.07)
(28.81)
29.22
34.60
(25.45)
(29.25)
30.92
Performance Unit Awards
Shares
63
(36)
27
(27)
0
102
(6)
96
$
$
$
$
Weighted Average
Grant-Date
Fair Value
32.80
(34.24)
30.88
(30.88)
0
35.41
(35.41)
35.41
Employee Stock Purchase Plan
In June 1992, Company adopted an Employee Stock Purchase Plan (the “Stock Purchase Plan”). A total of 4,750,000 shares of
common stock are reserved for issuance under the Stock Purchase Plan. 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 nine 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 percent
of the lower of the fair market value of the common stock on the offering date or at the end of each three-month period following the
offering date during the applicable offering period. Employees may end their participation in the offering at any time during the
offering period, and participation ends automatically on termination of employment. At April 28, 2012, there were 271,886 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 on the grant date using the Black-Scholes option-pricing model. Total expense recognized related to the employee stock
61
purchase plan was $1.8, $1.8 and $1.6 million during fiscal years 2012, 2011 and 2010, respectively. The following table summarizes
the weighted-average assumptions relating to the Stock Purchase Plan for fiscal years 2012, 2011 and 2010:
Expected dividend yield......................................................................................................................
Expected stock price volatility ............................................................................................................
Risk-free interest rate ..........................................................................................................................
Expected life of options (years) ..........................................................................................................
1.4%
31.3%
0.2%
0.5
2012
2011
0.4%
31.3%
0.2%
0.5
2010
0.0%
29.0%
0.1%
0.5
Capital Accumulation Plan
In 1996, we adopted an employee Capital Accumulation Plan (the “CAP Plan”). A total of 6,000,000 shares of common stock
are reserved for issuance under the CAP Plan. 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 three years from the beginning of the plan
year, but restricted shares are subject to forfeiture provisions. At April 28, 2012, 2,345,792 shares were available for purchase under
the CAP Plan.
Based on the provisions of the CAP Plan, there are option elements for which the fair value is estimated on the grant date using
the Black-Scholes option-pricing model. Total expense recognized related to the CAP Plan was $1.3, $1.4 and $1.6 million during
fiscal years 2012, 2011 and 2010, respectively. The following table summarizes the weighted-average assumptions relating to the CAP
Plan for fiscal years 2012, 2011 and 2010:
Expected dividend yield....................................................................................................................
Expected stock price volatility ..........................................................................................................
Risk-free interest rate ........................................................................................................................
Expected life of options (years) ........................................................................................................
1.4%
31.3%
0.3%
1.0
2012
2011
0.4%
31.3%
0.4%
1.0
2010
0.0
29.0%
1.1%
1.0
15. Litigation
We are involved in various product related, employment related and other legal proceedings arising in the ordinary course of
business. Some of these proceedings involve product liability claims arising out of the use of products we distribute. Product liability
indemnification is generally obtained from our suppliers. However, in the event a supplier of a defective product is unable to pay a
judgment for which Patterson may be jointly liable, Patterson would have liability for the entire judgment.
We maintain product liability insurance coverage for any potential liability for claims arising out of products sold by us. While
we believe our insurance coverage is adequate, there can be no assurance that our insurance coverage is sufficient or will be available
to in adequate amounts or at reasonable costs in the future. Also, there can be no assurance that the indemnification agreements with
our suppliers will provide adequate protection. In addition, future claims brought against us could involve claims not covered by
insurance or indemnification agreements, and could have a material adverse effect on our business or financial condition.
As of April 28, 2012 and April 24, 2011, Patterson had accrued our best estimate of potential losses relating to product liability
and other claims that were probable to result in a liability and for which it was possible to reasonably estimate a loss. These accrued
amounts, as well as related expenses, have not been material to our financial position, results of operations or cash flows. Our method
for determining estimated losses considers currently available facts, presently enacted laws and regulations and other external factors,
including probable recoveries from third parties.
62
16. 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 July 31, 2011, which
included 14 weeks. The following table summarizes results for fiscal 2012 and 2011.
Quarter Ended
Apr. 28,
2012
Net sales .....................................................................................................................
$ 936,334
Gross profit ................................................................................................................
313,721
Operating income .......................................................................................................
102,851
Net income .................................................................................................................
62,143
Earnings per share—basic..........................................................................................
0.59
Earnings per share—diluted.......................................................................................
0.58
$
$
Jan. 28,
2012
$ 895,030
289,534
89,906
53,108
0.50
0.50
$
$
Oct. 29,
2011
July 30,
2011
280,983
83,259
48,954
$ 856,875 $ 847,422
278,276
81,993
48,610
0.42
0.42
0.43 $
0.43 $
$
$
Net sales .................................................................................................................
Gross profit ............................................................................................................
Operating income ...................................................................................................
Net income .............................................................................................................
Earnings per share—basic......................................................................................
Earnings per share—diluted...................................................................................
Apr. 30,
2011
$ 883,819
303,949
104,125
62,707
0.52
0.52
$
$
Quarter Ended
Jan. 29,
2011
$ 824,650
280,875
92,707
55,396
0.47
0.47
$
$
Oct. 30,
2010
July 31,
2010
279,201
90,152
53,357
$ 857,414 $ 849,787
280,200
89,024
53,925
0.45
0.45
0.45 $
0.45 $
$
$
63
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 28, 2012,
using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—
Integrated Framework. Based on its assessment, management has concluded that our internal control over financial reporting was
effective as of April 28, 2012. During its assessment, management did not identify any material weaknesses in our internal control
over financial reporting. 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.
/s/ SCOTT P. ANDERSON
President and Chief Executive Officer
/s/ R. STEPHEN ARMSTRONG
Executive Vice President, Chief Financial
Officer and Treasurer
64
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 28, 2012, we carried out an evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and our Chief Financial Officer, of 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. 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 person 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 2012, there were no significant changes in our internal controls over financial reporting
that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Item 9B.
OTHER INFORMATION
None.
65
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 10, 2012 (the “2012 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 2012 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 2012 Proxy Statement and such information is
incorporated by reference herein.
Code of Ethics
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—Governance.” We intend to satisfy the disclosure requirement of Form 8-K regarding an amendment to, or
waiver from, a provision of its Code of Ethics by posting such information on its 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” and “Executive Compensation” in the 2012 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 caption “Security Ownership of Certain Beneficial Owners and Management: and “Equity
Compensation Plan Information” in the 2012 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 2012 Proxy Statement.
Item 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
Information relating to principal accounting fees and services and pre-approval policies and procedures is set forth under the
captions “Proposal No. 6 Ratification of Selection of Independent Registered Public Accounting Firm—Principal Accountant Fees and
Services” in the 2012 Proxy Statement and such information is incorporated by reference herein.
66
Item 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
PART IV
(a)
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 .................................................................................................................. 40
Consolidated Balance Sheets as of April 28, 2012 and April 30, 2011 ................................................................................................... 41
Consolidated Statements of Income for the Years Ended April 28, 2012, April 30, 2011 and April 24, 2010 ...................................... 42
Consolidated Statement of Changes in Stockholders’ Equity for the Years Ended April 28, 2012, April 30, 2011 and
April 24, 2010 ..................................................................................................................................................................................... 43
Consolidated Statements of Cash Flows for the Years Ended April 28, 2012, April 30, 2011 and April 24, 2010................................ 44
Notes to Consolidated Financial Statements............................................................................................................................................ 45
2. Financial Statement Schedules.
The following financial statement schedule is filed herewith: Schedule II—Valuation and Qualifying Accounts for the Years
Ended April 28, 2012, April 30, 2011 and April 24, 2010.
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.
3. Exhibits.
Exhibit
2.1
3.1
3.2
4.1
4.2
4.3
4.4
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
Article of Merger and Plan of Merger dated June 23, 2004 10
Patterson’s Restated Articles of Incorporation 10
Patterson’s Bylaws, as amended 1
Specimen form of Patterson’s Common Stock Certificate 10
Pursuant to Item 601 (b)(4)(iii)(A) of Regulation S-K, the registrant has omitted to file certain unregistered convertible
debentures. The total amount of securities authorized thereunder does not exceed 10 percent of the total assets of the
registrant and its subsidiaries on a consolidated basis. The registrant hereby agrees to furnish a copy of such convertible
debentures to the Commission upon request. 8
Credit Agreement dated as of November 25, 2003 among Patterson Dental Company, the Subsidiary Borrowers from time
to time parties hereto, the Lenders from time to time parties hereto, Bank One, NA (main office Chicago), as
Administrative Agent, Bank of America, N.A., as Syndication Agent and Suntrust Bank, the Northern Trust Company, and
U.S. Bank National Association, as Documentation Agents 9
Note Purchase Agreement dated as of November 15, 2003 among Patterson Dental Company, AbilityOne Products Corp.,
AbilityOne Corporation, Patterson Dental Supply, Inc., Webster Veterinary Supply, Inc. and Webster Management, LP 9
Patterson Dental Company Employee Stock Ownership Plan, as amended 1
Patterson Dental Company 1992 Stock Option Plan 1
Patterson Dental Company 1992 Director Stock Option Plan 1
Patterson Dental Company Employee Stock Purchase Plan 1
Patterson Dental Company Capital Accumulation Plan 2
Patterson Companies, Inc. fiscal 2012 Incentive Plan
ESOP Loan Agreement dated June 15, 1990 as amended July 13, 1992 1
Amended and Restated Term Promissory Note dated July 13, 1992 1
67
Exhibit
10.9
Second Amended and Restated Contract Purchase Agreement dated April 28, 2000 between Patterson Dental Company
and U.S. Bank National Association 3
10.10 Amended and Restated Credit Agreement dated April 28, 2000 between Patterson Dental Company and U.S. Bank
National Association 3
10.11 Asset Purchase Agreement by and among Patterson Dental Company and J. A. Webster, Inc. 4
10.12
10.13
10.14
Third Amended and Restated Contract Purchase Agreement dated June 19, 2002 between Patterson Dental Company and
U. S. Bank National Association 5
Third Amended and Restated Receivables Purchase Agreement dated December 3, 2011 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. 12
Receivables Sale Agreement dated May 10, 2002 among PDC Funding Company, LLC, Patterson Dental Supply, Inc., and
Webster Veterinary Supply, Inc. 5
10.15
2001 Non-Employee Director Stock Option Plan 5
10.16 Amendments to Restated Employee Stock Purchase Plan 5
10.17 Amended and Restated Employee Stock Ownership Plan 5
10.18
Stock Option Plan for Canadian Employees 6
10.19
10.20
10.21
10.22
Patterson Companies, Inc. Equity Incentive Plan 11
ESOP Loan Agreement dated April 1, 2002 7
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 7
Bridge Credit Facility dated as of September 12, 2003 among Patterson Dental Company as the borrower and Banc One
Mezzanine Corporation, as Administrative Agent and Bank of America, N.A., as Syndication Agent. 8
10.23
ESOP Loan Agreement dated September 11, 2006 13
10.24
10.25
10.26
ESOP Note dated September 11, 2006 13
Receivables Sale Agreement dated April 27, 2007 among PDC Funding Company II, LLC, Patterson Dental Supply, Inc.,
and Webster Veterinary Supply, Inc. 14
Contract Purchase Agreement dated April 27, 2007 among PDC Funding Company II, LLC, Patterson Companies, Inc.,
U.S. Bank National Association and The Northern Trust Company 14
10.27 Amended and Restated Credit Agreement, dated as of November 28, 2007, among Patterson Companies, Inc., as Patterson,
the Subsidiary Borrowers from time to time parties hereto, the Lenders from time to time parties hereto, JPmorgan Chase
Bank, National Association (Successor by merger to Bank One, NA (Main Office Chicago)), as Administrative Agent,
Bank of America, N.A., as Syndication Agent, and SunTrust Bank, the Northern Trust Company, and U.S. Bank National
Association, as Documentation Agents. 15
10.28 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 16
10.29
Term Loan Credit Agreement dated March 20, 2008 among Patterson Companies, Inc., as the Borrower, the Lenders from
time to time parties hereto and JPMorgan Chase Bank, National Association (Successor by merger to Bank One, NA
(Main Office Chicago)), as Administrative Agent 16
10.30 Accelerated Share Repurchase Agreement, dated March 19, 2008, by and between Patterson Companies, Inc. and
JPMorgan Chase Bank, National Association 16
21
23
Subsidiaries
Consent of Independent Registered Public Accounting Firm
68
Exhibit
31.1
31.2
32.1
32.2
101
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
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
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
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 Electronically) The following financial information from our Annual Report on Form 10-K for fiscal 2012, filed
with the SEC on June 29, 2012, formatted in Extensible Business Reporting Language (XBRL): (i) the consolidated
balance sheets at April 28, 2012 and April 24, 2011, (ii) the consolidated statements of income for the year ended April 28,
2012, April 24, 2011 and April 25, 2010, (iii) the consolidated statements of cash flows for the years ended April 28, 2012,
April 24, 2011 and April 25, 2010, (iv) the consolidated statements of changes in stockholders’ equity for the years ended
April 28, 2012, April 24, 2011 and April 25, 2010 and (v) the notes to the consolidated financial statements. (a)
1
(a) 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.
Incorporated by reference to the Registrant’s Registration Statement on Form S-1 (No. 33-51304) filed with the Securities and
Exchange Commission August 26, 1992.
Incorporated by reference to the Registrant’s Form 10-K for the fiscal year ended April 27, 1996.
Incorporated by reference to the Registrant’s Form 10-K for the fiscal year ended April 29, 2000.
Incorporated by reference to the Registrant’s Form 10-K for the fiscal year ended April 28, 2001.
Incorporated by reference to the Registrant’s Form 10-K for the fiscal year ended April 27, 2002.
Incorporated by reference to the Registrant’s Form 10-Q for the quarterly period ended January 25, 2003.
Incorporated by reference to the Registrant’s Form 10-K for the fiscal year ended April 26, 2003.
Incorporated by reference to the Registrant’s Form 10-Q for the quarterly period ended October 25, 2003.
Incorporated by reference to the Registrant’s Form 10-Q for the quarterly period ended January 24, 2004.
Incorporated by reference to the Registrant’s Form 10-Q for the quarterly period ended July 31, 2004.
Incorporated by reference to the Registrant’s Form 8-K/A dated September 14, 2004, filed on September 29, 2004.
Incorporated by reference to the Registrant’s Form 8-K dated December 3, 2011, filed on December 8, 2011.
Incorporated by reference to the Registrant’s Form 8-K dated September 11, 2006, filed on September 12, 2006.
Incorporated by reference to the Registrant’s Form 8-K dated April 27, 2007, filed on May 3, 2007.
Incorporated by reference to the Registrant’s Form 8-K dated November 28, 2007, filed on December 3, 2007.
Incorporated by reference to the Registrant’s Form 8-K dated March 19, 2008, filed on March 24, 2008.
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
(b) See Schedule II.
(c) See Index to Exhibits.
69
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.
SIGNATURES
Dated: June 27, 2012
PATTERSON COMPANIES, INC.
By
/s/ SCOTT P. ANDERSON
Scott P. Anderson,
President and Chief Executive Officer
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.
/s/ SCOTT P. ANDERSON
Scott P. Anderson
President and Chief Executive Officer
(Principal Executive Officer)
/s/ R. STEPHEN ARMSTRONG
R. Stephen Armstrong
Executive Vice President, Treasurer,
and Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ PETER L. FRECHETTE
Peter L. Frechette
Director
(Chairman of the Board of Directors)
/s/ JOHN D. BUCK
John D. Buck
/s/ JODY H. FERAGEN
Jody H. Feragen
/s/ ANDRE B. LACY
Andre B. Lacy
/s/ CHARLES REICH
Charles Reich
/s/ ELLEN A. RUDNICK
Ellen A. Rudnick
/s/ HAROLD C. SLAVKIN
Harold C. Slavkin
/s/ BRIAN S. TYLER
Brian S. Tyler
/s/ LES C. VINNEY
Les C. Vinney
/s/ JAMES W. WILTZ
James W. Wiltz
Director
Director
Director
Director
Director
Director
Director
Director
Director
70
Date
June 27, 2012
June 27, 2012
June 27, 2012
June 27, 2012
June 27, 2012
June 27, 2012
June 27, 2012
June 27, 2012
June 27, 2012
June 27, 2012
June 27, 2012
June 27, 2012
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
PATTERSON COMPANIES, INC.
(Dollars 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 28, 2012:
Deducted from asset accounts:
Allowance for doubtful accounts ............................... $
LIFO inventory adjustment........................................ $
Inventory obsolescence reserve .................................
Total inventory reserve..................................... $
Year ended April 30, 2011:
Deducted from asset accounts:
Allowance for doubtful accounts ............................... $
LIFO inventory adjustment........................................ $
Inventory obsolescence reserve .................................
Total inventory reserve..................................... $
Year ended April 24, 2010:
Deducted from asset accounts:
Allowance for doubtful accounts ............................... $
LIFO inventory adjustment........................................ $
Inventory obsolescence reserve .................................
Total inventory reserve..................................... $
8,365 $
61,385 $
5,844
67,229 $
2,445 $
5,422 $
11,508
16,930 $
— $
— $
—
— $
2,979 $
— $
11,896
11,896 $
7,831
66,807
5,456
72,263
9,111 $
56,961 $
8,329
65,290 $
3,409 $
4,424 $
10,403
14,827 $
— $
— $
—
— $
4,155 $
— $
12,888
12,888 $
8,365
61,385
5,844
67,229
9,773 $
51,934 $
8,381
60,315 $
4,579 $
5,027 $
10,347
15,374 $
— $
— $
—
— $
5,241 $
— $
10,399
10,399 $
9,111
56,961
8,329
65,290
71
INDEX TO EXHIBITS
Exhibit 10.6
Patterson Companies, Inc. Fiscal 2012 Incentive Compensation Plan
Exhibit 21
Subsidiaries
Exhibit 23
Consent of Independent Registered Public Accounting Firm
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 2002
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 2002
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 2002
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 2002
101
(Filed Electronically) The following financial information from our Annual Report on Form 10-K for fiscal 2012,
filed with the SEC on June 29, 2012, formatted in Extensible Business Reporting Language (XBRL): (i) the
consolidated balance sheets at April 28, 2012 and April 24, 2011, (ii) the consolidated statements of income for the
year ended April 28, 2012, April 24, 2011 and April 25, 2010, (iii) the consolidated statements of cash flows for the
years ended April 28, 2012, April 24, 2011 and April 25, 2010, (iv) the consolidated statements of changes in
stockholders’ equity for the years ended April 28, 2012, April 24, 2011 and April 25, 2010 and (v) the notes to the
consolidated financial statements. (a)
72
PATTERSON COMPANIES, INC.
Fiscal 2012
Incentive Plan
Exhibit 10.6
PLAN PURPOSE
The objective of Fiscal 2012 Patterson Companies, Inc. (PDCO) Incentive Compensation Plan (the “Plan”) is to encourage
greater initiative, resourcefulness, teamwork, and efficiency on the part of its employees. The day-to-day performance and
responsibilities of each individual have a direct impact on our internal and external customer satisfaction, sales and operational goals,
which ultimately affects the profitability.
ELIGIBILITY
Participation
This Incentive Program is designed to include designated employees across the organization. Incentive opportunity for targeted
groups of employees is specified in the Plan schedules attached to this document. Newly hired, transferred, or employees who become
participants during the Plan year will be eligible on a prorated basis under the respective schedule.
Participation in the Plan is determined by the CEO with approval of the President of each respective subsidiary or operating unit
and is based on level of responsibility and organizational impact of the participant.
Participants are eligible for participation in only one Patterson Companies, Inc. (or subsidiary thereof) incentive, bonus, or other
variable pay program, unless so authorized by specific provisions included in this Plan and the respective Patterson Companies, Inc.
variable pay Plan document(s).
Award Payments
To receive an award several criteria must be met:
Employment—To be eligible to receive an award, the individual must be employed by Patterson Companies, Inc., or a
subsidiary thereof, on the date awards are made;
Job elimination—Participants whose positions are eliminated may, at the discretion of management, be eligible for
prorated awards based on tenure in the qualifying position, overall performance level, actual results attained, and other criteria
determined by management;
Job transfer—Participants who transfer into or out of eligible positions within Patterson may be eligible for prorated
awards based on tenure in the qualifying position, overall performance level, actual results attained, and management discretion;
Performance—Continued participation in the Plan is dependent upon the participant remaining an employee in good
standing as defined by Patterson Companies, Inc. or its subsidiary. To qualify for an award, a participant must have a
satisfactory performance rating and not be on a formal performance improvement plan. A participant on written warning or
disciplinary status at any time during the Plan year may have his/her incentive award reduced or denied at management’s
discretion;
Ethical and Legal Standards—Participants are required to be in compliance with, and abide by, Patterson Companies, Inc.
Code of Ethics and comply with the letter and spirit of its provisions at all times.
No awards are considered earned until they are paid.
BASIS FOR AWARDS
The management of Patterson Companies, Inc. will approve participant objectives and evaluate performance of the business
unit. Performance will be evaluated based on the specific goals and measures described in the attached plan schedules, the effective
management of customer and employee relations, and compliance with Company expectations of good business practices and ethical
conduct.
Patterson Companies, Inc. reserves the right to make changes to the Plan at any time, including but not limited to: withdraw or
withhold from the Plan any transaction, product or service it might select; revise territories; establish specific account, customer, or
portfolio representation; and assign or reassign specific accounts, customers, or portfolios within a participant’s location service area
at any time during the fiscal year.
Goals, incentive targets, territory assignments, and any other factors affecting this Plan may be reviewed and changed at any
time during the Plan year.
APPROVAL OF AWARD PAYMENTS
The President of each respective subsidiary or operating unit will review and approve all award recommendations prior to
submission to payroll for payment. Management may adjust payments at its own discretion to reflect the impact of any event that
distorts actual results achieved and effective management of customer and employee relations. All awards are paid at the discretion of
management.
DISTRIBUTION OF AWARD PAYMENTS
Generally, awards are calculated following the end of the fiscal year and payments are scheduled within 75 days after the end of
the fiscal year.
Award payments are made by the same means as the individual’s normal payroll. Applicable withholdings are deducted from all
payments. Payments made under this Plan will be used in the calculation of benefits only as allowed under the applicable benefit plan.
Awards are considered as earned by the participant on the date of actual distribution.
Generally, awards are determined and paid according to the provisions of this Plan document. Any exceptions require the
approval of the President of each respective subsidiary or operating unit.
CHANGES IN EMPLOYMENT STATUS
In the event a participant dies, becomes disabled (as defined by Patterson’s Group Long Term Disability Plan provisions),
retires, or is on a leave of absence (as defined by applicable Patterson policies), he/she may be eligible for an award based on
management's discretionary review of the participant’s actual performance and actual work done while at work. In the event of death,
the award payment, if any, is issued in the name of the deceased and made payable to the estate.
ADOPTION AND ADMINISTRATION
The President and Chief Executive Officer of Patterson Companies, Inc., and the President of the subsidiary or operating unit, or
the Vice President—Human Resources on their behalf, must approve the attached Plan schedules. The Plan schedules are effective for
each fiscal year and are updated annually.
The President of each respective subsidiary or operating unit holds general authority and on-going responsibility for Plan
administration. Any exceptions to the provisions in this Plan require approval of the President of Patterson Companies, Inc. and the
President of the respective subsidiary or operating unit. The foregoing officers and the Executive Vice President of Patterson
Companies, Inc., or the Vice President of Human Resources acting on their behalf, have the authority to interpret the terms of this
Plan.
This Plan supersedes all prior Incentive Plans. No agreements or understandings will modify this Plan unless they are in writing
and approved by the President and Chief Executive Officer of Patterson Companies, Inc. and the President of the respective subsidiary
or operating unit. This Plan is reviewed annually to determine the appropriateness of future continuation.
NO CONTRACT
Participation in this Plan does not constitute a contract of employment and shall not affect the right of Patterson Companies, Inc.
to discharge, transfer, or change the position of a participant. The employment of any person participating in the Plan may be
terminated at any time and no promise or representation is made regarding continued employment because of participation in the Plan.
The Plan shall not be construed to limit or prevent Patterson Companies, Inc. from adopting or changing, from time to time, any
rules, standards, or procedures affecting a participant’s employment with Patterson Companies, Inc. or any Patterson Companies, Inc.
affiliate, including those which affect award payments, with or without notice to the participant.
ETHICAL AND LEGAL STANDARDS
A participant shall not pay, offer to pay, assign or give any part of his/her compensation or any other money to any agent,
customer, or representative of the customer or any other person as an inducement or reward for assistance in making a sale. Moreover,
no rights under this Plan shall be assignable or subject to any pledge or encumbrance of any nature.
If a participant fails to comply with the Patterson Companies, Inc. Code of Ethics or the provisions included in this Plan
document or violates any other Company policy, his/her award may be adjusted, reduced, or denied at the discretion of Patterson
Companies, Inc. management.
Approved
Scott P. Anderson
President & Chief Executive Officer
R. Stephen Armstrong
Chief Financial Officer and
Executive Vice President
Date
Date
NAME
Patterson Dental Holdings, Inc.
Patterson Dental Supply, Inc.
Direct Dental Supply Co.
Patterson Dental Canada Inc.
Patterson Technology Center, Inc.
Patterson Office Supplies, Inc.
Williamston Industrial Center, LLC
PDC Funding Company, LLC
PDC Funding Company II, LLC
Webster Veterinary Supply, Inc.
Webster Management LP
Patterson Medical Holdings, Inc.
Patterson Medical Supply, Inc.
Tumble Forms, Inc.
Midland Manufacturing Company, Inc.
Sammons Preston Canada, Inc.
Homecraft Roylan LTD
Kinetec S.A.
Patterson Medical Limited
Mobilis Healthcare Group LTD
Halo Healthcare LTD
County Footwear LTD
Ausmedic Australia LTD
Auckbritt International LTD
Metron Holdings LTD
Metron Medical Australia LTD
Metron Medical Co. LTD
Physio Med Services LTD
Days Healthcare Property Investments LTD
PCI Limited I, LLC
PCI Limited II, LLC
PCI Two Limited Partnership
Patterson Logistics Services, Inc.
Dolphin Imaging Systems, LLC
Dolphin Practice Management, LLC
SUBSIDIARIES
JURISDICTION OF INCORPORATION
EXHIBIT 21
Minnesota
Minnesota
Nevada
Canada
Minnesota
Minnesota
Michigan
Minnesota
Minnesota
Minnesota
Minnesota
Delaware
Minnesota
New York
South Carolina
Ontario
England & Wales
France
United Kingdom
United Kingdom
United Kingdom
United Kingdom
Australia
New Zealand
Australia
Australia
Thailand
United Kingdom
United Kingdom
Minnesota
Minnesota
United Kingdom
Minnesota
Delaware
Delaware
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
EXHIBIT 23
We consent to the incorporation by reference in the Registration Statements on Forms S-8 (Nos. 333-137497, 333-114643, 333-
101691, 333-87488, 333-45742 and 333-03583) and the Registration Statements on Form S-3 (Nos. 333-116226, 333-79147, 333-
61489, 333-41199, and 333-19951) of Patterson Companies, Inc. of our reports dated June 27, 2012, with respect to the consolidated
financial statements and schedule of Patterson Companies, Inc., and the effectiveness of internal control over financial reporting of
Patterson Companies, Inc. included in this Annual Report (Form 10-K) for the year ended April 28, 2012.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
June 27, 2012
Certification of the Chief Executive Officer Pursuant to
Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.1
I, Scott P. Anderson, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K for the fiscal year ended April 28, 2012 of Patterson Companies, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
c)
designed under our supervision, 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;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: June 27, 2012
/s/ SCOTT P. ANDERSON
Scott P. Anderson
President and Chief Executive Officer
Certification of the Chief Financial Officer Pursuant to
Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2
I, R. Stephen Armstrong, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K for the fiscal year ended April 28, 2012 of Patterson Companies, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
c)
designed under our supervision, 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;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: June 27, 2012
/s/ R. STEPHEN ARMSTRONG
R. Stephen Armstrong
Executive Vice President, Chief Financial Officer and
Treasurer
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
EXHIBIT 32.1
In connection with the Annual Report on Form 10-K of Patterson Companies, Inc., (the “Company”) for the fiscal year ended
April 28, 2012, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned officer of
Patterson certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to
his knowledge:
1.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of Patterson Companies, Inc.
2.
A signed original of this written statement required by Section 906 has been provided to Patterson and will be retained by
Patterson and furnished to the Securities and Exchange Commission or its staff upon request.
June 27, 2012
/s/ SCOTT P. ANDERSON
Scott P. Anderson
President and Chief Executive Officer
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 2002
EXHIBIT 32.2
In connection with the Annual Report on Form 10-K of Patterson Companies, Inc., (the “Company”) for the fiscal year ended
April 28, 2012, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned officer of
Patterson certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to
his knowledge:
1.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of Patterson.
2.
A signed original of this written statement required by Section 906 has been provided to Patterson and will be retained by
Patterson and furnished to the Securities and Exchange Commission or its staff upon request.
June 27, 2012
/s/ R. STEPHEN ARMSTRONG
R. Stephen Armstrong
Executive Vice President, Chief Financial Officer and
Treasurer
A Strong Commitment To Giving Back
The three markets served by Patterson Companies know us as a strong leader that prefers to keep its philanthropy out of the
spotlight. But helping people in need is engrained in our culture, with a growing number of employees making it their business to
build upon the Patterson tradition of giving. Because of the decentralized model through which it operates, Patterson encourages
employees in local service areas to provide support to the charitable organizations in the communities where they live and work.
This expanded outreach includes support for organizations and initiatives such as:
The Dental Lifeline Network
Last year, Patterson Dental and its business partners raised a record contribution of more than $200,000 for Dental Lifeline Network
(DLN) programs through the Patterson Dental Leadership Summit in Minneapolis. Contributions are given to DLN in lieu of an
attendance fee to support DLN programs that provide dental care to vulnerable people with disabilities or who are elderly or
medically fragile.
Patterson Dental is also a longtime supporter of DLN’s Donated Dental Services (DDS) program, which coordinates comprehensive
dental treatment donated by 15,000 dentists and 3,350 laboratories nationwide. Each year Patterson territory representatives
routinely sell the highest number of DentaCheques, a dental product value book for practices, with 100 percent of proceeds going to
support dental care for people who desperately need it through DDS.
The Patterson Foundation
The Patterson Foundation is unique in that 100% of its funding comes from current and former
Patterson employees. Funding by employees is steadily increasing the reach of the Patterson
Foundation, which was formed in 2000 when Patterson’s chairman, Pete Frechette, and other
executives acted on their desire to give back.
All grants relate to dentistry, veterinary medicine or
occupational and physical health, especially programs that
benefit disadvantaged people. To date, the Foundation
has funded 77 nonprofit organizations with more than
$4 million. Another Foundation priority is funding higher
education scholarships for dependents of Patterson
employees. The post-secondary scholarships provided by
the Foundation will surpass $1 million this year. To date,
469 new and renewed scholarships have been awarded to
dependents of Patterson employees around the world.
A disabled veteran enters a room newly remodeled
for a wheelchair user and service dog accessibility
through a Patterson Foundation grant to America’s
VetDogs, the Veteran’s K-9 Corps.
The Patterson Foundation supports organizations and programs that
benefit communities, including efforts to provide access to dental care
for those in need.
Photo by Amy Pelsinsky/
Courtesy of The Dr. Samuel D. Harris National Museum of Dentistry
Grins for a Good Cause
Since Patterson Dental’s Grins for a Good Cause initiative took root two years ago, more than $500,000 has
been raised to increase awareness of breast cancer and help support underserved women and their families
who are battling this disease. Grins for a Good Cause leverages Patterson’s large network of branch offices to
partner with breast cancer awareness organizations and host events focused in their communities.
The philanthropic priorities above, and others, are an important part of a Patterson success story that is guided
by principles of caring and grounded in giving back.
This report contains forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are
information of a non-historical nature and are subject to risks and uncertainties which are beyond the Company’s ability to control. The Company cautions
shareholders and prospective investors that the following factors, among others, may cause actual results to differ materially from those indicated by the
forward-looking statements: the ability to integrate recent acquisitions into Patterson’s operations in a timely manner; competition within the dental,
veterinary, and rehabilitative and assistive living supply industries; changes in the economics of dentistry, including reduced growth in expenditures by
private dental insurance plans, the effects of economic conditions and the effects of healthcare reform, which may affect future per capita expenditures for
dental services and the ability and willingness of dentists to invest in high-technology products; the effects of healthcare related legislation and regulation
which may affect expenditures or reimbursements for rehabilitative and assistive products; changes in the economics of the veterinary supply market,
including reduced growth in per capita expenditures for veterinary services and reduced growth in the number of households owning pets; the ability of
the Company to maintain satisfactory relationships with its sales force; unexpected loss of key senior management personnel; unforeseen operating risks;
and risks associated with the dependence on manufacturers of the Company’s products. Forward-looking statements are qualified in their entirety by the
cautionary language set forth in the Company’s filings with the Securities and Exchange Commission.
1031 Mendota Heights Road
St. Paul, MN 55120-1419
651/686-1600
www.pattersoncompanies.com
Patterson Dental
1031 Mendota Heights Road
St. Paul, MN 55120-1419
651/686-1600
Webster Veterinary
137 Barnum Road
Devens, MA 01434
978/353-6000
Patterson Medical
1000 Remington Boulevard, Suite 210
Bolingbrook, IL 60440-5117
630/378-6300